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TDS on Bank processing Fees

Ashish Ranade (AGM) (38 Points)

05 October 2009

We have to pay Processign Fees to bank for loan purpose

Whether TDS has to be deducted for the same

If yes at what rate

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19 Replies

Dintakurthi Tirumala (CA FINAL) (15994 Points)
Replied 05 October 2009

No, TDS need not to be deduct for any type of payments made to banks

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Sunil Liladhar Kotak (Manager (F & A)) (2025 Points)
Replied 05 October 2009

Agreed with the above solution

Sumit (Software Developer) (34 Points)
Replied 05 October 2009

Thanks for information.

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https://www.sagarinfotech.com/Payroll.aspx

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 05 October 2009

sec194 exempts from the same

Aarush (Delhi) (1566 Points)
Replied 05 October 2009

If bank charged Service tax of processing fee than TDs is lible to cut of Service tax amount

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Sunil (Trader) (2611 Points)
Replied 05 October 2009

You have to deduct TDS u/s 194J. Loan processing fee is a technical service and that also includes managerial services. The exemption given for non deduction of TDS to Banks is specifically for section 194A. Therefore if you pay more than 20,000 per annum to Bank as processing fees, please deduct TDS.

Rajeev (www.rkmco.com) (985 Points)
Replied 06 October 2009

I dont think so TDS is deductible . Loan processing fee is interest as defined in sec 2(28A) of the IT Act , so this payment falls u/s 194A , which specifically excludes banks .Hence TDS not deductible , provisions dont apply

Dintakurthi Tirumala (CA FINAL) (15994 Points)
Replied 06 October 2009

Originally posted by :Sunil
"	You have to deduct TDS u/s 194J. Loan processing fee is a technical service and that also includes managerial services. The exemption given for non deduction of TDS to Banks is specifically for section 194A. Therefore if you pay more than 20,000 per annum to Bank as processing fees, please deduct TDS.	"

I think so sec194J relats for payments to proffessionals for service rendered by them and the bank was not a proffessional it was service sector so need not to be TDS deduct. it only my opinion Thank you

Sunil (Trader) (2611 Points)
Replied 06 October 2009

Processing or loan appraisal and such items are Managerial Services. Managerial services fall under definition of Technical Service.

If the processing fee is taken as the part of interest, then there is no problem. However, if loan is rejected, there is no question of interest payment as no loan is availed. In this case the processing or appraisal fee will be u/s 194J.

Rajeev (www.rkmco.com) (985 Points)
Replied 06 October 2009

Sunil ji ,

The definition of Interest includes loan processing Fees , whether the loan is sanctioned or not is irrelevant according to me .

Tds provisions dont apply .

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Sunil (Trader) (2611 Points)
Replied 07 October 2009

Section 2, 28A

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 the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised

My understanding differs.

For the fees and charges to qualify to be a payment of interest, the money has to be borrowed or debt incurred or credit facility should NOT have been utilised. For a facility NOT to be utilised, first it has to be sanctioned, say an overdraft facility or L/C facility. If a fee is paid for not using such sanctioned facility it will be an interest.

If a loan is sanctioned, the correct accounting treatment would be to debit the processing fees to the interest account against those loans sanctioned. Only your narration would be loan processing fees. However if there is a rejection means there is no loan offered or given. Therefore there is no question of you having accepted a loan or availed of one to pay any amount that can be charged to your revenue or capital account as an interest. What fee you pay cannot be in nature of interest because interest can be charged only on a loan, deposit or even a defaulted amount or bill.The fees are in nature of an appraisal fees. Appraisal can be technical or managerial fees and therefore section 194J would apply if no loan is sanctioned. However if loan is sanctioned and we do not avail of it, if a committment fee is charged it will be an interest. The idea is that there has to be a loan committed and not rejected. In Banking Business a Bank has to manage its funds by paying interest or borrowing from call markets at a cost that is charged as interest. Therefore on a sanctioned loan then income it receives as fees for non availment is interest. The income it receives for not committing any loan at all is other income and applicable to other sections for TDS other than 194A.

Rajeev (www.rkmco.com) (985 Points)
Replied 07 October 2009

Sunilji,

I think the words used in the definition are"words of art " which have been used independently . It could fall under the "service fee " category . The extention of the definition which you have marked in red cannot be extended to service fees .

However you may be right , but in all cases we have not deducted TDS . Are u aware of any such case law which states that processing fees fall u/s 194J.We will have to check up if any processing fees was paid and loans were rejected . ( In most of the cases , we negotiate with the bank and dont pay processing fees until the loan is sanctioned ) However this could be a big issue .(We rely on Sc judgement 224 ITR 551 which defined interest as follows :-

In the circular issued by the Central Board of Direct Taxes, the concept of "interest" defined under section 2(28A) has been explained with the added Explanation as under (see [1976] 105 ITR (St.) 24) :

" The term 'interest' has been defined in new clause (28A) inserted in section 2 of the Income-tax Act with a view to removing doubts about the true character of fees or other charges paid in respect of moneys borrowed or in respect of the credit facilities which have not been utilised. The definition is very wide and covers interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations. It also includes any service fees or other charges in respect of such loans, debts, deposits, etc., as also fees in the nature of commitment charges on unutilised portion of credit facilities. This definition will be applicable for all purposes of the Income-tax Act. "

In my opinion , the words are used independently , Hence TDS provisons dont apply u/s 194J , but apply u/s 194A

Sunil (Trader) (2611 Points)
Replied 07 October 2009

I have come accross cases of TDS on processing fees on trade facilities rejected by foreign banks working on liason basis and not through a branch in India. These were deducted u/s 195 and were not classified as interest. Simply Processing fees. Anyway sec 195 is more cumbersome but the sec 2 (28A) would apply here as well.

Fees for arranging foreign loans to Indian bank comes under 194J. I have come accross that somewhere. However, in this case the bank has not given the loan. They just arranged it. People have the misconception that all payments to bank do not attract TDS. It is true as long as the nature of payment can be deemed to be interest.

Rajeev (www.rkmco.com) (985 Points)
Replied 07 October 2009

sunilji ,

There is one more issue , while paying the processing fees , i wouldnt know whther my loan is going to be approved or rejected . so how do i deduct tds ?? . Have u deducted TDS on loan processing charges in your cases u/s 194J?

195 is a different issue altogether.