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Sudit K. Parekh & Co.

Tax Deduction at Source Certain peculiar issues




Overview of the Presentation

Scope of TDS provisions

Rates of TDS

Due-dates

IssuesConsequences of default

Circulars

Case laws

2




Objectives behind TDS

Pay as you Earn

Regular Cash Inflow

Avoid Evasion

Widening of Tax Base

Shift 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 salaries

Payment should be in the nature of salaryThe 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

6




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

th

e later / oth

er employer(s). Th

e information is to befurnished 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.

7




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 th

em 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

8




Other Issues

The annual circular is issued by the CBDT every year guidesemployers 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 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 26

While calculating income under t

he

head salary, t

he TTbuying 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)

10




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 wasotherwise deductible i.e. at the time of payment of income chargeable underthe 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 outof which, Rs. 50,000 is on account of non-monetary perquisite. Employeropts 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 onbehalf of a local authority or a company or a corporation established by aCentral, 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 thestage 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 heldthat, 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 - Dividends

Effectively, TDS is applicable only for deemed dividendu/s. 2(22)(e) for an amount exceeding Rs. 2,500 At what rate to deduct? 10% (Rate applicable toany 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 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 th

e time of payment or creditwhichever 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 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 onthe unutilized portions of the credit facilities

ITO v Arihant Trust & Others [214 ITR 306](Mad)




Interest section 2(28A)

Interest means

Interest payable in any manner

In respect of moneys borrowed or debt incurred including a

deposit, claim or oth

er similar righ

t or obligationIncludes any service fee or other charge in respect of

moneys 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 purpose

Notwithstanding the agreement between the company, directors and

the lender, TDS is applicable under section 194ACentury Building Industries [163 Taxman 188](SC)

Tax has to be deducted on the Gross Interest payable by a person andnot 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 TDSCircular No 738. dated 25/3/96




Some other Issues

The person responsible for making the interest payment may at thetime of making any deduction, increase or decrease the amount to bededucted for the purpose of adjusting any excess or deficiency arisingout 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 whetherborrower uses funds for acquiring fixed assets, capital assets or stock-in-trade or for making payments of trading debts.




Some other Issues . (contd)

A private trust having beneficiaries as individuals, while

making payments whether required to deduct Tax on its

borrowingM.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 interestSudershan 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 bededucted from cash prize with reference to the aggregateamount of the cash prize and the value of prize in kind. Andwhere in the part of cash is not sufficient to meet the liability

for tax deduction in respect of whole of the winnings thenpayer has to collect the balance from the payee.

(ii) Where the prize is wholly in kind - The payer has to collectthe 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 MarutiUdyog from Mr. X and the same can be deposited with thegovernment on account of tax deduction.




Section 194C

- TDS on payment tocontractors and sub-

contractors




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 contractWritten 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




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.

30




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 railwaysCatering

Manuf acturing a product according to s pecification of customer by

using materi al 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 coveredBirla 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 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

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 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.

33




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

CBDTs 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 bemade 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 agencymakes payments to its artists and the media. What are the TDSimplications?Payment to agency 1% / 2% u/s 194CPayment to artists Section 194J

Payment 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 governmentagency

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 194C

However, 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 organizationsQ. no. 19 of Circular No. 715




Some Issues

Payments made to courier agency is for carriage of goods. Hence, TDS

under section 194C is applicableQ. no. 8 of Circular No. 715

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

section 194CQ. 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 194CCBDTs 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

- CBDTs 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 apply

CBDTs 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.

CBDTs 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 assesseeand 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 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 undersection 194C

Controversy 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 W ork

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 allowthe use of its premises for assessees 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 byDPayment made to D was based on the number of vehicles sold andvehicles 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 premises

Based on the manner of computation of

consideration paid to D, the transaction is in thenature 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 forTDS 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 filmprints by way of fixed percentage of net weekly collection as per thecontract entered between themWhether the AO is justified in treating S as assessee in default for failure todeduct 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. Inthe 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 filmsand 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 orland or building etc. It cannot be invoked to the present facts and it hasbeen clarified by the Board Circular No 736 dated13th Feb 1996 thatexhibitors 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 brokerage

Insurance 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 indirectly

By a person acting on behalf of another person

For services rendered not being professional

services orFor 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

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

saleHindustan 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)

52




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 retentionCircular No. 619

If retention is made on a principal to principal basis, it is not

in the nature of commission and TDS is not requiredCIT v Samaj [77 ITD 358](Cuttack)

53




Section 194-I - TDS on Rent




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


What is covered? Income by way of rent

When to deduct? A

t th

e time of payment or credit wh

ich

ever isearlier

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

55




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 anyLand

Building

Land appurtenant to a building

Machinery or PlantEquipment, Furniture or Fittings

Whether 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

wh

ere payment is linked to revenue from salesKamat Hotels [78 ITD 241](Mum)




Kamat Hotels (I) Ltd vs. CIT [78 ITD 241]

Assesse was engaged in the business of hotelleiring and catering belongingto Kamat group. It entered into contract with Fantasyland and Esselworldfor conducting business in the restaurants / food outlets owned and set upin 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 andPIP.

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 onlyincidental that the premises was allowed to be used as s permissive userunder a license.

Rent should normally be a fixed payment which does not vary and is notlinked with some other fluctuating payments or amounts.




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 depositsCircular No. 718

59




Municipal taxes etc.

If municipal taxes, ground rent etc. are borne by the tenant,

TDS is not requiredCircular No. 718

If municipal taxes etc. are paid to the landlord, is it in thenature 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 tax

Credit 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 th

e assessee after cancellation ortransfer

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

propertyCircular 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 thenature of rent

Held that charges paid for room to a hotel is rent and tax wasdeductible from the same

63




Payment for Hotel Rooms

Payment made to hotels for rooms taken on regul ar basis would be inthe nature of rent

Circular No. 715

Meaning of the term Regul ar basis (C ircul ar No. 5/2002)

Where earmarked rooms let out for a specific rate and specified period, itis in the nature of accommodation on a regular basisSame would be the case where rooms are not earmarked but hotel isunder a legal obligation to provide such rooms

Where the employee pays the hotel bills and the company reimbursesthe same, TDS will not be applicable

(Circular No. 5/2002)Agreement entered with a hotel to fix the room tariffs - Such agreements arein the nature of rate-contracts and such cases are not covered underaccommodation 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 separatelyCircular 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 (Unre ported ) 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. 718

Hindustan 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 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 undersection 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 HUF

Applicable to Individuals and HUF only if they are liable to tax audit


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%

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 itemscovered by the section

72




Professional services

Services rendered by a person in the course of carrying on a:Legal profession

Medical profession

Engineering profession

Architectural profession

Accountancy professionTechnical 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)

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 forConstruction, Mining or like project, or

Consideration 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 taxCircular no. 715

If separate bill is raised for reimbursement of

expenses, TDS is not applicableDr. Willmar Schwabe India (P) Ltd. [3 SOT 71](Del)

75

Section 194 J




Royalty

Consideration forTransfer 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

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 orexhibition of cinematographic films

Rendering 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 th

rough

regular banking ch

annelsSuch 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 194JCircular 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?

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 Issues

Payment to Agencies providing Recruitment Services whetherthrough 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 attractedKotak 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 personother 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 A

OP

or trust is assessable in th

eh

ands of th

e members /beneficiary

Income 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.

Deducteemust 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, oth

er th

an TDS on salariesWhere 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 themonth in which deduction is made

However 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 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 timelimit 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 bythe deductor.Where no such statement is filed, such order can be passed up till fouryears from the end of the financial year in which the payment is made orcredit is given.Proceedings for a financial year upto 31st March, 2007 and earlier yearscan 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 fromthe 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 thestatement would be made and interest shall be charged on the sum socomputed.

Tax and interest would be calculated and sum payable or refund due will bedetermined.

An intimation will be sent within one year from the end of the financial year inwhich 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 rectificationor 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 d eductible to the date of

paymentAs 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 deductedPantagon Engineering P Ltd [212 ITR 92]

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 totax which a person fails to deduct. This penalty is not for failure to deposittax.

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 relevantF.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 pointfor 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 d eductible 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 d eductible 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 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 ActWhen 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

97




An overview of TDS u/s 195

Snapshot of the Section

Sec. 195(1) Scope & conditions for applicability

Sec. 195(2) A

pplication by payer toA

.O. for lowerdeduction of tax

Sec. 195(3 & 4) Application by payee to A.O. for lowerdeduction of tax

Sec. 195(5) Powers to CBDT to make Rules

Sec. 195(6) Payer to furnish information in prescribedform




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

income

b) a non-resident Includes NRIs does not include NOR

c) sum chargeable to tax (Other than Salaries)




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 assetsituated 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 (contd )

Business Income (of NR)Off-shore Supply : 288 ITR 408

If title to goods passed outside India and payments outside Indianot 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 [278ITR 97] and Rajiv Malhotra [285 ITR 564](AAR)




Certain Cross Border Payments Withholding Tax Issue (contd )

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




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 WHTIn 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-residentsBinding 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




Samsung Electronics [185 Taxman 313](Kar)

In view of HC, income arises even in case of payments forpurchase of goods from non-residentsCan taxpayer still take a position that WHT only where sumchargeable to tax?

SC in Transmission, in fact, observed that any sum would mean sum onwhich tax is leviableSC ruling supported by interpretation of by Rajasthan HC in SBI [226 CTR310] Support also from alternative procedure remittance based on CA certificateCircular 4/2009 dated 29 June 2009 procedure can be followed forremittanceCircular 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, Partner

Sudit K Parekh & Co.

Mumbai.

Tel: +91 22 66178000

Email: [email protected]

Documents

Presentation+ +Manish+Shah