Volume VIII Part 1 July 10, 2014 21 Business Advisor

Service tax and TDS

Dr Sanjiv Agarwal

Service tax is payable on gross amount payable by

service receiver to the service provider. Since TDS is

deducted on behalf of the payee, gross amount for the

purpose of service tax would be the amount inclusive

of or before deduction of income tax deducted at

source (TDS).

On TDS on payments made to service providers, CBDT

vide Letter No F. No. 275/1/2006-IT (B) dated

21.7.2006 addressed to CIT, Mumbai clarified that tax

deduction u/s 194-J of Income Tax Act, 1961 would be required to be made

on the sums payable by the deductors inclusive of any service tax.

In CCE, Jaipur I v. Louis Berger International Inc. (2009) 13 STR 381; (2008)

18 STT 312 (Cestat, New Delhi), it was held that amount of tax deducted at

source (TDS) is not excludible from gross amount for determining tax

liability.

The TDS amount deducted was payable only on behalf of the appellant to

income tax department and there was no justification to exclude TDS

amount from gross amount for the purpose of determining service tax

liability.

In re: Mainetti (India) (P.) Ltd. (2013) 38 STT 347 (Cestat, Chennai), in case of

service provider, TDS is not deductible for purpose of calculating service tax

liability since service tax is to be charged on gross amount received.

No TDS on service tax component

In CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (2013) 31 STR 642

(Rajasthan), it was held that in section 194J of Income Tax Act, 1961, ‗any

sum paid‘ relates to fees for professional or technical services. Whether

service tax had to be separately paid or not, is purely a question of fact. If as

per agreement, it was to be paid separately, then it is not subject to TDS.

CBDT clarification

The Central Board of Direct Tax has issued Circular No. 1/2014 dated

13.01.2014 referring to the Rajasthan High Court decision in CIT (TDS) v.

Rajasthan Urban Infrastructure (supra) that if as per the terms of the

agreement between the payer and the payee, the amount of service-tax is to

Volume VIII Part 1 July 10, 2014 22 Business Advisor

be paid separately and was not included in the fees for professional services

or technical services, no TDS is required to be made on the service-tax

component under Section 194J of the Income Tax Act, 1961.

Pursuant thereto, the CBDT has decided in exercise of powers under Section

119 that wherever the terms of the agreement between the payer and the

payee, the service tax component comprised in the amount is indicated

separately, tax shall be deducted at source under Chapter XVII-B of the

Income Tax Act, 1961 on the amount paid without including such service

tax component.

This clarification is applicable not only to payment relating professional

services or technical services it is also applicable to payments relating other

services i.e. works contract etc. Even before issue of this order TDS is not

applicable to service tax portion in the case of rent (Section 194-I) as per

Circular issued by the CBDT. This is explained by an example:

In this case, Service Tax is liable to be

deducted on Rs 1,000 only.

It may be noted that while making

payment of rent along with service tax,

income tax at source (TDS) should not

be deducted on service tax if shown

separately.

CBDT had issued a Circular No. 4/ 2008 dated 28.04.2008 to this effect.

This has further been reiterated in CBDT Circular No. 1/2014 dated

13.01.2014 clarifying the same treatment i.e., wherever in terms of the

agreement/ contract between the payer and the payee, the service tax

component comprised in the amount payable to a resident is indicated

separately, tax shall be deducted at source under Chapter XVII – B of the

Income Tax Act, 1961, on the amount paid / payable without including

such service tax component.

TDS on rent

So far as TDS on rent is concerned, CBDT has clarified vide Circular No. 4

dated 28.4.2008 that service tax paid by the tenant does not partake of the

nature of income of landlord. The landlord only acts as a collection agency

for the Government for collection of service tax. Therefore, TDS under

section 194-I of the Income Tax Act, 1961 would be required to be made on

the amount of rent paid or payable without including the service tax.

(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur)

Sl No. Particulars Rs

1. Service charges 1,000

2. Service tax 123.60

Total 1,123.60