Payments to Banks and Non-Banking Financial Companies (NBFCs), usually in the form of Interest, Commission, Loan Processing Fee/Charges, etc have often been contested at various forums with the Revenue fighting for their share of the taxes and the assesses fighting tooth and nail for the expenses to be allowed in the absence of deduction of tax at source.
Various judicial rulings have tried to settle the issue by clarifying the liabilities of the assessee in this regard. In this article, we try to summarise the legal position with respect to the deduction of TDS in such cases.
Sec 194A of the Income Tax Act 1961 (ITA) which deals with TDS on interest other than interest on securities states as under (relevant portion only)
1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income [by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:
[Explanation: For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called Interest payable account or Suspense account or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.]
(3) The provisions of sub-section (1) shall not apply —
(iii) to such income credited or paid to —
(a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank), or
(b) any financial corporation established by or under a Central, State or Provincial Act, or
(c) the Life Insurance Corporation of India was established under the Life Insurance Corporation Act, 1956 (31 of 1956), or
(d) the Unit Trust of India was established under the Unit Trust of India Act, 1963 (52 of 1963), or
(e) any company or co-operative society carrying on the business of insurance, or
[Explanation. –For the purposes of this clause, the co-operative bank shall have the same meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);]
Now as per the above provision it becomes very clear that any interest being paid to a Banking Co shall not be subjected to TDS. The same is adequately clear and indisputable. This issue is settled beyond any iota of doubt.
Now, the question arises as to whether TDS would be deductible on other amounts paid to a Bank such as a Guarantee Fee, Loan Processing Charges, etc
In order to answer this question, one first needs to understand the definition of interest as given in sec 2(28A) of the ITA
(28A) interest means interest payable in any manner in respect of any amounts of money 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 the money borrowed or debt incurred or in respect of any credit facility which has not been utilized
A loan processing fee or Renewal fee is charged by a Bank when a borrower approaches the bank for processing the application or renewal of the same year on year. A plain reading of the definition implies that the loan processing fee or charges by whatever name called would form part of the above. Once it is agreed that processing/renewal fees are in the nature of interest, they cannot be subjected to TDS by virtue of the exception given in sub-section (3) of sec 194A. This position has been substantiated in a number of judicial rulings – by ITAT Pune in Chintamani Hatcheries Pvt Ltd vs DCIT, by ITAT Kolkata in DCIT vs Champion Commercial Co Ltd., and others.
Now let us consider the case of the Guarantee fee paid to the banks for Bank Guarantees. The issue of deduction of TDS on Bank Guarantee fee was dealt with by ITAT Mumbai in the case of DCIT (TDS) v Laqshya Media Pvt Ltd. The Revenue in this case contended that the guarantee commission fee paid to various banks was in the nature of the commission and hence liable for TDS u/s 194H of the ITA. The Tribunal observed that the explanation to Sec 194H defines commission as follows:
“Commission or brokerage’ includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities”.
It is apparent from the above that the payment must be treated as a commission only if there is a principal-agent relationship between the two parties. The recipient must act on the payer’s behalf. However, in the case of a Bank Guarantee, the banker does not act on the customer’s behalf for rendering any kind of service. The contract of guarantee does not result in a principal-agent relationship. Thus, the commission received by the bank cannot be compared to the commission as contemplated under sec 194H. Hence, the same cannot be subjected to TDS. CBDT vide it’s Circular no. 56 of 2012 has reaffirmed the above position.
Hence, it is clear from the above that TDS on payment made to any banking co including Interest, Loan Processing Fee, Guarantee Commission, etc cannot be subjected to TDS.
Now, let us consider the case of NBFC. Usually, payments to NBFC are either interest or loan processing charges. Now, as it is clear from the above discussion that Loan Processing Charges are also part of interest, thus if interest to NBFC is chargeable to tax, the loan processing charges would also be subjected to tax.
Now, it is an established fact that an NBFC is a Company formed under the Companies Act and not regulated by The Banking Regulations Act, hence, it cannot be said that an NBFC is covered by the exceptions mentioned in sub-section 3 of sec 194A. In the absence of an exception, both interest and loan processing fees would fall within the purview of TDS u/s 194A, and any non-compliance would attract the consequences of being an assessee in default. This position was also clarified by the ITAT Mumbai in Shekhar Dadarkar vs DCIT and many other cases.
It can hereby be concluded that the law and judicial pronouncement have made it aptly clear that in case of payments to a banking company all payments of interest, loan processing fee, etc are exempted from TDS by virtue of sec 194A(3).
However, all payments including Interest and Loan Processing Charges shall be subjected to TDS for ensuring sufficient compliance with the TDS provisions. Even when the payments are being made through automated EMI, the NBFCs usually reimburse the TDS payments on the production of valid Form 16 by the Borrower.
The following table details the chargeability of TDS
|Loan Processing Fee||NO||u/s 194A|