Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether TDS U/s. 194A Is Deductible On Payment Of Credit Card?

QUERY: Whether TDS u/s. 194A is deductible on payment of credit card? Several entities have been receiving notices regarding non-deduction of TDS u/s. 194A on charges paid to banks towards use of credit card facilities used by them as merchant establishments. Whether these charges would be covered by the term ‘interest’ and would get covered under the said section?
ANSWER: S. 2(28)(a) defines ‘interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized’.

Thus, payment made for using the credit card cannot be considered payment made for any moneys borrowed or debt incurred including deposit, claim or other similar right or obligation. The payment for use of credit card is only a compensation to the credit card agency and hence no TDS is required to be deducted on the basis of ITO v. Parag Mahasukhlal Shah [46 SOT 302(Ahd)], wherein it has been held that:

“As per S. 194A, if a person is responsible for paying any income by way of interest, he shall at the time of credit or at the time of payment be required to deduct income tax. Vide an explanation annexed to S. 194A, it is clarified that where any income by way of interest is credited either under the ‘suspense account’ or ‘interest payable account’ or ‘by any other name’, then also such person is liable to deduct tax. On plain reading of this section, it is apparent that the term ‘interest’ used in this section relates to and in connection of a debt or a loan or a deposit. The circumstances under which the assessee is required to deduct the tax have also been narrated. Therefore, a conclusion can be drawn that if a payment is compensatory in nature and not related to any deposit / debt / loan, then such a payment is out of the ambit of the provision of S.194A. If the immediate source of receipt of payment is a loan, deposit etc. then the payment is in the nature of ‘interest’ but if the immediate source of receipt of payment is trade activity then the nature of receipt is not ‘interest payment’ but in the nature of compensation”.
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