The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has delivered a significant verdict that brings much-needed relief to fintech companies, e-commerce platforms, and businesses using payment gateway services across India. In a landmark ruling in September 2025, the ITAT held that no Tax Deducted at Source (TDS) is required to be deducted under Section 194H of the Income Tax Act, 1961, on payments made to payment gateway service providers.
This decision in the case of One Mobikwik Systems Ltd. (earlier known as One Mobikwik Systems Pvt. Ltd.) vs. Joint Commissioner of Income Tax (OSD), TDS Circle, Gurgaon (ITA Nos. 7830/Del/2018, 273 & 274/Del/2025) marks a watershed moment for the digital payments industry and provides critical clarity on the nature of payment gateway charges.
The case arose when a survey under Section 133A(2A) was conducted on One Mobikwik Systems Ltd., a prominent company authorized by the Reserve Bank of India (RBI) to operate a “Stored Value Card Wallet” — an electronic wallet system that enables users to make digital transactions seamlessly.
To facilitate online payments, Mobikwik engaged two Payment Gateway (PG) service providers: CC Avenue and Zaaki Payment Services Pvt. Ltd. These payment gateways served as technological intermediaries that processed electronic fund transfers between customers, banks, and the merchant.
During the survey conducted on 7th November 2017, the Assessing Officer (AO) observed that Mobikwik had made payments to these payment gateway companies without deducting TDS. The AO took the view that these payments amounted to “commission” under Section 194H of the Income Tax Act. Consequently, Mobikwik was treated as an assessee in default under Sections 201 and 201(1A), and tax demands were raised for Assessment Years 2015-16 to 2017-18.
The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the AO’s view, holding that a principal-agent relationship existed between Mobikwik and the payment gateways, thereby attracting TDS provisions under Section 194H.
Section 194H of the Income Tax Act mandates TDS deduction on payments made as commission or brokerage to a resident. The provision applies when the payment exceeds the threshold limit (currently ₹20,000 from 1st April 2025, increased from ₹15,000).
Effective from 1st October 2024, as per Budget 2024, the TDS rate under Section 194H has been reduced from 5% to 2%. However, if the payee does not furnish a valid PAN, TDS is charged at 20%.
The critical requirement for applicability of Section 194H is that TDS is deductible only where there exists:
The definition of commission includes any payment received or receivable, directly or indirectly, by a person “acting on behalf of another person” for services rendered. This phrase “acting on behalf of another person” postulates the existence of a legal relationship of principal and agent as per Section 182 of the Contract Act, 1872.
The assessee put forth compelling arguments to challenge the tax demand, asserting that:
The Supreme Court categorically held that “the expression ‘acting on behalf of another person’ postulates the existence of a legal relationship of principal and agent”. The Court further observed that the obligation to deduct TDS under Section 194H arises only when such relationship exists.
The Supreme Court laid down that the following factors must be examined to determine a principal-agent relationship:
The Delhi High Court clarified in the MakeMyTrip case that “payment gateway charges are fees for banking or technical services and not commission”, since the gateway merely facilitates the transfer of funds between two principals.
The Court held that where an assessee selling travel products paid fees to banks for providing payment gateway facility, the same could not be treated as commission or brokerage liable to TDS under Section 194H, as it was of the nature of fee and not commission.
In this case, the Supreme Court affirmed that discount in a sale transaction is not commission or brokerage. The Court held that where the transaction is a sale on a principal-to-principal basis, Section 194H has no application.
The Karnataka High Court ruled that service charges paid by a bank to National Financial Switch and Cash Tree for processing customer payments were not subject to TDS deduction under Section 194H. The Court held that the relationship between the bank and these service providers was not of agency but principal-to-principal basis.
The Bangalore ITAT held that payments made to gateway providers are not brokerage and TDS under Section 194H is not applicable. The Tribunal observed that payment gateway providers collect fees from participants and after deducting their charges, transfer the remaining amount to the merchant.
The term “sine qua non” is a Latin phrase meaning “an essential condition” or “without which nothing”. In legal contexts, it refers to an indispensable requirement that must be met for something to be valid or applicable.
When judicial precedents state that agency is “sine qua non” for Section 194H, they mean that the existence of a principal-agent relationship is an absolute prerequisite for the TDS provisions to apply. Without establishing this relationship, Section 194H simply cannot be invoked.
After carefully examining the facts, legal provisions, and judicial precedents, the ITAT found substantial merit in Mobikwik’s submissions. The Tribunal held that:
The Tribunal observed: “We find sufficient force in the argument of the assessee regarding the non-existence of a principal-agency relationship between the assessee and the payment gateways. The assessee’s case is covered by judicial precedents and CBDT instructions. Hence, the provisions of section 194H read with sections 201 and 201(1A) are not attracted.”
Accordingly, the ITAT set aside the orders of the lower authorities and directed deletion of the demand raised under Sections 201 and 201(1A) for all years in question.
Section 201(1) provides that any person who fails to deduct tax at source or fails to pay the tax after deducting shall be deemed to be an “assessee in default” in respect of such tax.
Section 201(1A) mandates payment of interest on the amount of tax not deducted or not paid:
By setting aside the demand under these sections, the ITAT has provided complete relief to Mobikwik from both the tax liability and the interest burden.
This ruling delivers major compliance relief to fintech players, e-commerce platforms, startups, and MSMEs that rely heavily on payment gateway infrastructure. The decision has far-reaching implications:
Payment gateways earn revenue primarily through transaction fees (Merchant Discount Rate or MDR), typically ranging from 1.6% to 3% of the transaction value in India, depending on the payment method used.
The payment gateway business model includes:
Payment gateways like Razorpay, PayU, Cashfree, CCAvenue, and Paytm charge approximately 2% platform fee on domestic transactions, with UPI transactions often having no or minimal charges. For international transactions, fees typically range from 3% to 3.5%.
In light of this landmark ruling, businesses should:
The ITAT Delhi’s decision in the Mobikwik case represents a pragmatic and progressive interpretation of tax law that recognizes the realities of modern digital payment infrastructure. By holding that payment gateway charges do not attract TDS under Section 194H due to the absence of a principal-agent relationship, the Tribunal has provided crucial clarity to India’s rapidly growing fintech and e-commerce sectors.
This ruling aligns with the government’s Digital India initiative and supports the seamless functioning of India’s digital payments ecosystem, which processes billions of transactions worth trillions of rupees annually. The decision removes an unnecessary compliance burden and allows businesses to focus on growth and innovation rather than getting entangled in tax disputes over the characterization of payment gateway fees.
As India continues its journey toward becoming a less-cash economy with digital payments at the forefront, such jurisprudence that distinguishes between genuine commission arrangements and technology service fees becomes increasingly important. The Mobikwik ruling sets a strong precedent for future cases and reinforces the principle that tax provisions must be applied based on the true legal and commercial substance of transactions, not mere form.
For businesses operating in the digital payments space, this judgment is not just a legal victory but a validation of their business models and an affirmation that the tax system recognizes the unique nature of technology-driven payment facilitation services.
Disclaimer: This article is for informational purposes only and should not be construed as legal or tax advice. Businesses should consult qualified tax professionals for advice specific to their circumstances.
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