Practical issues in tax deduction at source uploaded by Simpletaxindia.net

Practical issues in Tax Deduction at Source

Payments to residents (other than salary)

CA. N.C. Hegde

Deloitte Haskins & Sells

22nd March 2013

www.simpletaxindia.net

Contents

• Section 194A – Interest other than interest on securities

• Section 194C – Payments to contractors

• Section 194J – Fees for professional or technical services

• Section 194H – Commission or brokerage

• Section 194I – Rent

• Other issues

• Appendix

2


Section 194A – Interest other

than interest on securities

3


Section 194A

TDS on net off payment?

Issue

• Whether deduction should be done from gross interest payable or net interest

after setting-off mutual balances?

Held

• Statutory liability is imposed at the time of the credit of interest

• It is not possible to cast off the liability or shirk the liability imposed by the statute

• The expression, 'any income by way of interest' in section 194A, indicates that all

'interest income' is included except those which are specifically excluded from the

scope of the section

• The principal of netting the interest has no application under section 194A

• Tax was required to be deducted on gross interest credit to the account

4

S.K. Sundararamier and Sons (240 ITR 740) (Madras HC)


Section 194A

Discounting charges

Issue

• Whether discounting charges are in the nature of ‘interest’ on which tax is

deductible?

Held

• Interest is the sum payable in respect of money borrowed or debt incurred

• Bill discounting is a process in which sale consideration receivable on sale of

goods is discounted, which is not debt incurred or money borrowed

• The Interest Tax Act, 1974 specifically includes discounting charges in the

definition of interest. However interest defined under the Income-tax Act, 1961

(Act) does not include discounting charges

• Wherever the legislature intended the discount of bills of exchange to be included

within the definition of interest, the same was specifically provided for. Hence

omission of these words in the definition under the Act indicates the intention of

the legislator to keep the same out of the ambit of ‘interest’ under the Act

• The same rationale is also laid down in Circular no. 65 issued by the Central

Board of Direct Taxes (CBDT) in relation to section 194A of the Act

• Circular no. 647 dated 22 March 1993 also referred to

5 Cargill Global Trading (I) (P) Limited (ITA Nos. 331 & 204 of 2011) (SC)


Section 194A

Usance interest

Issue

• Whether finance charges / usance interest is in the nature of ‘interest’ on which

tax is deductible?

Held

• The intention of the parties to the contract was clear and the price of the material

to be supplied was reflected in a separate invoice

• In lieu of the credit facility, the buyer was required to pay interest at a stipulated

rate for which a separate invoice was prepared

• There was no nexus between the interest amount and fixation of the price of the

raw materials purchased. The nexus of interest was only with the period from

which the purchase price became due

• Thus, the outstanding price was a ‘debt incurred’ within the meaning of

interest under the Act

6

Uniflex Cables Ltd. (150 TTJ 290) (Mumbai ITAT)

Circular no. 65 of 1971 – TDS is applicable where there is no immediate

discounting and the bank (as an agent) receives interest at the end of the period


Section 194A

Payment on overdue purchase price

Issue

• Whether a compensatory sum payable on overdue purchase price is ‘interest’ on

which tax is deductible?

Held

• A distinction is required between payments not connected with any debt and

those having connection with borrowings

• A payment having no nexus with a deposit, loan or borrowings is out of the ambit

of the definition of interest

• If the immediate source of receipt is trade activity, then the nature of receipt

is not ‘interest payment’ but is payment of compensation. TDS is not

applicable

7

Parag Mahasukhlal Shah (46 SOT 302) (Ahmedabad ITAT)


Section 194A

Interest along with damages / compensation

Issue

• Whether interest for delay in construction projects is ‘interest’ for section 194A?

Held

• In case the houses were ready within the stipulated period the assessee would

not be liable to pay interest

• When construction of a house was delayed, there could be escalation in the cost,

the allottee could be deprived of rental income / right of living in his own house

• Thus, the amount paid by the assessee was not payment of interest but

payment of damages to compensate the allottee for the delay in the

construction of his house and the harassment caused

• The allottees had not given money to the assessee by way of deposit nor had the

assessee borrowed the amount from the allottees

• The amount was paid under a self-financing scheme for construction of the flats

and the interest was paid on account of damages suffered by the claimant for

delay in completion of the flats. TDS is not applicable

8

H. P. Housing Board (340 ITR 388) (HP HC)


Section 194C – Payments to

contractors

9


Section 194C

Deputation of employees

Background and issue

• JV company (JV) made payment towards reimbursement of salaries of

employees deputed by its promoter companies, without deducting tax at source

• Whether the payment can be considered as payment for supply of labour for

carrying out the work and would fall under the provisions of section 194C

Held

• The deputed personnel worked under the control and management of the JV

• The work was being carried out as employees of the JV and not on behalf of the

promoter companies

• Their salary cost was a charge on profits of the JV

• Instead of paying it to the employees directly, the JV reimbursed the amount to

the promoter companies who had paid the amount to the employees

10


Section 194C

Deputation of employees

• Merely because the promoter companies had in an agreement to depute their

employees would not mean that it was a works contract

• Such payment by way of salary would neither constitute FTS nor a works

contract performed by the promoter companies

11

Bhagyanagar Gas Ltd. (29 taxmann.com 220) (Hyderabad ITAT)


Section 194C

Wages paid through Board

Issue

• When wages paid to Mathadi Board for onward payment to labourers is subject

to TDS under section 194C?

• Held

• The mandate of section 194C is that the relationship of the person paying any

sum to the person carrying out any work including the supply of labour should be

in the nature of the principal to contractor

• There was no contractual relationship as a principal and contractor between the

assessee and Mathadi Board, but, in fact, in pursuance of the provisions of the

Act as well as the scheme, the assessee was bound to engage labourers or the

workers through the Mathadi Board

• The payments to Mathadi Board are not subject to TDS under section 194C

12

Gokuldas Virjibhai & Company (139 ITD 284) (Pune ITAT)


Section 194C

Meaning of ‘work’ and ‘service’

Issue

• Whether section 194C is applicable only to payments made for 'any work' and not

the payment made as fee for services rendered?

Held

• If the term 'any work' in section 194C by itself covers any kind of service, the

words in the bracket in sub-section (1) i.e. ‘including supply of labour for carrying

out any work’, will be otiose or superfluous

• But for the specific inclusion of those words in section 194C, obtaining of supply

of labour for carrying out the work would have fallen outside the word 'work‘

• The term ‘any work' is not wide enough to comprise within its scope obtaining of

supply of labour to carry out work (because this is essentially within the sphere of

'services‘). However, 'any work' is wide enough to cover any kind of work which

one can get carried out through another

• It is most inappropriate to equate rendering of a service to carrying out a work

13

S.R.F. Finance Ltd. (76 Taxman 432) (Delhi HC)


Section 194C

Payment for hire of machinery

Issue

• Whether mere providing of machinery on hire without any manpower cannot be

termed as ‘carrying out of any work’ by plant and machinery owners and, thus,

provisions of section 194C cannot be applied?

Held

• There was no contract between the hirer and the owners of the machinery to

carry out any work and only the machinery belonging to the owners was hired for

a fixed period, on payment of hire charges

• Hiring of machinery for the purpose of using it in its business would not amount to

a contract for carrying out any work, as contemplated in section 194C

• The provisions of section 194C are attracted only where any sum is paid for

carrying out any work including supply of labour for carrying out any work

• Circular no. 681 also clarified that the provisions of section 194C would not apply

in relation to payments made for hiring or renting of equipments etc.

14

Kiran Constructions (30 taxmann.com 235) (Hyderabad ITAT)


Section 194C

Different contracts – viewed as a ‘works contract’


• For the purpose of setting up an oil refinery, the assessee entered into three

contracts (for supply of material, for labour-cum-erections and for construction of

refinery) with its sister concern

• Whether these contracts could be termed as 'works contract‘ on which tax was

deductible?

Held

• It is necessary to consider the primary object of the transaction and intention of

the parties in order to determine whether contract is divisible or indivisible

• The assessee had originally entered into a single agreement for construction of

refinery plant and thereafter made amendments and created three separate

contracts for supply (wherein the original agreement was mentioned at various

places)

• Thus, the three agreements were found to be in nature of a single integrated

agreement for construction of refinery plant which could be termed as

'works contract‘. TDS under section 194C is applicable

15 Essar Oil Ltd (30 taxmann.com 39) (Gujarat HC)


Section 194C

Different contracts – not viewed as a composite

transaction


• Assessee entered into entered into three independent contracts with the contractors, viz., agreement for supply, agreement for civil work, and agreement for erection work for total / partial turnkey project

• Tax was deducted for civil work and erection work, but not for payments for supply

• Whether TDS is applicable on payments for supply portion?

Held

• The contract to be entered into would be treated as divisible contract resulting in three separate contracts (owing to the language in the contract)

• Carrying out any work is a sine quo non to attract section 194C. A contract under which a contractor agrees to supply material which may be used by him later in carrying out the work will not render the agreement to supply a contract for carrying out any work

• The contract for supply of materials is a distinct contract in respect of which TDS is not applicable

16

Karnataka Power Transmission Corporation Ltd. (21 taxman.com

473) (Karnataka HC)


Section 194C

Warehousing charges

Issue

• Whether tax is deductible on warehousing charges paid to clearing and

forwarding agents under section 194C or section 194I?

Held

• From an analysis of the various lease deeds and agreements entered into by the

assessee with the landlord / lessors and separately the C & F agreements, the

ITAT was able to discern that no element of rent was paid by the assessee to the

C & F agents

• Wherever there was a payments of rent, TDS had been deducted under section

194I

• What was paid to the C & F agents as warehousing charges was the

consideration in terms of the agreement on which tax was deductible under

section 194C

17

Hindustan Lever Ltd. (29 taxmann.com 313) (Delhi HC)


Section 194C

Hire of trucks without contract of carriage of goods

Issue

• Is payment for mere hiring of trucks liable to TDS under section 194C?

Held

• Section 194C would be applicable when there is a payment for carrying out any

work including supply of labour for carrying out any work in pursuance of a

contract

• In the present case, the carriage of goods was not entrusted with the lorry / truck

owners from whom the lorries / trucks were hired by the transport contractor for

further hiring to ‘L’ or even with the transport contractor himself

• The responsibility of carriage of goods remained with ‘L’

• Therefore, there is no contract for carriage of goods between the transport

contractor and the lorry / truck owners from whom the trucks / lorries were hired

and hence, the provisions of section 194C are not applicable

18

Reez Karakkattil Raghavan (29 taxmann.com 295) (Cochin ITAT)


Section 194C

Facilities provided by hotels

Issue

• Whether various facilities offered to guests of the hotel (apart from boarding and

lodging) should be subject to TDS under section 194C?

Held

• The phrase ‘carrying out work’ under section 194C is limited to any work, which

on being carried out, culminates into a product or result (reliance was placed on

the decision of the SC in the case of Associated Cements)

• Circular no. 681 dated 3 March 1994, to the extent it applies to a customer

availing the services of a hotel, should be held contrary to section 194C

• The word ‘work’ has to be understood in a limited sense and would extend only to

the service contracts specifically included in (the then) Explanation III to section

194C

• All service contracts do not automatically fall under the purview of section

194C

19

East India Hotels Ltd and another (320 ITR 526) (Bombay HC)


Section 194C

Payment to transporters


• The assessee got a sub-contract pertaining to construction of peripheral and

approach roads and to transport the construction material to the site, the

assessee had availed services of transporters

• Whether tax was deductible on payments made to the transporters?

Held

• The assessee was solely responsible for execution of the work and no part of

such liability was cast on the transporters

• The services of the transporters had only been availed for carrying the material to

the site

• For application of section 194C, what is necessary is a relationship

between the contractor and sub-contractor (and not merely hiring of an

agency during the course of execution of the work)

• TDS is not applicable in the present case

20

Prashant H Shah (29 taxmann.com 296) (Gujarat HC)


Section 194C

Use of name and copyright


• The assessee was engaged in providing education and training across the

country through education centres run by assessee or by its franchisees

• Whether payment to franchisees attracts TDS under section 194C?

Held

• The substance of the franchisee agreement is that it is a business arrangement

under which both parties hope to benefit (and there are mutual obligations and

rights)

• It is not a simple case of an agreement under which a person is engaged in

carrying out any work for the other

• An arrangement under which both sides have joined together by mutual

arrangement and to share profits of a joint enterprise is not covered by the

definition

• The work is undertaken jointly by them for third parties who pay

consideration which is shared. Parties do not work for each other

• Section 194C is not applicable

21

Career Launcher India Ltd. (20 taxmann.com 637) (Delhi HC)


Section 194C

Reimbursement of expenses

Issue

• Whether reimbursement of customs clearance expenses to a C & F agent

through a separate bill attracts TDS under section 194C?

Held

• If the assessee reimbursed expenses towards freight incurred on its behalf under

an agreement for which separate bills is raised, the provisions of section 194C

are not attracted

• Section 194C is applicable where payments is made to a contractor / sub-

contractor where the contract is either a work contract or a contract for

supply of labour for works contract

• In the present case, the assessee has reimbursed the expenses to its

consignment agent and it was not a direct payment of freight by the assessee to

the transporter

22

Surendra Commercial & Exim (P) (ITA No. 916) (Kolkata ITAT)


Section 194J – Fees for

professional or technical

services

23


Section 194J

Transaction fees paid to stock exchange

Issue

• Whether transaction charges paid to stock exchanges would be Fees for

Technical Services (FTS)?

Held

• The BOLT system of the stock exchange provides all the data that is necessary

for an intending buyer and intending seller of the respective securities

• The fact that the BOLT system has inbuilt automatic safeguards which

automatically alert if the price fluctuation exceeds a particular limit, does not

mean that managerial services are not rendered

• Stock exchanges are required to manage the entire trading activity carried on by

its members and accordingly managerial services are rendered by the stock

exchanges

• Therefore, transaction charges paid to the stock exchange are for rendition

of managerial services and hence, constitutes FTS under section 194J

24

Kotak Securities Ltd. (340 ITR 333) (Bombay HC)


Section 194J

Third Party Administrators (TPAs)


• TPAs provide services such as hospitalization services, cashless access

services, processing and settlement of claims

• TPAs make payment to hospitals for rendering medical services to the policy

holders

• Whether the TPA is required to deduct tax at source under section 194J?

Held

• Though a hospital by itself, being an artificial entity, is not a ‘medical

professional’, it provides medical services by engaging the services of doctors

and qualified medical professionals. These services are rendered in the course of

carrying on the medical profession

• Accordingly, the TPA is required to deduct tax at source under section 194J

• Circular no. 8/2009 dated 24.11.2009 is applicable

• The circular is set aside to the extent it states that a failure to deduct tax on

payments made by TPAs to hospitals will necessarily attract a penalty under

section 271C

25

Dedicated Health Care Services TPA (324 ITR 345) (Bombay HC)


Section 194J

Film broadcasting rights

Issue

• Whether payment made for acquiring rights for satellite broadcasting of film

amounts to 'royalty‘ on which tax is deductible?

Held

• Consideration for transfer of all or any rights in respect of any copyright, including

copyright for films and videotapes, used in connection with television or tapes,

would fall within the definition of 'royalty‘ (except consideration for sale,

distribution and exhibition of cinematographic films)

• Assessee had only received right for satellite broadcasting and had not

purchased the cinematographic films

• Whether the transfer of rights is perpetual or only relates to a part of the rights,

the consideration paid would be ‘royalty’ as long as it relates to transfer of any

right relatable to a copyright of a film or videotape, which is to be used in

connection with television or tapes. TDS under section 194J is applicable

26

Shri Balaji Communications (30 taxmann.com 100) (Chennai ITAT)


Section 194J

Participation fees for seminar

Issue

• Whether payment as participation fees for a conference is subject to TDS under

section 194J or section 194C?

Comments

• The payment for attending a seminar would not be for procuring any technical

services if the information in the seminar is general in nature and not specifically

delivered for the participating company. Accordingly, TDS under section 194J

should not apply

• If the conference is not specifically organized for the payer, there would be no

‘contract for work’ and hence, TDS under section 194C would not be triggered

27


Section 194J

Relationship with stockist


• Assessee appointed a firm as a ‘super stockist’ responsible for getting stock of

the assessee for onward transmission to the market, through the retailer

• Whether the ‘super stockist’ is a manager for the purpose of section 194J?

Held

• The agreement clearly stipulates that the relationship shall be on a ‘Principal to

Principal’ basis and that the super stockist is not and shall, at no point, hold itself

as an agent / employee / legal representative / partner of the assessee

• There is no payment (mush less payment of fee for professional services) which

attracts section 194J

• A bare perusal of section 194J makes it clear that it is necessary that the

assessee or the person concerned liable to deduct and pay TDS must be

responsible for paying to a resident any sum, by way of fees for professional

services, fees for technical services, royalty, etc. In the present case, the

assessee had not paid any sum to the super stockist

• The relationship is on a Principal to Principal basis and TDS is not applicable

28 Piramal Healthcare Ltd (Mumbai ITAT)


Section 194J

Reimbursement of expenses


• Assessee made payments for professional charges and also reimbursed car

maintenance expenses of a consultant (which were charged to the assessee

through separate bills)

• Whether reimbursement of expenses was also part of professional fee paid to

consultant and liable to TDS under section 194J?

Held

• The bills raised for car expenses were towards actual expenses incurred by the

consultant and there was no element of any profit involved therein

• It was a clear case of reimbursement of actual expenses incurred and therefore

not a payment covered by section 194J requiring TDS

• Circular no. 715 dated 8 August 1995 applies in cases where bills are raised

for the gross amount inclusive of professional fees as well as

reimbursement of actual expenses (which was not the case in the present

facts)

29

Dr. Willmar Schwabe India (P.) Ltd. (3 SOT 71) (Delhi ITAT)


Section 194J

Meaning of ‘managerial’ services

• ….merely because some managerial skill is required to render the services, it would not make the services to be managerial services as envisaged in Explanation 2 to section 9(1)(vii). Similarly, the requirement of knowledge of local laws on the part of the service providers to render the services ….would not change the basic nature of the services which otherwise are commercial services…”

• “The term 'managerial services' refers to managing certain affairs, a quid pro quo for which will be described as fees for technical services…The assessee has no role, much less the provision of any managerial services, in the process of completion of successful sales, which entitles it to user fee.….When some purchaser intends to purchase a particular product, he accesses the assessee's website and on finding a suitable product, clicks 'Buy It Now' button. It concludes the transaction of sale between the buyer and seller, entitling the assessee to its fee.…By providing a platform for doing business, the assessee can, by no standard, be considered as having rendered any managerial services either to the buyer or to the seller, for which it received fee from the seller.”

30

eBay International AG (140 ITD 20) (Mumbai ITAT)

Yash Raj Films Pvt. Ltd. (28 taxmann.com 247) (Mumbai ITAT)


Section 194J

Acquisition of software

Notification no. 21/2012 dated 13 June 2012 –

• No TDS under section 194J on payments for acquisition of software in some

cases, subject to certain conditions

• Payment by a person (i.e. transferee) for acquisition of software from another

person, being a resident, (i.e. transferor), where

− the software is acquired in a subsequent transfer and the transferor has

transferred the software without any modification

− tax has been deducted under section 194J / 195 on payment for any

previous transfer of such software

− the transferee obtains a declaration from the transferor regarding such TDS

along with the Permanent Account Number of the transferor

31

Effective from 1 July 2012


Section 194H – Commission or

brokerage

32


Section 194H

Credit card commission to banks

Issue

• Whether credit card commission retained by the credit card company / bank from

the sale transaction of merchants is subject to TDS under section 194H?

Held

• Though the definition of ‘commission or brokerage’ used under section 194H is

an inclusive definition, the liability to deduct tax under the said section arises only

when a person acts on behalf of another person

• Sale made through credit card is clearly a transaction of the merchant

establishment. The credit card company / bank only facilitates the electronic

payment, for a charge

33


Section 194H

Credit card commission to banks

• The commission retained by the credit card company is in the nature of normal

bank charges and not in the nature of commission / brokerage for acting on

behalf of the merchant establishment

• Accordingly, there is no requirement of deducting tax at source on the

commission retained by the credit card companies

34

M/s. Vah Magna Retail Pvt. Ltd. v. Department of Income Tax on 10

April, 2012 (ITA No. 905/Hyd./2011)

No TDS on credit / debit card commission

for transaction between merchant

establishment and acquirer bank

- Notification No 56/2012 [F. NO.

275/53/2012-IT(B)], Dt. 31-12-2012


Section 194H

Principal - agent relationship


• Assessee is engaged in providing cellular mobile telephone services

• It sells SIM cards and pre-paid cards at a fixed rate (below market price) to

distributors / franchisees for onward sale to ultimate customers

• Whether the price difference (between the sale price and market price) is a

payment of commission and hence subject to TDS under section 194H?

Held

• As per the agreement, there was essentially a relation of principal and

agent between the assessee and the distributors / franchisees

• In the real sense, the franchisee was acting on behalf of the assessee for selling

SIM cards and pre-paid cards to the customers of the assessee

• The property in the SIM cards and prepaid cards remained with the assessee

even after transfer and delivery to franchisee

35


Section 194H

Principal - agent relationship

• The franchisee had no free choice to sell and everything was being regulated and

guided by the assessee

• The rate at which the franchisee would sell to retailers and that at which is

realized by the assessee from the franchisee was also regulated and fixed by the

assessee

• The franchisee had no role except that of a middleman between the assessee

and the ultimate customers, for which a discount (in real sense commission) was

received

• Therefore, the assessee was liable for deduction of tax at source under

section 194H on the indirect commission paid to its franchisees

36

Bharti Cellular Ltd. (244 CTR 185) (Calcutta HC)


Section 194H

Principal - principal relationship


• Assessee was a cellular telephone service provider offering both pre-paid and

post-paid facilities to subscribers

• It appointed distributors for pre-paid cellular connections and recharge coupons

• At the time of selling its pre-paid cellular connections and recharge coupons to

the distributors, some margin was allowed to the distributors in the form of

discount / commission on the market price

Held

• ‘Commission or brokerage’ as contained in clause (i) of the Explanation to section

194H is not so wide that it would include any payment receivable, directly or

indirectly, for services in course of buying or selling of goods

37


Section 194H

Principal - principal relationship

• The element of agency is required in case of all services or transactions

contemplated by Explanation (i) to section 194H

• Held that transactions between the assessee (a cellular service provider) and the

distributor (for prepaid cellular connections and recharge coupons) were on a

principal to principal basis (i.e. the legal relationship between a seller and

purchaser) and not on principal to agent basis

• Therefore the margins allowed to the distributors on prepaid cards was not

in the nature of commission and hence, section 194H was not applicable

38

Idea Cellular Ltd (125 ITD 222) (Hyderabad ITAT)

Dairy was not liable to deduct tax on payments made to concessionaires /

agents to whom milk and milk products were sold on a principal to principal

basis – Mother Dairy India Ltd. (249 CTR 559) (Delhi HC)


Section 194H

Difference between commercial price and published price


• Airlines had an agreement with agents to sell tickets at a minimum fixed

commercial price which was lower than the published price

• Agents could sell at a higher price subject to a maximum of published price

• As per IATA rules, agents were entitled to commission at 9% on the published

price

• Airlines deducted tax on the payment of this 9% commission. However, Revenue

contended that the difference between commercial price and published price was

also in the nature of commission and liable to TDS

Held

• The agents were entitled to sell tickets at any price between the fixed commercial

price and the published price. As a result the airlines would have no information

regarding the final rates at which tickets were sold

39


Section 194H

Difference between commercial price and published price

• It would be impracticable and unreasonable to expect the airlines to collect

feedback from its numerous agents regarding the prices at which the tickets were

finally sold

• Thus, the difference between the commercial price and the published price

could neither be considered as commission nor brokerage in the hands of

the agents and hence was not liable to TDS

40

Qatar Airways (332 ITR 253) (Bombay HC)


Section 194H

Commission and supplementary commission

• Tax should be deducted at source under section 194H on the amount

available to agents, being the difference between airfare fixed by airlines and

the price at which agents are enabled to sell tickets

• Supplementary commission retained by travel agents over and above the net fare

made over to airlines is liable to TDS under section 194H as commission

• Air tickets sold by airlines company to travel agents at a concessional rate

held to be a sale transaction on principal to principal basis and does not

amount to commission

41

Around the World Travels & Tours Pvt. Ltd. (141 Taxman 53)

(Madras HC)

Singapore Airlines Ltd. & Other airlines (319 ITR 29) (Delhi HC)


Section 194H

Discount given to retail customers, group passengers

and small time agents


• Assessee, an IATA approved agent, was engaged in booking tickets for various

airline companies

• Commission (i.e. in effect, discounts offered) payments made by the assessee

(without TDS) could be grouped into payments to retail customers, to group

passengers like Haj pilgrims and to small time travel agents

• Whether tax is deductible on the said commission ceded?

Held

• Retail / group customers do not provide any service to the assessee and only

get flight tickets at a concession. Accordingly, they cannot be considered as

'agents' and the commission ceded by the assessee is in the nature of 'Discount'

• Small time travel agents act on behalf of and provide service only to their

customers by identifying the best available rates for their flight tickets. Hence,

commission income ceded by the assessee in respect of tickets purchased by

them would also partake the character of 'Discount' only

• No TDS is applicable

42 Al Hind Tours & Travels (P.) Ltd. (29 taxmann.com 294) (Cochin ITAT)


Section 194H

Discount availed by stamp vendors

Issue

• Whether tax is deductible on discount given to stamp vendors?

Held

• Discount given to the Stamp Vendors is for purchasing the stamps in bulk

quantity

• The said discount is in the nature of cash discount

• The transaction is that of a sale and section 194H has no application

43

Ahmedabad Stamp Vendors Association (348 ITR 378) (SC)


Section 194H

Incentive to distributors


• The assessee had given certain discounts to distributors by issuing credit notes

and specifically mentioned the nomenclature 'discount' in these credit notes

• No tax was deducted contending that the relationship between the distributor and

the assessee was that of Principal to Principal

• Whether the amount of discount paid by way of credit note could be regarded as

‘commission’ in absence of Principal–Agent relationship?

Held

• A discount is given from the gross price and it occurs at the instance of sale and

purchase between the manufacturer and the distributor / dealer

• Commission is in the nature of refund or compensation for performing some task

or business by one person on behalf of the other and in case of sale and

purchase of goods, the commission is accrued at the instance of further sales by

the dealer or distributor

44


Section 194H

Incentive to distributors

• The dispute in the present case is not regarding income arising due to difference

between MRP and the price as invoiced to the distributor but relates to the

incentive given by the assessee in addition to the margin on the purchase and

sale of goods

• Therefore, even if the relationship is that of principal to principal so far as the

price and sale of products is concerned, the incentive / benefit given to the

distributor is not accruing from transaction of sale and purchase and therefore,

cannot be regarded as income from purchase and sale of product

• TDS is applicable as section 194H talks about the payment of commission

or brokerage and does not talk about the relationship between the payer

and the payee necessarily be of a principal and agent. It does not require

any formal contract of agency

45

SKOL Breweries Ltd. (29 taxmann.com 111) (Mumbai ITAT)


Section 194I – Rent

46


Section 194I

Payment for infrastructure facility

Issue

• The assessee was engaged in the business of providing computer education

and training. For this purpose, it had entered into various agreements with

franchisees for running the education centers at various metro cities

• For the purpose of convenience, the assessee had categorized the fees shared

as (i) marketing claim and (ii) infrastructure claim

• Whether the infrastructure claim paid by the franchisees to the assessee can be

termed as ‘rent’ under section 194I?

Held

• The relations between the parties were not of a lessor and lessee as was sought

to be contended by the revenue authorities

• The franchisee agreement showed that a limited license was granted by the

assessee to the licencee for use of the trademark and the trade name of the

assessee for the education center

47


Section 194I

Payment for infrastructure facility

• Instead of giving a deposit which it would have done if it was a tenant, the

assessee, in fact, received a security deposit from the licensee

• If the interpretation of the revenue was to be accepted, then in a case where

there is a partnership and one of the partners brings in his capital in the form of

his premises from where the partnership business is carried on, payment made

to such a partner by the firm can be stretched to be included in the definition of

rent under section 194I

• The agreement was in fact a franchisee agreement and it could not be said

that the rent was being paid by the assessee company to the licensee

franchisee

48

NIIT Ltd. (184 Taxman 472) (Delhi HC)


Section 194I

Roaming charges

Issue

• Whether payment towards roaming charges (by one telecom service provider to

another) would be payment for services or payment for use of equipment?

Held

• ‘Rent’ means any payment by whatever name called under any lease, sub-lease

or tenancy or ‘any other agreement’. The emphasis is upon the term ‘use’

• The service provider is merely a facilitator between the subscriber and the other

service provider (for facilitating a roaming call to be made by the subscriber)

• The service provider only collects the roaming charges from its subscriber and

passes it on to the other service provider and cannot be said to have used the

equipment which is involved in the roaming facility

49


Section 194I

Roaming charges

• Rent is something which is paid for earmarked premises, and in the case of

roaming charges, a subscriber does not get any earmarked premises from

service provider. Also, the choice of the service provider (who will provide the

roaming facility) is left to the subscriber

• The payment for roaming charges to be paid by the service provider is not

in the nature of ‘rent’

50

Vodafone Essar Ltd. (9 taxmann.com 31) (Mumbai ITAT)


Section 194I

Payment for use of equipment

Issue

• Whether the payment for use of equipment is ‘rent’ under section 194I or ‘FTS’

under section 194J?

Comments

• If the control and supervision of the equipment is with the owner of the

equipment, the payer is only availing services from the owner of equipment.

Accordingly, the same may not be considered as rent under section 194I

− Poompuhar Shipping Corpn. Ltd. – (53 SOT 451) (Chennai ITAT)

− Chhattisgarh State Electricity Board (50 SOT 33) (Mumbai ITAT)

• Payment for use of equipment cannot be regarded as FTS unless human

element is involved for providing the services

− Bharti Cellular Ltd. – (319 ITR 139) (Delhi HC)

− Dampskibsselskabet of 1912 – (142 TTJ 70) (Mumbai ITAT)

− Merchant Shipping Services Pvt. Ltd – (135 TTJ 589) (Mumbai ITAT)

51


Section 194I


Issue

• Whether the payment for use of equipment is ‘rent’ under section 194I or ‘royalty’

under section 194J?

Comments

• ‘Royalty’ (Explanation to section 194J r.w. Explanation 2 to section 9(1)(vi))

includes amount payable for the use or right to use any industrial, commercial or

scientific equipment (excluding payments referred to in section 44BB)

• ‘Rent’ (Explanation to section 194I) means any payment under any lease, sub-

lease, tenancy or any other agreement or arrangement, amongst others, for the

use of any equipment

• Both these sections (i.e. sections 194I and 194J) apply for payment towards

use of equipment

52


Section 194I


• It is settled law that the provisions which are more beneficial to the assessee

should be followed

‒ Noble Enclave & Towers (P.) Ltd. (50 SOT 5) (Kolkata ITAT)

• Section 194I is specific in respect of payment of rent for use of equipment

as against section 194J which is general in nature covering fees for

professional services, fees for technical services and royalty

• Payment of any sum shall be liable for deduction of tax only under one section

‒ Circular No. 720, dated 30-8-1995

53


Section 194I

Security deposit

Issue

• Whether security deposit for hiring a premises which was to be reduced every six

months by an amount of rent which became payable in accordance with the

agreement is subject to TDS?

Held

• The security deposit was not a fully ‘refundable deposit amount’

• It was in the nature of advance rent and accordingly, TDS under section

194I is applicable

54

Reebok India Co. (291 ITR 455) (Delhi HC)

Circular no. 715 dated 8 August 1995 - If the deposit is adjustable against future

rent, the deposit is in the nature of advance rent subject to TDS


Section 194I

Upfront charges

Issue

• Whether upfront charges can be regarded as ‘rent’?

Held

• Rent has been specifically defined in the Explanation to section 194I

• Definition of 'rent' includes payments of any type under any agreement or

arrangement for use of land

• The definition of 'rent' under Explanation to section 194I will squarely cover

the upfront charges and render such payment liable to TDS

55

Foxconn India Developer (P.) Ltd. (53 SOT 213) (Chennai ITAT)


Section 194I

Reimbursement of rent


• The holding company had taken office premises on rent and it permitted the

assessee to use portion of said premises

• The rent for the whole premises was paid directly by the holding company to the

lessors and tax was deducted under section 194I

• Whether TDS is applicable on reimbursement of rent expenditure by the

assessee to its holding company?

Held

• The lease deed provided for use of the premises by the subsidiary companies

• The actual payments were made by the lessee (holding company) to the lessor

after deducting tax therefrom

• Also, the holding company had not debited the whole rent amount in its books of

account. It had only debited that portion of the rent which pertained to the part of

the premises occupied by it

56


Section 194I

Reimbursement of rent

• Therefore, there was no lessor and lessee relationship between the holding

company and assessee where the provisions of section 194I were attracted

• The assessee had been paying rent to the holding company as reimbursement

for last many years and this position had been accepted by the department so far

57

Result Services (P.) Ltd. (52 SOT 598) (Delhi ITAT)

• The above decision as well as Circular no. 4/2008 dated 28 April 2008

(relating to service tax component on rent) recognize that TDS is applicable

on ‘income’ of the landlord

• Could the same rationale be extended to sections other than section 194I or

would it fail owing to difference in the language in these sections?

Rent reimbursed could be regarded as reimbursement of expenses if –

• The rent agreement provides that the lessee may allow its subsidiaries /

associates to use the premises; and

• The lessee does not book the entire rent expense


Other issues

58


Other issues

Provisions / credits to suspense account

Issue

• Whether TDS is applicable on provisions / credits to suspense account?

Comments

• TDS is applicable at the time of payment or credit, whichever is earlier (including

credit to suspense account)

• Accordingly, TDS would ordinarily be applicable while creating provisions for

expenses as well as crediting amounts to any party’s account including suspense

account

• However, if it is not possible to identify the payee at the time of creating the

provision / credit to suspense account (depending on the facts), a position

could be adopted that no tax was required to be deducted

• It was observed in the case of Industrial Development Bank of India (107 ITD 45)

(Mumbai ITAT) that the TDS mechanism cannot be put into practice until the

identity of the person in whose hands it is includible as income, can be

ascertained 59


Other issues

TDS prior to accrual of income?

Issue

• Applicability of TDS prior to accrual of income in the hands of the recipient?

Comments

• TDS is applicable at the time of payment or credit, whichever is earlier

• However, there could be instances where this event would precede the accrual of

income in the hands of the recipient (e.g. interest on cumulative deposit /

debenture / bond – refer circular no. 643 dated 22 January 1993)

• Issues when the recipient maintains cash system of accounting

60


Other issues

Threshold for applicability of section 44AB

Issue

• The assessee, an individual, is a surgeon running a private nursing home at

Jodhpur

• What would be the applicable threshold for requiring tax audit under section

44AB and the consequent liability to deduct tax?

Held

• There is no bar for a professional to carry on trade or commerce, which could

also be one annexed to the exercise of his profession

• Where, say lawyers are employed as specialists in their respective areas of

practice with a view to broaden the horizons of the professional services being

offered, the firm, though only a law firm as far as the clients are concerned, its

proprietor could be said to be carrying out trade or commerce, inasmuch as his

function is only passive, of an entrepreneur managing the affairs, much in the

same manner as a nonprofessional would

• A business, by its very nature, is characterized by a much higher level of risk, in

comparison to profession, and which would be one of the defining attributes of a

business

61 Sunil Chandak (ITA No. 344) (Jodhpur ITAT)


Appendix

62


Section 194A

Extract

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income

by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the

account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode,

whichever is earlier, deduct income-tax thereon at the rates in force:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or

profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the

financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct

income-tax under this section.

Explanation.—For the purposes of this section, where any income by way of interest as aforesaid is credited to any account,

whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person

liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the

provisions of this section shall apply accordingly.

63


Section 194C

Extract (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for

carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the

contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time

of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an

amount equal to—

(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a

Hindu undivided family,

of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any

other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit

of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the

Explanation, tax shall be deducted at source—

(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of

the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of

Hindu undivided family.

64


Section 194J

Extract (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by

way of—

(a) fees for professional services, or

(b) fees for technical services, or

(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible

under section 192, to a director of a company; or

(c) royalty, or

(d) any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue

of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as

income-tax on income comprised therein :

………………………….

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the

business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB

during the financial year immediately preceding the financial year in which such sum by way of fees for professional services

or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-

tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal

purposes of such individual or any member of Hindu undivided family.

65


Section 194H

Extract

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of

June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section

194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of

such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax

thereon at the rate of ten per cent :

………………………….



during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid,

shall be liable to deduct income-tax under this section

66


Section 194I

Extract

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income

by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in

cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the

rate of—

(a) two per cent for the use of any machinery or plant or equipment; and

(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including

factory building) or furniture or fittings:

………………………….



during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid,

shall be liable to deduct income-tax under this section.

67


Section 194A

Interest on time deposits by banks using CBS Software

Circular no. 3/2010 dated 2 March 2010 –

• Clarification on the issue of TDS from payment of interest on time deposits by

banks using Core-Branch Banking Solutions (CBS) software

• No tax is required to be deducted where:

− Interest on time deposits is calculated on daily or monthly basis and for macro

monitory purpose only

− No constructive credit is given to the depositor’s / payee’s account

• Tax is required to be deducted on the income (exceeding limits specified under

section 194A) where:

− Interest is accrued at the end of the financial year or at periodic intervals as per

practice of the bank; or

− as per the depositor's / payee's requirement or on maturity or on encashment of

time deposits

whichever event takes place earlier.

68


Section 194A

Other key circulars

69

Circular no. Gist

643 (dated 22

January 1993)

• Cumulative deposit / debenture / bond – TDS is

applicable every time interest is credited in the books of the

payer and is not to be postponed till maturity

715 (dated 8

August 1995)

• Reinvestment term deposit – TDS is applicable at the time

of credit of interest to the account of the payee (or credit to

suspense account) or at the time of payment thereof,

whichever is earlier

• Variable deposits are in the nature of time deposits and

TDS is applicable on the interest thereon

647 (dated 22

March 1993)

• Commercial Papers and Certificates of Deposits – The

difference between issue price and face value is to be

treated as ‘discount allowed’ (and not as ‘interest paid’). TDS

is not applicable

526 (dated 5

December 1988)

• Interest payments under Land Acquisition Act – TDS is

applicable

718 (dated 22

August 1995)

• Interest, if any, carried on deposit provided to landlord –

TDS is applicable on


Section 194C

Key circulars

70

Circular no. Gist

715 (dated 8

August 1995)

TDS is applicable on payments to / for the following –

• Clearing and forwarding agents for carriage of goods

• Carrier of goods (by clearing and forwarding agents)

• Couriers

• Supply of printed material

• Electrician engaged on a contract basis

• Sponsorship for functions held with a view to earn publicity

through display of banners, etc. (as, in essence, it is an

agreement for carrying out a work of advertisement)

• Chartering an aircraft for carriage of passengers or goods

• Reimbursement of expenses (as section 194C refers to ‘any

sum paid’) – whether stating the expense claim

separately in the invoice / separate invoice could

relieve TDS liability thereon?

13 (dated 13

December 2006)

• TDS shall be applicable only where it is a ‘contract for work’

and not where it is ‘contract for sale’


Section 194J

Key circulars

71

Circular no. Gist

726 (dated 18

October 1995)

• Fees for professional services from foreign companies /

foreign law and accountancy firms (who are non-residents

and do not have any agent / business connection /

permanent establishment in India) to any CA, lawyer,

advocate or solicitor who is resident in India may not be

subject to TDS

715 (dated 8

August 1995)

Following would be liable to TDS under section 194J (and not

section 194C)

• Payments to recruitment agencies

• Payments made by a company to a share registrar

• Maintenance contracts involving rendition of technical

services (unless it is routine/normal maintenance contracts

which include supply of spares)

Reimbursement of actual expenses cannot be deducted out of

the bill amount for the purpose of TDS (since section 194J

refers to ‘any sum paid’)


Section 194H

Payments to banks

Notification no. 56/2012 dated 31 December 2012 –

• No TDS on following payments to a bank (listed in the Second Schedule to the

Reserve Bank of India Act, 1934), excluding a foreign bank –

− bank guarantee commission

− cash management service charges

− depository charges on maintenance of DEMAT accounts

− charges for warehousing services for commodities

− underwriting service charges

− clearing charges (MICR charges)

− credit card or debit card commission for transaction between the merchant

establishment and acquirer bank

72

Effective from 1 January 2013


Section 194I

Key circulars

73

Circular no. Gist

715 (dated 8

August 1995)

• Subletting a rented premise (fully or in part) for putting up a

hoarding would be liable to TDS under section 194I (and not

section 194C)

• TDS is applicable with respect to business centre agreements

718 (dated 22

August 1995)

• TDS is applicable on warehousing charges

• No TDS on municipal taxes, ground rent, etc., borne by the

tenant

1 (dated 10

January 2008)

• TDS under section 194I is not applicable for cooling charges

for cold storage (the customer is not given any right to use any

demarcated space/place or the machinery of the cold store

and thus does not become a tenant)

• However, since the arrangement is basically contractual in

nature, TDS under section 194C is applicable

4 (dated 28

April 2008)

• TDS is applicable on the amount of rent paid / payable without

including service tax thereon


Section 194I

Key circulars

74

Circular no. 5/2002 dated 30 July 2002

• Clarifications regarding payments for hotel accommodation taken on a

regular basis

• Where an employee or an individual representing a company (like a consultant,

auditor, etc.) makes payment directly to the hotel, the question of TDS would not

normally arise (except where he is covered under section 44AB) since the payer

is an individual (and the company merely reimburses the expenditure)

• Following would be construed as accommodation available on ‘regular basis’ –

− Earmarked rooms let out for a specified rate and specified period

− No rooms are earmarked, but the hotel has a legal obligation to provide such

types of rooms during the currency of the agreement

• TDS would not apply to mere rate contracts i.e. –

− Contract provides specified types of hotel rooms at pre-determined rates during

an agreed period (usually entered into for lower tariff rates)

− There is no obligation on the part of the hotel to provide a room / set of rooms

− Occupancy would be occasional / casual


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