No TDS under Section 194J on auto-deducted clearing charges paid via payment system company

The ITAT Chennai held that no TDS under section 194J is applicable on clearing or professional charges paid to the payment system company, as the amounts are auto-deducted electronically by CCIL from members' accounts without direct payment by the appellant. Since CCIL has paid tax on these charges, the appellant cannot be held liable for non-deduction. The tribunal relied on notification 47/2016 and Supreme Court principles allowing retrospective application of beneficial circulars. It was clarified that issuing Form 26A is the deductee's responsibility, not the deductor's. Consequently, the ITAT set aside the lower authorities' order and directed the AO to delete the addition, allowing the appellant's appeal.

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ISSUES:

Whether tax deduction at source (TDS) under section 194J is required on clearing charges or professional charges paid to a payment system company authorized by the Reserve Bank of India (RBI).Whether the appellant can be held liable for non-deduction of TDS when payments to the payment system company are auto-deducted electronically by the company itself.Whether the payment system company's payment of taxes on clearing charges/professional charges received from members affects the appellant's liability to deduct TDS.Whether notification no. 47/2016 dated 17.06.2016 exempts the appellant from TDS deduction on clearing charges paid to an RBI-authorized payment system company.Whether the direction by the appellate authority to submit Form 26A for deletion of addition is maintainable when the payment system company declines to issue such certificate.

RULINGS / HOLDINGS:

The Court held that "no case of any tax deduction u/s 194J is made out qua the appellant assessee upon clearing / professional charges paid to CCIL," a payment system company authorized by RBI.The Court found that the appellant cannot be held liable for non-deduction of TDS because the amounts are "auto deducted electronically by CCIL" and "do not travel from appellant to CCIL" in a manner that triggers TDS liability.The Court noted that since the payment system company has "unequivocally confirmed about the payment of taxes on clearing charges / professional charges received from its members," the appellant's non-deduction of TDS is not culpable.The Court accepted that notification no. 47/2016 is "merely clarificatory in nature" and thus applies retrospectively, exempting the appellant from TDS deduction on clearing charges paid to an RBI-authorized payment system company.The Court held that the direction to submit Form 26A for deletion of addition is "ipso facto non-maintainable" when the payment system company refuses to issue such certificate, as the responsibility to issue Form 26A lies with the deductee and not the deductor.

RATIONALE:

The Court applied the provisions of section 194J of the Income Tax Act concerning TDS on professional or technical services.The Court relied on the principle that TDS liability arises only when the deductor makes payment to the deductee, including by credit to the account of the deductee, and that where payments are auto-deducted by the payee (payment system company), the deductor's liability does not arise.The Court considered notification no. 47/2016 issued by the Ministry of Finance, which exempts deduction of tax on clearing charges paid to RBI-authorized payment system companies, interpreting it as clarificatory and retrospective based on the Supreme Court's principle that "a beneficial circular has to be applied retrospectively."The Court emphasized that the responsibility to issue Form 26A (TDS certificate) lies with the deductee, and refusal by the payment system company to issue such certificate cannot be held against the deductor.

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