Are Interchange Fees and Payment Gateway Charges Subject to TDS?

Tax Deducted at Source (TDS) is generally not applicable to interchange fees, payment gateway charges, or the Merchant Discount Rate (MDR).** This stance has been clearly established by the Central Board of Direct Taxes (CBDT) through official notifications and has been consistently reinforced by judicial rulings.

Here is a breakdown of the key reasons and legal justifications for this exemption.

### 1. CBDT Notification (2016)

The CBDT explicitly addressed this issue by issuing **Notification No. SO 2143(E)** in June 2016. This notification specifically exempts the interchange fees charged on credit and debit card transactions from the requirement of TDS deduction.

### 2. The Nature of the Payment: Not a "Commission"

The primary legal argument rests on how these charges are classified under the Income Tax Act.

- **Section 194H** mandates TDS deduction on payments made as "commission or brokerage."

- However, courts and tax authorities have determined that fees paid to payment gateways and banks for transaction processing are **fees for banking or technical services**, not commission.

- The relationship between a merchant and a payment gateway provider is considered **principal-to-principal**, rather than a principal-agent relationship. Since there is no agency, the provisions of Section 194H do not apply.

### 3. Support from RBI Guidelines

The Reserve Bank of India (RBI) has also provided clarity that supports this tax position. In its March 2020 guidelines on "Regulation of Payment Aggregators and Payment Gateways," the RBI treats these entities as **outsourcing partners or independent service providers**, not as agents of the merchant. This regulatory classification reinforces the principal-to-principal dynamic.

### 4. Landmark ITAT Ruling (Mobikwik Case)

In a significant ruling in **September 2024**, the Income Tax Appellate Tribunal (ITAT) provided a strong precedent on this matter.

- **The Case:** *One Mobikwik Systems Ltd. vs. Joint Commissioner of Income Tax*

- **The Verdict:** The ITAT held that no TDS is required to be deducted under Section 194H on payments made to payment gateway service providers.

- **The Impact:** This ruling confirms that even for digital payment platforms, the transaction charges paid to them are not in the nature of commission, thereby eliminating the TDS liability for the entity making the payment.

### Summary

In conclusion, businesses are not required to deduct TDS on interchange fees, MDR, or payment gateway charges. This is backed by a specific CBDT notification, the interpretation of "commission" under tax law, the operational guidelines of the RBI, and a definitive ruling by the ITAT.