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Tax Deduction at Source –
Certain peculiar issues
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Overview of the Presentation
Scope of TDS provisions
Rates of TDS
Due-dates
Issues
Consequences of default
Circulars
Case laws
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Objectives behind TDS
Pay as you Earn
Regular Cash Inflow
Avoid Evasion
Shift the Responsibility
Widening of Tax Base
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Important points relating to TDS
What is the nature of payment being made?
Is it covered by any of the TDS sections?
On what amount is it to be deducted?
What is the rate of TDS?
When is it to be deducted?
When is to be paid to the Govt.?
Which challan is to be used for payment?
Which TDS statement is to be filed?
When is it to be filed?
Which form of TDS certificate to be issued?
When is it to be issued?
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Section 192
- TDS on salaries
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Section 192 – TDS on salaries
Payment should be in the nature of salary
The employer has to deduct tax from the salary that he
pays
At what rate to deduct? - TDS at average rate of tax on the
estimated income of the employee under the head
“Salaries”
When to deduct? - TDS is attracted on payment basis.
Thus, for example, if salary for March 2009 is paid on 7th
April, 2009 then tax has to be deducted in April and not
March even if the expense is booked in March
When to pay the TDS to the Govt.? – Within 7 days from
the end of the month in which tax is deducted
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Some Issues - Multiple employments
Either simultaneously or one after the other
Employee may furnish details of salaries (and TDS
therefrom) received from the former / other employer(s) to
the later / other employer(s). The information is to be
furnished in FORM No. 12B.
In such cases, the later / other employer is under an
obligation to take into account those details
What if the employee does not give these details? The
employer cannot be held responsible for this.
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Income under Other Heads
Employee not under an obligation to furnish details of
income under other heads
If he furnishes the details of income and TDS thereon, the
employer is under an obligation to take them into account.
There is no prescribed form for this.
Loss under any head, except house property, cannot be
taken into account
Particulars of other income and TDS on the same, except
under House property, cannot reduce the amount of tax
which was otherwise deductible
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Other Issues
The annual circular is issued by the CBDT every year guides
employers on how to compute the taxable salary and the tax
Short or excess deduction can be adjusted from subsequent
salaries within the same year.
CIT vs Marubeni P. Ltd [294 ITR 157]
A.P State electricity board [20 ITD 318] (Hyd)
Vinsons [89 ITD 267](Mum)
Donation made by employee u/s 80G
Annual Circular on salary
Proof for allowance u/s 10(14) and deduction under chapter VI
Larsen and Tubro [221CTR 620]
Retainership fees – Salary Vs Professional fees.
Disallowance u/s 40a(iii)
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Salaries payable in foreign currency
Conversion into Indian currency at Telegraphic Transfer
(TT) buying rate on the date on which tax is required to
be deducted – Rule 26
While calculating income under the head salary, the TT
buying rate as on the last day of the month immediately
preceding the month in which salary is due or paid –
Rule 115
Proviso to Explanation 2 to Rule 115(1)
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Non Monetary Perquisite
An option has been given to the employer to make payment of tax on such
perquisites himself without making any TDS from the salary of the employee.
The employer will have to pay such tax at the time when such tax was
otherwise deductible i.e. at the time of payment of income chargeable under
the head ‘Salaries’ to the employee.
Tax has to be calculated at the average rate of Income tax.
Illustration
Suppose Income chargeable under the head ‘Salaries’ is Rs. 4,50,000 out
of which, Rs. 50,000 is on account of non-monetary perquisite. Employer
opts to pay tax on such perquisite.
Income
– 4,50,000.
Tax on salaries
– 46,350
Average rate of tax [(46,350/4,50,000)100]
– 10.3%
Tax payable on Rs. 50,000 (10.3% of 50,000)
– Rs 5,150
Amount to be deposited per month
– Rs 430
(5,150/12)
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Section 193
- TDS on Interest on securities
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Section 193 – Interest on securities
“Interest on Securities” as per section 2(28B) means
(i) interest on any security of Central Government or State Government;
(ii) interest on debentures or other securities for money issued by or on
behalf of a local authority or a company or a corporation established by a
Central, State or Provincial Act
With effect from 1st June 2007, interest on 8% Savings (Taxable)
Bonds,2003, liable to TDS if interest exceeds Rs. 10,000/- during the year.
Exemption to Provident fund whose income is exempt u/s 10(25)
Interest on Deep Discount Bond to be deducted at the time of
redemption.
In case of Joint Owners of a security, tax credit is allowable in proportion
to the income offered to tax (New Rule recently notified – Rule 37BA
which is discussed subsequently)
Where the person who is to receive the interest cannot be identified at the
stage at which the provision for ‘interest accrued but not due’ is made,
TDS is not required to be deducted
IDBI [10 SOT 497]
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Redemption of debentures at Premium
TDS implication on redemption of debentures would
depend upon characterization of such premium as
‘interest’ or ‘capital gains’. In case the entire or part
amount of the premium is characterized as ‘interest’,
then, TDS would have to be deducted under section
193.
In this case, reliance can also be placed on the
decision in case of Lomax [12 ITR 1] where it was held
that, characterization as income or capital would
depend on several factors and would also depend on
the facts of each individual case.
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Rates of TDS
At what rate to deduct? –
Particulars
Interest on debentures/securities
issued by or on behalf of Local
Authority/statutory corporation,
Listed debentures and 8% Savings
(Taxable) Bonds, 2003
Recipient other
than Domestic
Company
10%
Domestic
Company
10%
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Section 194
- TDS on Dividends
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Section 194 - Dividends
Effectively, TDS is applicable only for deemed dividend
u/s. 2(22)(e) for an amount exceeding Rs. 2,500
At what rate to deduct? – 10% (Rate applicable to
any other income)
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Section 194A
- TDS on Interest other than
interest on securities
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Section 194A – Interest other than interest on securities
Applicable to all payers, except Individuals and HUF
Section applies to an Individual and HUF only if they are
liable for tax audit during the preceding financial year
When to deduct? - TDS at the time of payment or credit
whichever is earlier
Credit to Suspense account or Interest Payable account is
deemed to be credit to the account of the payee
At what rate to deduct?
10% - whether corporate assessee or otherwise
20% - In case on non resident and foreign company
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Coverage
Inter - Corporate Deposits/Loans
Public Deposits
Loans
Suppliers on late payment of bills (also where payments
routed through the bank)
Service fees in respect of loans and commitment charges on
the unutilized portions of the credit facilities
ITO v Arihant Trust & Others [214 ITR 306](Mad)
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Interest – section 2(28A)
Interest means
Interest payable in any manner
In respect of money’s borrowed or debt incurred including a
deposit, claim or other similar right or obligation
Includes any service fee or other charge in respect of
money’s borrowed or debt incurred or in respect of any
credit facility which has not been utilised
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Some issues
Where the loan transactions of directors are routed through the
company, the company cannot contend that it acted merely for
collecting and disbursement purpose
Notwithstanding the agreement between the company, directors and
the lender, TDS is applicable under section 194A
Century Building Industries [163 Taxman 188](SC)
Tax has to be deducted on the Gross Interest payable by a person and
not on the net interest after mutual set – off between the parties.
S.K. Sundararamier and Sons [240 ITR 740](Mad)
Genuine hire purchase transaction – Not subjected to TDS.
Circular No. 760. dated 13/1/98.
However, Finance transaction in the garb of hire purchase would be
subjected to TDS
Circular No 738. dated 25/3/96
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Some other Issues
The person responsible for making the interest payment may at the
time of making any deduction, increase or decrease the amount to be
deducted for the purpose of adjusting any excess or deficiency arising
out of any previous deduction or failure to deduct during the year Section 194 A(4)
Whether capitalization of interest payable attracts TDS U/S 194A?
Yes. Capitalization of interest payable attracts the provisions of TDS.
TDS is to be made on interest payment regardless of the fact whether
borrower uses funds for acquiring fixed assets, capital assets or stockin-trade or for making payments of trading debts.
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Some other Issues …. (cont’d)
A private trust having beneficiaries as individuals, while
making payments whether required to deduct Tax on its
borrowing
M.L. Family Trust [213 ITR 152](Guj).
Contra - Subhash Metal Indl [44 ITD 677](Bom)
Form 15H / 15G must precede the date of credit or
payment of interest
Sudershan Auto & General Finance [60 ITD 177](Delhi)
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Other issue - Guarantee Fees
Guarantee payment cannot be said to be in respect of any
money borrowed or debt incurred and hence it does not
come within the ambit of definition of ‘interest’.
Tax withholding on guarantee fees per se is not specifically
covered under the Act.
Further it cannot be termed as ‘service fee’.
This view would essentially depend upon the terms of the
contract between the parties concerned.
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Section 194B
– Winnings from lottery or
crossword puzzle.
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194 B – Gift (prize by way of winnings from lottery) given in kind
(i) If prize is given partly in cash and partly in kind - Tax will be
deducted from cash prize with reference to the aggregate
amount of the cash prize and the value of prize in kind. And
where in the part of cash is not sufficient to meet the liability
for tax deduction in respect of whole of the winnings then
payer has to collect the balance from the payee.
(ii) Where the prize is wholly in kind - The payer has to collect
the liability for tax deduction from payee.
Example – Mr.” X “wins a Maruti-Zen value of Rs.3,70,000/- on
August 20, 2008, in a draw of lot organized by Maruti Udyog.
Tax liability on prize in kind comes to Rs.1,14,330/- (i.e., 30.9%
of Rs.3,70,000/-) which may be recovered by the Maruti
Udyog from Mr. “X” and the same can be deposited with the
government on account of tax deduction.
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Section 194C
- TDS on payment to
contractors and subcontractors
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Section 194C – Payments to contractors and sub-contractors
Substitution of the entire section w.e.f 01/04/2009
Applicable to Individuals and HUF only if they are liable for tax audit
during the preceding financial year
What is covered? - Payment made for carrying out any work including
supply of labour for carrying out any work, in pursuance to a contract
Written as well as Oral contracts are covered
No TDS if payment is made by an Individual/HUF for personal purposes.
Tax to be deducted on advance payment against the contract
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Monetary Limit and Rates
Single payment exceeds Rs. 20,000, or
Aggregate payments during the financial year exceed or are likely to
exceed Rs. 50,000
At what rate to deduct? Payment to Individual and HUF: 1%
Other than Individual and HUF : 2%
No Difference between contractor and sub-contractor
Payments to Transport Contractors – No TDS on furnishing PAN.
Otherwise, TDS as per the above rates. w.e.f 01/04/2010 - @20%
Person responsible for making payment to transporter to furnish
prescribed information.
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What is ‘Work’?
Work includes:
Advertising
Broadcasting and telecasting including production of programmes for
broadcasting and telecasting
Carriage of goods and passengers by any mode other than railways
Catering
Manufacturing a product according to specification of customer by
using material purchased from customer
Work includes but is not limited to a Works Contract
The word ‘any’ preceding the word ‘work’ indicates that each and
every type of work is covered
Birla Cement Works v. CBDT [248 ITR 216](SC)
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Contract for work v Works contract
The term ‘Works contract’ has a separate meaning under tax laws
and cannot be equated with the term ‘work’
Contract for work is a broader term than Works Contract
Associated Cements Co. Ltd. [201 ITR 435](SC)
All Gujarat Federation of Tax Consultants [214 ITR 276](Guj)
For instance, transport contract and service contracts are contracts
for carrying out work but are not works contracts
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Contract for sale v Contract for work
Customer specific sale is still a contract for sale
Seagram Manufacturing [19 SOT 139](Del)
Whirlpool of India Ltd. [16 SOT 435](Del)
BDA Ltd. Vs ITO(TDS) [281 ITR 99] (Bom)
CIT vs Dabur India Ltd. [283 ITR 197](Del)
Printing of books
Where paper is supplied by the customer, it is a contract for work
Where paper is provided by the printing press, it is a contract for sale
However, Q. No. 15 of Circular No. 715 dated 08-08-1995 suggests Tax to
be deducted u/s 194C which will have to be interpreted in light of the
amendments in Section 194C.
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Reimbursement of expenses
The term ‘Any Sum’ refers to the Gross Amount paid under the
contract. Hence, reimbursement of expenses would also attract TDS
Reimbursement of actual expenses cannot be deducted out of the bill
amount for the purpose of tax deduction at source
CBDT’s Circular No. 715
The percentage deduction prescribed in law is with reference to the
amount of payment and not income comprised in the payment
Associated Cement Co. Ltd. v. CIT [201 ITR 435]
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Service tax
Since section 194C refers to any sum paid, TDS will be
attracted on the service tax portion also
Circular No. 4/2008 states that TDS should not be
made on service tax element of rent. Since the
circular specifically mentions rent, it cannot be
applied for the purpose of section 194C
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Advertising contracts
A person makes payment to an advertisement agency. The agency
makes payments to its artists and the media. What are the TDS
implications?
Payment to agency – 1% / 2% u/s 194C
Payment to artists – Section 194J
Payment by agency to media (Print/Electronic) – No TDS
Payment directly to media – TDS applicable u/s 194C(Q. no. 1, 2 & 3 of
Circular 715)
Payment to Doordarshan is not liable to TDS as it is a government
agency
Q. no. 4 of Circular No. 715
Payment made for production of program for the purpose of
broadcasting and telecasting - TDS u/s 194C
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Advertisement Hoardings
Contract for putting a hoarding is an “Advertisement contract” and is
covered under section 194C
However, if the space for hoarding is taken on rent and then sub-let,
the payment will be covered under section 194I
Q. no. 5 of Circular No. 715
Payment made for sponsorship for debate, seminar or other functions
held in college, schools etc. is in the nature of carrying out work of
advertisement and liable to TDS
Q. no. 18 of Circular No. 715
TDS would apply in case of advertisement issued in souvenirs brought
out by organizations
Q. no. 19 of Circular No. 715
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Some Issues
Payments made to courier agency is for carriage of goods. Hence, TDS
under section 194C is applicable
Q. no. 8 of Circular No. 715
Food served by hotels, restaurants or cafes does not attract TDS under
section 194C
Q. no. 11 of Circular No. 715
Whether 194C would apply if specific contract entered into with hotel
fixing day, date, no of people and rate? Can this be construed as
‘contract of catering’ or ‘food served by hotel in the normal course’?
Payments to banks for discounting bills, collecting payments through
cheques or drafts, L/C commission are not covered under section 194C
CBDT’s Circular No. 681
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GR issued by contractors
Can each GR issued by transporter be regarded as a separate
contract?
If goods are transported on a ‘one-off’ basis, each GR can be
treated as a separate contract
If goods are transported continuously in pursuance of a contract for
a specified period or quantity, all GRs relating to that contract will
be aggregated for the purpose of TDS
- CBDT’s Circular No. 715
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Maintenance Contracts and Installation Charges
Normal maintenance contracts which include supply of spares will be
covered under section 194C
Where technical services are rendered, section 194J will apply
CBDT’s Circular No. 715
Whether contract for design, manufacture and supply of Plant and
Equipment including erection and installation - liable for TDS?
Power grid Corporation of India [13 SOT 347](Hyd)
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Payments to travel agents
Whether payment made to airlines or travel agents for
booking of travel tickets attracts TDS under section 194C?
There is no privity of contract between the passenger and
the travel agent.
Section 194C does not apply
However, TDS under section 194-I is applicable for
chartering of aircraft, ship etc.
CBDT’s Circular No. 715
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Payments to Clearing and forwarding agents
Payments to clearing and forwarding agents attracts TDS under
section 194C
National Panasonic P Ltd [3 SOT 16](Del)
Reimbursement made to a person, acting on behalf of assessee
and who has deducted TDS – whether TDS applicable on such
reimbursement?
UP State Industrial Development Corpn. Ltd [81 ITD
173](Lucknow)
Payment to Architect – consolidated contract
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Car Hire charges
The terms of hire need to be examined
Section 194C includes payment for carriage of goods and passengers
Hirer should not have control over the direction of the car
It should be a time charter – Gosalia Shipping Co case
Point-to-point service / Pick and drop facility is covered under
section 194C
Controversy now resolved by amendment made by Finance Act
2009
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Power charges/Telephone charges
Power charges are not specified in the inclusions to the
definition of Work
Payment for power/electricity charges cannot be said to be
payments for carrying out any work
Under central excise and sales tax, electricity is treated as
goods
Hence, it can be argued that payment of power charges is a
contract for sale and hence outside the purview of section
194C
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Bhasin Motors India (P.) Ltd - 16 SOT 319
Facts of the case:
Assessee was dealing in cars and spares and servicing of vehicles
It entered into an agreement with ‘D’ whereby D had agreed to allow
the use of its premises for assessee’s business
D installed machinery and equipment in its premises for servicing of
vehicles
D decorated the premises for display, repair and parking of vehicles
D also provided manager and supervisor whose salaries were borne by
D
Payment made to D was based on the number of vehicles sold and
vehicles serviced
TDS for this payment will be attracted under which section:
Section 194C?
Section 194H?
Section 194-I?
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Bhasin Motors India (P.) Ltd - Held
It cannot be said that the assessee made the
payment merely to use the premises
Based on the manner of computation of
consideration paid to D, the transaction is in the
nature of sharing of revenue between the parties
Hence, the payment cannot be said to be Rent or
Commission.
It is in the nature of a contractual payment liable for
TDS under section 194C
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Shringar Cinemas P Ltd. [20 SOT 480]
Assessee (S) is engaged in the business of exhibition of films.
S paid its distributors substantial amounts on account of supply of film
prints by way of fixed percentage of net weekly collection as per the
contract entered between them
Whether the AO is justified in treating S as assessee in default for failure to
deduct tax as applicable u/s 194C? Are provisions of 194I applicable?
HELD
194 C is on payments made for any work carried on by the contractor. In
the present case the distributor has only given its film on rent to S.
Therefore, payment made is for license to use the films or renting of films
and is not covered u/s 194C.
Provision of 194I can only be invoked where the payments of rent are
made, but, it relates to payment of rent for the use of the machinery or
land or building etc. It cannot be invoked to the present facts and it has
been clarified by the Board Circular No 736 dated13th Feb 1996 that
exhibitors do not let out the cinema halls to the distributors.
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Payments to Hotels for other facilities
Whether TDS is required to be deducted on payments made
to hotels for availing incidental amenities like food and
beverages, laundry, telephone, wifi, health club, etc.
alongwith accommodation?
East India Hotels Ltd [2009-TIOL-122-HC-MUM-IT]
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Section 194H
- TDS on Commission and
Brokerage
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Section 194H – Commission or Brokerage
Applicable to all payers other than Individuals and HUF.
Applicable to Individuals and HUF liable to tax audit during
the preceding financial year
What is covered? - TDS on payment of income by way of
commission or brokerage
Insurance commission, brokerage for securities are not
covered
At what rate to deduct? - 10%
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What is Commission or Brokerage?
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 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
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Points to be noted
Existence of agency relationship is implied
Commission should be distinguished from discount
Ahmedabad Stamp Association [176 CTR 193](Guj)
Contract of agency should be distinguished from contract of
sale
Hindustan Coca-Cola Beverages [97 ITD 105](JPg.) - Against
Favourable – National Panasonic India [3 SOT 16](Del)
Favourable – All India Radio Commercial Broadcasting Service [8
SOT 513 (Del)
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Commission retained by consignee
In certain cases, Commission is retained by consignee from
payments to be made to the consignor
Such retention constitutes a constructive payment to the
consignee
TDS applicable on such retention
Circular No. 619
If retention is made on a principal to principal basis, it is not
in the nature of commission and TDS is not required
CIT v Samaj [77 ITD 358](Cuttack)
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Section 194-I
- TDS on Rent
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Section 194-I - Rent
Applicable to all payers, except Individuals and HUF
Applicable to Individuals and HUF only if they are liable to tax audit
during the preceding financial year
What is covered? – Income by way of rent
When to deduct? – At the time of payment or credit whichever is
earlier
Credit to suspense account is deemed to be credit to the account of the
payee
At what rate to deduct? –
Machinery, Plant or Equipment - 2%
Furniture, Land or Building - In All cases: 10%
No TDS if the amount paid or likely to be paid during the financial year
does not exceed Rs. 1,20,000 in aggregate
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What is Rent?
Any payment, by whatever name called
Under any lease, sub-lease, tenancy or any other
agreement or arrangement
For the use ,either separately or together, of any
Land
Building
Land appurtenant to a building
Machinery or Plant
Equipment, Furniture or Fittings
Whether or not owned by the payee
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Service tax
No TDS on service tax element of rent
Circular No. 4/2008
Payments to Shopping malls / Multiplexes
Payments made by food courts/restaurants to shopping malls
where payment is linked to revenue from sales
Kamat Hotels [78 ITD 241](Mum)
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Kamat Hotels (I) Ltd vs. CIT [78 ITD 241]
Assesse was engaged in the business of hotelleiring and catering belonging
to Kamat group. It entered into contract with Fantasyland and Esselworld
for conducting business in the restaurants / food outlets owned and set up
in the amusement parks.
Assessee was to run the outlets and in consideration was to pay a
commission or royalty of 15 and 20 percent respectively of sales to MF and
PIP.
Are provisions of 194I applicable as assessee was also allowed the use of
premises, furniture & fixture etc ?
It was held that the dominant intention of the parties was to grant a
conducting license to manage & conduct the catering business. It was only
incidental that the premises was allowed to be used as s permissive user
under a license.
Rent should normally be a fixed payment which does not vary and is not
linked with some other fluctuating payments or amounts.
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Rent Deposits
No TDS in case of refundable deposits
However, if deposit is non-refundable, it partakes character of rent
and liable to TDS at the time of payment of deposit
Reebok India Company [291 ITR 455](Del). Deposit was to be
adjusted after certain period. Court held it to be advance rent liable
for TDS upfront.
Interest, if any, on deposits will be covered under section 194A
No Notional income on deposits
Circular No. 718
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Municipal taxes etc.
If municipal taxes, ground rent etc. are borne by the tenant,
TDS is not required
Circular No. 718
If municipal taxes etc. are paid to the landlord, is it in the
nature of rent and requires TDS under section 194I ?
Treatment in case of Society Maintenance charges borne by
tenant – whether TDS u/s 194C or 194I ?
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Advance rent
Difficulty in claiming TDS credit in case of advance rent
since income is spread over more than one year
TDS Credit is allowed in the same proportion in which
advance rent is offered to tax
Credit for all such years will be allowed based on the
single TDS certificate
Circular No. 5/2001
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Advance rent – Cancellation of agreement / transfer of property
Advance rent is paid and tax is deducted at source
The agreement is subsequently cancelled or the property is transferred
Rental income does not accrue to the assessee after cancellation or
transfer
The transferee (buyer) cannot claim TDS credit as the TDS certificate is
not in his name
Unclaimed credit for TDS can be claimed by the assessee (transferor /
seller) in the year of cancellation of rent agreement or transfer of
property
Circular No. 5/2001
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Krishna Oberoi vs. UOI 257 ITR 105 (AP)
Hotel rooms were rented out under an arrangement with
Indian Airlines and others
Assessee argued that payments received were not in the
nature of rent
Held that charges paid for room to a hotel is ‘rent’ and tax was
deductible from the same
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Payment for Hotel Rooms
Payment made to hotels for rooms taken on regular basis would be in
the nature of rent
Circular No. 715
Meaning of the term ‘Regular basis’ (Circular No. 5/2002)
Where earmarked rooms let out for a specific rate and specified period, it
is in the nature of accommodation on a regular basis
Same would be the case where rooms are not earmarked but hotel is
under a legal obligation to provide such rooms
Where the employee pays the hotel bills and the company reimburses
the same, TDS will not be applicable
(Circular No. 5/2002)
Agreement entered with a hotel to fix the room tariffs - Such agreements are
in the nature of rate-contracts and such cases are not covered under
‘accommodation taken on a regular basis’
Sudit K. Parekh & Co.
Co-owned property
If the share of each co-owner can be ascertained, the limit
of Rs. 1.2 lacs will apply to each co-owner separately
Circular No. 715
Trade Fair
Payments made for trade fair/exhibition – Liable to TDS u/s
194I.
Sudit K. Parekh & Co.
65
Business Centre Agreements
Essence of the agreement to be seen
Where essence of the agreement is for taking premises on
rent, tax is deductible
Nomenclature of transaction is not important
- Circular No. 715
Sudit K. Parekh & Co.
66
Internet Charges
Payment of internet charges are not under any lease or tenancy. Usage
of internet facility cannot be said to be leased-out by the ISP to the
user. The user does not have any rights over the communication
network.
Hence, section 194-I / 194J was not applicable.
Skycell communication [251 ITR 53](Mad)
HFCL Infotel Ltd [99 TTJ 440](Chd)
Wipro Ltd. [80 TTJ 191](Banglore)
Position now set to change – Delhi Special Bench decision in the case
of New Skies Satellites NV (Unreported) holding that payments made by
telecasting companies to satellite companies for telecommunication
constitutes ‘Royalty’
Sudit K. Parekh & Co.
67
Conference Hall charges
Payment is covered under section 194 I. However if invoice
is raised on “per person basis”, whether TDS u/s 194C as
catering contract or u/s 194 I?
In case separate invoices are provided, Hall charges are
covered under section 194 I, and Food and beverages
charges will fall under section 194C – Catering contract
Sudit K. Parekh & Co.
68
Warehousing charges and Cold storages
Warehousing charges paid for storage of goods is covered u/s 194I
Circular No. 718
Hindustan Coca Cola Beverages (P.) Ltd. 90 ITD 720 (T-Del.)
Cold storages provide a composite service – Preservation of goods and
their storage
Storage is only incidental to the main purpose of preservation
No hiring of building, plant or machinery
Customer is not given any right to use a demarcated space or
machinery
The arrangement is contractual in nature and attracts TDS under
section 194C and not under section 194-I
Circular No. 1/2008
Whether above circular could taken help of in case of preservation of
files, documents, etc?
Sudit K. Parekh &
Co.
69
Section 194J
- TDS from Fees for
Professional and Technical
Services
Sudit K. Parekh & Co.
Section 194J – Fees for professional or technical services
Applicable to all payers except Individuals and HUF
Applicable to Individuals and HUF only if they are liable to tax audit
during the preceding financial year
What is covered?
Fees for professional services
Fees for technical services
Royalty
Non-compete fee
When to deduct? - TDS at the time of payment or credit, whichever is
earlier
Credit to suspense account is deemed to be credit to the account of the
payee
At what rate to deduct? - 10%
Sudit K. Parekh & Co.
71
Exclusions
No TDS if fees for professional services are paid by an
Individual or HUF for personal purposes of the
individual or member of the HUF
No TDS if the payment does not exceed Rs. 20,000 in
aggregate during the financial year
The limit of Rs. 20,000 applies separately to the items
covered by the section
Sudit K. Parekh & Co.
72
Professional services
Services rendered by a person in the course of carrying on a:
Legal profession
Medical profession
Engineering profession
Architectural profession
Accountancy profession
Technical consultancy profession
Interior decoration profession
Profession of Information Technology
Profession of Company Secretary
Film artistes
Sports person, Umpires and Referees, Coaches and trainers, Team
Physicians and Physiotherapists, Event Managers, Commentators,
Anchors and Sports Columnists (Notification 2085(E) dated 21st August
2008)
Sudit K. Parekh & Co.
73
Fees for technical services
Consideration for rendering of
Managerial, technical or consultancy services
Including provision of services of technical or other
personnel
But does not include consideration for
Construction, Mining or like project, or
Consideration chargeable in the hands of the recipient
under the head ‘Salaries’
Sudit K. Parekh & Co.
74
Section 194 J
Since section 194J refers to “any sum paid”, TDS is
applicable even on reimbursement of expenses
including service tax
Circular no. 715
If separate bill is raised for reimbursement of
expenses, TDS is not applicable
Dr. Willmar Schwabe India (P) Ltd. [3 SOT 71](Del)
Sudit K. Parekh & Co.
75
Royalty
Consideration for
Transfer of all or any rights including granting of a license
in respect of a patent, invention, model, design, secret
formula or process or trademark or similar property
Imparting of any information concerning the working or
use of the above
Use of any patent, invention, model, design, secret
formula or process or trademark or similar property
Imparting of information concerning technical,
industrial, commercial or scientific knowledge,
experience or skill
Sudit K. Parekh & Co.
76
Royalty
Use or right to use any industrial, commercial or
scientific equipment but not including the amounts
referred in section 44BB
Transfer of all or any rights, including granting of
licence, in respect of copyright, literary, artistic or
scientific work including films and video tapes for use
in connection with radio broadcasting but not
including consideration for sale, distribution or
exhibition of cinematographic films
Rendering of services in connection with above
Sudit K. Parekh & Co.
77
Sitting fees to non-executive director
A director is also a manager under the provisions of
the companies Act, 1956. He is therefore, a technical
personnel.
Any payment made to such director (be it a sitting
fee or any other sum) shall be required to be taken
into consideration for the purposes of deduction of
tax at source under section 194J.
If the Director is an employee of the company,
section 194J does not apply
Sudit K. Parekh & Co.
78
Non-resident making payment to professional in
India
Non-resident making payment of professional fees to any
resident CA, lawyers, advocate and solicitor is not required
to deduct tax provided:
Such fees is paid through regular banking channels
Such non resident does not have any agent, business
connection or permanent establishment in India
Circular No. 726
Sudit K. Parekh & Co.
79
Payment to Hospitals and Nursing Homes
Payments made to hospitals for rendering medical services
attract TDS under section 194J
Circular No. 715
Medi Assist India P .Ltd [2009-TITOL-534-HC-KAR] – Third Party
Administrator
Payment for use of machinery or equipment – Whether TDS
u/s 194I or 194J (Royalty)?
Whether Payment for fees for PMS would be liable for TDS? –
Whether Professional fees or fees for Technical Service?
Sudit K. Parekh & Co.
80
Software charges
If IPR of the developer is transferred to the user, no TDS since it is a
transfer of a capital asset
Purchase of shrink wrapped software or copyrighted article does not
amount to royalty – No TDS
Tata Consultancy Services [271 ITR 401](SC)
Lucent Technologies [82 TTJ 163]
Nokia, Erricson and Motorola [95 ITD 269]
Sonata Information Technologies [103 ITD 324](Banglore)
Against
Samsung Electronics [185 Taxman 313](Karnataka)
Head Start [285 ITR 530](AAR)
IMT Labs [287 ITR 450](AAR)
Sudit K. Parekh & Co.
81
Some Issues
Payment to Agencies providing Recruitment Services whether
through Internet or Otherwise – Liable to deduct TDS u/s 194J
Circular 715
Fees paid to Training Institute – Whether can be considered as
‘Technical Service’ ??
Transaction fees paid to Stock Exchange an the basis of volume
of transactions is payment for use of facilities provided by stock
exchange and not for any services, either technical or
managerial, hence provisions of section 194J are not attracted
Kotak Securities Ltd. [25 SOT 440](Mum)
Dun & Bradsteet [272 ITR 99](AAR)
Sudit K. Parekh & Co.
Some Other Issues
Credit for TDS (In case of cash system of accounting)
Though tax deduction will show up as credit in Form 26AS,
the assessee as professional has to claim credit for TDS
relating to income offered to tax during the year.
Sudit K. Parekh & Co.
Credit for TDS
Sudit K. Parekh & Co.
Rule 37BA- Credit for TDS
Section 199 is the relevant section.
Credit for TDS shall be given to deductee on the basis of information
relating to tax dedcution furnished by the deductor to tax authority.
Credit for taxes should be allowed to the payee in the year in which the
income is assessable.
If income on which tax is deducted is assessable in the hands of a person
other than deductee, credit shall be given to that other person.
For e.g.
Income of deductee is included in income of other person u/s 60,61,64
etc.
Income of AOP or trust is assessable in the hands of the members /
beneficiary
Income received by a partner or member of HUF, which is assessable
in the hands of firm or HUF.
Sudit K. Parekh & Co.
Rule 37BA- Credit for TDS
In case of joint ownership of a property where income from such property
is taxable in the hands of the joint owners, TDS credit would be allowed in
proportion to the ownership interest.
Deductee must file a declaration with the deductor specifying the name,
address, PAN of the person to whom credit is to be given and reasons for
giving credit to such person.
The deductor shall issue the certificate for deduction of tax at source to
the person so specified.
Sudit K. Parekh & Co.
Issue of Form 16 and Form 16A
Form 16 is required to be issued by 30th of April
Form 16A is required to be issued by every person
making TDS, other than TDS on salaries
Where the amount is credited to the account of the payee
on the last day of the accounting year – Within 7 days from
the expiry of 2 months from the date on which the amount
was credited
In any other case – Within 1 month from the end of the
month in which deduction is made
However where a consolidated certificate is to be issued –
within 30 days from the end of the financial year
Sudit K. Parekh & Co.
87
Smt. Anusuya Alva vs. DCIT [278 ITR 206](Kar.)
Tax deducted under section 194 I but not remitted to the government
by the payer
TDS certificates were not issued to the assessee and thus not
submitted with the return
Revenue wanted to recover the demand from the assessee
The demand cannot be recovered from the assessee as tax had already
been deducted
Recovery can only be made from the payer
Sudit K. Parekh & Co.
88
Assessment u/s 201 on failure of deduction of tax
Prior to Finance Act 2009, no time limit for making assessment u/s 201.
Special bench Decision of Mumbai ITAT in case of Mahindra & Mahindra
[122 TTJ 577] laid down that the time limit has to be at par with the time
limit specified u/s 147
Insertion of New Section – 201(3)
An order u/s 201(1) shall be passed within two years from the end of the
financial year in which the statement of tax deduction at source is filed by
the deductor.
Where no such statement is filed, such order can be passed up till four
years from the end of the financial year in which the payment is made or
credit is given.
Proceedings for a financial year upto 31st March, 2007 and earlier years
can be completed by the 31st March, 2011
However, no time-limits have been prescribed for the following:
(a) the deductor has deducted but not deposited the tax so deducted
(b) the employer has failed to pay the tax wholly or partly u/s 192(1A)
(c) the deductee is a non-resident and it is not possible to recover the tax from
the non-resident.
It is proposed to make these amendments effective from 1st April, 2010
Sudit K. Parekh & Co.
Section 200A – Processing of Statement of TDS
Adjustments of any arithmetical error or apparent incorrect claim in the
statement would be made and interest shall be charged on the sum so
computed.
Tax and interest would be calculated and sum payable or refund due will be
determined.
An intimation will be sent within one year from the end of the financial year in
which the statement is filed.
No intimation shall be sent after the expiry of aforesaid period.
It appears that the Section is a procedural amendment and hence it shall apply
to all pending statements
This processing would happen through Central Computer Processing.
No Corresponding amendment is Section 154 or Section 246A for rectification
or Appeal.
Sudit K. Parekh & Co.
Defaults In TDS
- Consequences
Sudit K. Parekh & Co.
91
Consequences of default
Assessee deemed to be an “Assessee in default” for not deducting the
TDS or not depositing the Tax
Interest under section 201(1A) at the rate of 1% per month or part of
the month from the date on which tax was deductible to the date of
payment
As per rule 119A(b), any fraction of a month shall be deemed to be a full
month
Interest is not tax deductible
Iyer & Sons [1 ITD 502](Del)
Interest is mandatory and there is no precondition of reasonable cause
for non payment in time of tax deducted
Pantagon Engineering P Ltd [212 ITR 92]
Sudit K. Parekh & Co.
92
Consequences of default
Penalty under section 221 – Not exceeding amount of tax in arrears
Penalty under section 271C (Only for failure to deduct tax) – Amount equal to
tax which a person fails to deduct. This penalty is not for failure to deposit
tax.
Whether both penalties can be levied simultaneously?
Disallowance of certain expenditure under section 40(a)
The order passed u/s 201 after the expiry of Four years from end of relevant
F.Y. was held as time barred
S.B.I [106 ITD 589](Mum)
The date of payment of tax by the recipient should be considered as end point
for computing period of default for charging interest u/s 201(1A)
Manav Greys Exim P Ltd [75 TTJ 115]
Adidas India Marketing P Ltd [288 ITR 379](Del)
Sudit K. Parekh & Co.
Hindustan Coca cola Beverages P. Ltd
[163 Taxman 355](SC)
The Supreme Court relying on Circular No. 275/201/95-IT(B) dated 291-1997 agreed with the deductor that once the deductee has paid the
taxes, the Department cannot once again recover the tax from the
deductor.
Madhumilan Syntex Ltd [290 ITR 199]
Held that a delayed payment of tax deducted at source constitutes
offence u/s 276B and hence liable to prosecution
Sudit K. Parekh & Co.
Disallowance of expenditure – Section 40(a)
For expenses where tax was deductible during April to February, if tax
has not been deducted or after deduction has not been paid to the
Government on or before 31st March
For expenses where tax was deductible during March and has been
deducted during March, if it has not been paid to the Government on
or before due date under section 139(1)
Deduction allowed in subsequent year in which tax is paid or deducted
and paid in subsequent year
Sudit K. Parekh & Co.
95
Section 195
- TDS on payment to nonresidents
Sudit K. Parekh & Co.
Section 195 – Other sums
Section applies to all payers, including individuals and HUF
Section covers payment made to a non-resident not being a
company or a foreign company
What is covered? – Payment in the nature of interest or
any other sum chargeable under the Act
When to deduct? – TDS at the time of payment or credit,
whichever is earlier
At what rate to deduct? – Rates in force for the section
under which the payment falls (for e.g. Section 115A, 111A
etc.) or treaty rate whichever is beneficial
Sudit K. Parekh & Co.
97
An overview of TDS u/s 195
Snapshot of the Section
Sec. 195(1) – Scope & conditions for applicability
Sec. 195(2) – Application by payer to A.O. for lower
deduction of tax
Sec. 195(3 & 4) – Application by payee to A.O. for lower
deduction of tax
Sec. 195(5) – Powers to CBDT to make Rules
Sec. 195(6) – Payer to furnish information in prescribed
form
Sudit K. Parekh & Co.
An overview of TDS u/s 195 (contd…)
Section 195 (1) : Scope and Conditions
Wide scope of the section
Conditions for application of Section 195
a) “any person” – Includes a person having no taxable
income
b) “a non-resident” Includes NRIs – does not include NOR
c) “sum chargeable to tax (Other than Salaries)”
Sudit K. Parekh & Co.
Scope of Income of a Non-Resident
1.
Business Profits
Taxable if Business Connection in India or property
or asset or source in India or trf. of a capital asset
situated in India.
Vodafone International Holdings [16 DTR
185](Mum)
2.
Salaries
Taxable if services are rendered in India [Section
9(1)(ii)] (Refer Eli Lilly [312 ITR 225](SC))
3.
Dividends
Taxable if paid by an Indian Company [Section
9(1)(iv)] – (At present exempt)
4.
Capital Gains on Shares /
Property
Taxable if situs of Shares / Property in India
5.
Rental from Properties
Taxable if situs of Property in India
6.
Interest / Royalty /FTS
Taxable if sourced in India
Sudit K. Parekh & Co.
Certain Cross Border Payments – Withholding Tax Issue (cont’d …)
Business Income (of NR)…
Off-shore Supply : 288 ITR 408
If title to goods passed outside India and payments outside India
not taxable
Signing in India is not relevant
Performing of certain activities in India (loading, unloading, inland
transportation) not relevant
Payment to foreign agents
Operations outside India (CBDT circulars 23 and 786)
Not taxable in India – (125 ITR 525), (267 ITR 725)
Contrary view taken by AAR in case of Wallace Pharma [278
ITR 97] and Rajiv Malhotra [285 ITR 564](AAR)
Sudit K. Parekh & Co.
Certain Cross Border Payments – Withholding Tax Issue (cont’d …)
Issues arising u/s 195 in respect of certain specific payments
Royalties and FTS :
Section 9(1)(vi) and Section 9(1)(vii):
Payments in nature of Royalty and FTS:
These subsections override section 9(1)(i) [167 ITR 884]
Difference between “Royalty” and “FTS”
“Royalty” – Act vs Treaty
“FTS” – Act vs Treaty
“Make available” definition of FTS
TDS where FTS Article is missing in Treaty
Most Favoured Nations (MFN) Clause
Sudit K. Parekh & Co.
Certificate by CA for Remittance
As amended by Notification No. 30/2009 dt. 25th
March, 2009 w.e.f. 1st July,2009.
CA certificate to be obtained in Form No.15 CB
Form No. 15 CA to be furnished electronically by the
assessee.
Sudit K. Parekh & Co.
Samsung Electronics [185 Taxman 313](Kar)
Payments to non-residents are subject to WHT, unless
taxpayer obtains order from tax authorities for determination
of WHT
In absence of such order, taxpayer is liable to withhold tax on entire
income paid
Lower or Nil withholding requires statutory dispensation from the tax
officer
SC in Transmission corporation has declared legal position
with respect to WHT on payments to non-residents
Binding on all High Courts in India
Tax authority not required to determine income of non-resident for
determining WHT
WHT provisions seek to withhold a tentative amount as tax before
determination of actual tax liability of non-resident
Sudit K. Parekh & Co.
Samsung Electronics [185 Taxman 313](Kar)
In view of HC, income arises even in case of payments for
purchase of goods from non-residents
Can taxpayer still take a position that WHT only where sum
chargeable to tax?
SC in Transmission, in fact, observed that ‘any sum’ would mean ‘sum on
which tax is leviable
SC ruling supported by interpretation of by Rajasthan HC in SBI [226 CTR
310] Support also from ‘alternative procedure – remittance based on CA
certificate’
Circular 4/2009 dated 29 June 2009 procedure can be followed for
remittance
Circular more beneficial than HC ruling even for taxpayers in HC
jurisdiction
Strategy for risk mitigation?
195/197 certificate
Practical Issues
Tax authorities could attempt to enforce on all cross border payments
Hopefully CBDT takes proactive steps to suitable address arising issues
Sudit K. Parekh & Co.
Thank you
Manish Shah, Partner
Sudit K Parekh & Co.
Mumbai.
Tel: +91 22 66178000
Email: [email protected]
Sudit K. Parekh & Co.