tds+presentation+ +manish+shah

Sudit K. Parekh & Co.

Tax Deduction at Source – Certain peculiar issues


Overview of the Presentation

Scope of TDS provisionsRates of TDSDue-datesIssuesConsequences of defaultCircularsCase laws

2


Objectives behind TDS

Pay as you EarnPay as you Earn

Regular Cash InflowRegular Cash Inflow

Avoid EvasionAvoid Evasion

Widening of Tax BaseWidening of Tax Base

Shift the ResponsibilityShift the Responsibility

3


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?

4


Section 192 - TDS on salaries


Section 192 – TDS on salariesPayment should be in the nature of salaryThe employer has to deduct tax from the salary that he paysAt 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 MarchWhen to pay the TDS to the Govt.? – Within 7 days from the end of the month in which tax is deducted

6


Some Issues - Multiple employments

Either simultaneously or one after the otherEmployee 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 detailsWhat if the employee does not give these details? The employer cannot be held responsible for this.

7


Income under Other Heads

Employee not under an obligation to furnish details of income under other headsIf 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 accountParticulars of other income and TDS on the same, except under House property, cannot reduce the amount of tax which was otherwise deductible

8


Other IssuesThe annual circular is issued by the CBDT every year guides employers on how to compute the taxable salary and the taxShort 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 80GAnnual Circular on salary

Proof for allowance u/s 10(14) and deduction under chapter VILarsen and Tubro [221CTR 620]

Retainership fees – Salary Vs Professional fees.Disallowance u/s 40a(iii)

9


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 26While 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 115Proviso to Explanation 2 to Rule 115(1)

10


Non Monetary PerquisiteAn 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 – 46,350Average rate of tax [(46,350/4,50,000)100] – 10.3%Tax payable on Rs. 50,000 (10.3% of 50,000) – Rs 5,150Amount to be deposited per month – Rs 430(5,150/12)


Section 193 - TDS on Interest on securities


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]


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.


Rates of TDS

At what rate to deduct? –

15

Particulars Recipient other than Domestic Company

Domestic Company

Interest on debentures/securities issued by or on behalf of Local Authority/statutory corporation, Listed debentures and 8% Savings (Taxable) Bonds, 2003

10% 10%


Section 194 - TDS on Dividends


Section 194 - DividendsEffectively, TDS is applicable only for deemed dividend u/s. 2(22)(e) for an amount exceeding Rs. 2,500At what rate to deduct? – 10% (Rate applicable to any other income)

17


Section 194A - TDS on Interest other than

interest on securities


Section 194A – Interest other than interest on securities

Applicable to all payers, except Individuals and HUFSection applies to an Individual and HUF only if they are liable for tax audit during the preceding financial yearWhen to deduct? - TDS at the time of payment or credit whichever is earlierCredit to Suspense account or Interest Payable account is deemed to be credit to the account of the payeeAt what rate to deduct?

10% - whether corporate assessee or otherwise20% - In case on non resident and foreign company


Coverage

Inter - Corporate Deposits/LoansPublic DepositsLoansSuppliers 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)


Interest – section 2(28A)

Interest meansInterest payable in any mannerIn respect of money’s borrowed or debt incurred including a deposit, claim or other similar right or obligationIncludes 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

21


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 purposeNotwithstanding 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


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 stock-in-trade or for making payments of trading debts.


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)


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.


Section 194B – Winnings from lottery or

crossword puzzle.


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.


Section 194C - TDS on payment to contractors and sub-

contractors


Section 194C – Payments to contractors and sub-contractors

Substitution of the entire section w.e.f 01/04/2009Applicable to Individuals and HUF only if they are liable for tax audit during the preceding financial yearWhat is covered? - Payment made for carrying out any work including supply of labour for carrying out any work, in pursuance to a contractWritten as well as Oral contracts are coveredNo TDS if payment is made by an Individual/HUF for personal purposes.Tax to be deducted on advance payment against the contract


Monetary Limit and Rates

Single payment exceeds Rs. 20,000, orAggregate payments during the financial year exceed or are likely to exceed Rs. 50,000At 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.

30


What is ‘Work’?

Work includes:AdvertisingBroadcasting and telecasting including production of programmes for broadcasting and telecastingCarriage of goods and passengers by any mode other than railwaysCateringManufacturing 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)

31


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 ContractAssociated 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

32


Contract for sale v Contract for work

Customer specific sale is still a contract for saleSeagram 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 booksWhere paper is supplied by the customer, it is a contract for workWhere paper is provided by the printing press, it is a contract for saleHowever, 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.

33


Reimbursement of expenses

The term ‘Any Sum’ refers to the Gross Amount paid under the contract. Hence, reimbursement of expenses would also attract TDSReimbursement of actual expenses cannot be deducted out of the bill amount for the purpose of tax deduction at source

CBDT’s Circular No. 715The 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]

34


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

35


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 194CPayment to artists – Section 194JPayment by agency to media (Print/Electronic) – No TDSPayment 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


Advertisement Hoardings

Contract for putting a hoarding is an “Advertisement contract” and is covered under section 194CHowever, if the space for hoarding is taken on rent and then sub-let, the payment will be covered under section 194I


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


TDS would apply in case of advertisement issued in souvenirs brought out by organizations



Some Issues

Payments made to courier agency is for carriage of goods. Hence, TDS under section 194C is applicable


Food served by hotels, restaurants or cafes does not attract TDS under section 194C


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


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

39


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 applyCBDT’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)

40


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

41


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

42


Car Hire charges

The terms of hire need to be examinedSection 194C includes payment for carriage of goods and passengersHirer should not have control over the direction of the carIt should be a time charter – Gosalia Shipping Co casePoint-to-point service / Pick and drop facility is covered under section 194CControversy now resolved by amendment made by Finance Act 2009

43


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

44


Bhasin Motors India (P.) Ltd - 16 SOT 319

Facts of the case:Assessee was dealing in cars and spares and servicing of vehiclesIt entered into an agreement with ‘D’ whereby D had agreed to allow the use of its premises for assessee’s businessD installed machinery and equipment in its premises for servicing of vehiclesD decorated the premises for display, repair and parking of vehiclesD also provided manager and supervisor whose salaries were borne by DPayment made to D was based on the number of vehicles sold and vehicles servicedTDS for this payment will be attracted under which section:

Section 194C?Section 194H?Section 194-I?


Bhasin Motors India (P.) Ltd - Held

It cannot be said that the assessee made the payment merely to use the premisesBased on the manner of computation of consideration paid to D, the transaction is in the nature of sharing of revenue between the partiesHence, 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


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 themWhether 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.


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]


Section 194H - TDS on Commission and

Brokerage


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 brokerageInsurance commission, brokerage for securities are not covered

At what rate to deduct? - 10%

50


What is Commission or Brokerage?

Payment received or receivable, directly or indirectlyBy a person acting on behalf of another personFor services rendered – not being professional services or For services in the course of buying or selling of goodsOr in relation to any transaction relating to any asset, valuable article or thing not being securities

51


Points to be noted

Existence of agency relationship is implied

Commission should be distinguished from discountAhmedabad Stamp Association [176 CTR 193](Guj)

Contract of agency should be distinguished from contract of sale

Hindustan Coca-Cola Beverages [97 ITD 105](JPg.) - AgainstFavourable – National Panasonic India [3 SOT 16](Del)Favourable – All India Radio Commercial Broadcasting Service [8 SOT 513 (Del)

52


Commission retained by consignee

In certain cases, Commission is retained by consignee from payments to be made to the consignorSuch retention constitutes a constructive payment to the consigneeTDS 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)

53


Section 194-I - TDS on Rent


Section 194-I - Rent

Applicable to all payers, except Individuals and HUFApplicable to Individuals and HUF only if they are liable to tax audit during the preceding financial yearWhat is covered? – Income by way of rentWhen to deduct? – At the time of payment or credit whichever is earlierCredit to suspense account is deemed to be credit to the account of the payeeAt 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

55


What is Rent?

Any payment, by whatever name calledUnder any lease, sub-lease, tenancy or any other agreement or arrangement For the use ,either separately or together, of anyLandBuildingLand appurtenant to a buildingMachinery or PlantEquipment, Furniture or FittingsWhether or not owned by the payee

56


Service tax

No TDS on service tax element of rentCircular No. 4/2008

57

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)


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.


Rent DepositsNo 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 depositsCircular No. 718

59


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 ?

60


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 taxCredit for all such years will be allowed based on the single TDS certificateCircular No. 5/2001

61


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


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

63


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 basisSame 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’


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

65

Trade Fair

Payments made for trade fair/exhibition – Liable to TDS u/s 194I.


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

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’

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

68


Warehousing charges and Cold storages

Warehousing charges paid for storage of goods is covered u/s 194ICircular No. 718Hindustan Coca Cola Beverages (P.) Ltd. 90 ITD 720 (T-Del.)

Cold storages provide a composite service – Preservation of goods and their storageStorage is only incidental to the main purpose of preservationNo hiring of building, plant or machineryCustomer is not given any right to use a demarcated space or machineryThe 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?

69


Section 194J - TDS from Fees for

Professional and Technical Services


Section 194J – Fees for professional or technical services

Applicable to all payers except Individuals and HUFApplicable to Individuals and HUF only if they are liable to tax audit during the preceding financial yearWhat is covered?

Fees for professional servicesFees for technical servicesRoyaltyNon-compete fee

When to deduct? - TDS at the time of payment or credit, whichever is earlierCredit to suspense account is deemed to be credit to the account of the payeeAt what rate to deduct? - 10%

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

72


Professional servicesServices rendered by a person in the course of carrying on a:

Legal professionMedical professionEngineering professionArchitectural professionAccountancy professionTechnical consultancy professionInterior decoration professionProfession of Information TechnologyProfession of Company SecretaryFilm artistesSports 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)

73


Fees for technical services

Consideration for rendering ofManagerial, technical or consultancy servicesIncluding provision of services of technical or other personnel

But does not include consideration for Construction, Mining or like project, orConsideration chargeable in the hands of the recipient under the head ‘Salaries’

74


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)

75

Section 194 J


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 propertyImparting of any information concerning the working or use of the aboveUse of any patent, invention, model, design, secret formula or process or trademark or similar propertyImparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill

76


Royalty

Use or right to use any industrial, commercial or scientific equipment but not including the amounts referred in section 44BBTransfer 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 filmsRendering of services in connection with above

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

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 channelsSuch non resident does not have any agent, business connection or permanent establishment in IndiaCircular No. 726

79


Payment to Hospitals and Nursing Homes

Payments made to hospitals for rendering medical services attract TDS under section 194J

Circular No. 715Medi 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?

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)

AgainstSamsung Electronics [185 Taxman 313](Karnataka)Head Start [285 ITR 530](AAR)IMT Labs [287 ITR 450](AAR)

81


Some IssuesPayment 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)


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.


Credit for TDS


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 / beneficiaryIncome received by a partner or member of HUF, which is assessable in the hands of firm or HUF.


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.


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 creditedIn any other case – Within 1 month from the end of the month in which deduction is madeHowever where a consolidated certificate is to be issued – within 30 days from the end of the financial year

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

88


Assessment u/s 201 on failure of deduction of taxPrior 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 147Insertion 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, 2011However, 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


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.


Defaults In TDS - Consequences

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 deductibleIyer & 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]

92


Consequences of defaultPenalty 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)


Hindustan Coca cola Beverages P. Ltd [163 Taxman 355](SC)

The Supreme Court relying on Circular No. 275/201/95-IT(B) dated 29-1-1997 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


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

95


Section 195 - TDS on payment to non-

residents


Section 195 – Other sums

Section applies to all payers, including individuals and HUFSection covers payment made to a non-resident not being a company or a foreign companyWhat is covered? – Payment in the nature of interest or any other sum chargeable under the ActWhen to deduct? – TDS at the time of payment or credit, whichever is earlierAt 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

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


An overview of TDS u/s 195 (contd…)

Section 195 (1) : Scope and Conditions

Wide scope of the section

Conditions for application of Section 195a) “any person” – Includes a person having no taxable incomeb) “a non-resident” Includes NRIs – does not include NORc) “sum chargeable to tax (Other than Salaries)”


Scope of Income of a Non-Resident1. 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


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 taxableSigning in India is not relevantPerforming of certain activities in India (loading, unloading, inland transportation) not relevant

Payment to foreign agentsOperations 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)


Certain Cross Border Payments – Withholding Tax Issue (cont’d …)

Issues arising u/s 195 in respect of certain specific paymentsRoyalties 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 FTSTDS where FTS Article is missing in Treaty

Most Favoured Nations (MFN) Clause


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.


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 paidLower 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 IndiaTax 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


Samsung Electronics [185 Taxman 313](Kar)In view of HC, income arises even in case of payments for purchase of goods from non-residentsCan 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 leviableSC 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 remittanceCircular more beneficial than HC ruling even for taxpayers in HC jurisdiction

Strategy for risk mitigation?195/197 certificate

Practical IssuesTax authorities could attempt to enforce on all cross border paymentsHopefully CBDT takes proactive steps to suitable address arising issues


Thank you

Manish Shah, PartnerSudit K Parekh & Co.Mumbai.

Tel: +91 22 66178000Email: [email protected]

tds+presentation+ +manish+shah

Documents

bhasin motors india

preceding financial year

similar property imparting

service tax element

resident making payment

financial year

debt incurred

service fee