Service Tax -TDS

7/28/2019 Service Tax -TDS

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Whether TDS have to be deducted on the amount of service tax?

Hariom Jindal, CA

SynopsisBy the Finance Act 2007, Central Government has extended the levy of service tax on

renting of property with effect from 1.06.2007. Under section 194-I of the Income-tax Act

TDS have to be deducted by any person, who is responsible for paying to a resident any

income by way of rent. So the question was whether TDS have to be deducted on rent,

inclusive of service tax or exclusive of service tax. By Circular No. 4/2008, dated 28-4-

2008, CBDT clarified that Service tax paid by the tenant doesnt partake the nature of

income of the landlord, thus TDS has not to be deducted on Service tax. Though this

clarification was in respect of section 194I, but it was the considered opinion of

professionals and tax consultants that this view is also applicable in respect of other TDS

provisions. But the CBDT has recently clarified to the query of Bombay Chamber of

Commerce & Industry that TDS is also applicable on service tax portion in respect ofprofessional / technical fees payable u/s 194J. In this article the author has discuss the

scope of TDS on Service tax under different provisions of Income tax Act, 1961.

1 IntroductionBy the Finance Act 2007, Central Government had extended the levy of service tax onrenting of property also with effect from 1.06.2007. Renting of immovable property for

use in the course or furtherance of business or commerce is now taxable @12.36% under

section 65(105)(zzzz) of the Finance Act 1994. Renting includes letting, leasing,

licensing or other similar arrangement.

Under section 194-I of the Income-tax Act TDS have to be deducted by 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, at the rate of (a) fifteen per cent if the payee is anindividual or a Hindu undivided family; and (b) twenty per cent in other cases, if the

amount of such income or, as the case may be, the aggregate of the amounts of such

income credited or paid or likely to be credited or paid during the financial year by theaforesaid person to the account of, or to, the payee, exceed one hundred and twenty

thousand rupees. Individual or a Hindu undivided family are liable to deduct TDS only,

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 44ABduring the financial year immediately preceding the financial year in which such income

by way of rent is credited or paid. For the purposes of this section "rent" means any

payment, by whatever name called, under any lease, sub-lease, tenancy or any otheragreement or arrangement for the use of any land or any building (including factory

building), together with furniture, fittings and the land appurtenant thereto, whether or

not such building is owned by the payee. Also where any income is credited to anyaccount, whether called "Suspense account" or by any other name, in the books of


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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 shallapply accordingly.

So the question was not whether TDS have to be deducted or not on rent, but the question

was that whether TDS have to be deducted on rent, inclusive of service tax or exclusiveof service tax. The matter was clarified by CBDT. By Circular No. 4/2008, dated 28-4-

2008, CBDT clarified that Service tax paid by the tenant doesnt partake the nature of

income of the landlord. The landlord only acts as a collecting agency for Government forcollection of service tax. Therefore it has been decided by CBDT that tax deduction at

source (TDS) under sections 194-I of Income-tax Act would be required to be made on

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

Though this clarification was in respect of section 194I, but it was the considered opinion

of professionals and tax consultants that this view is also applicable in respect of otherTDS provisions. But the CBDT has recently clarified to the query of Bombay Chamber

of Commerce & Industry that TDS is also applicable on service tax portion in respect ofprofessional / technical fees payable u/s 194J.

2 TDS on Service Tax under dif ferent provis ions ofIncome Tax

Under income tax, there are two types of provisions for deduction of TDS. Some of theimportant provisions are discussed below:

TDS

provisions

When TDS has to be deducted

Section 192 Any person responsible forpaying any income chargeable under the

head "Salaries" shall, at the time of payment, deduct income-tax on theamount payable.

Section 193 The person responsible for paying to a resident any income by way of

interest on securities deduct income-tax.

Section 194 The principal officer of an Indian company or a company shall, before

making any payment in cash or before issuing any cheque or warrant inrespect of any dividend or before making any distribution orpayment to a shareholder, deduct from the amount of such dividend,

income-tax at the rates in force.

Section 194A Any person, not being an individual or a Hindu undivided family, who

is responsible for paying to a resident any income by way of interestshall, deduct income-tax thereon at the rates in force:

Section 194C Any person responsible forpaying any sum to any resident, shall, atthe 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 TDS at specified rates.


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Section 194E Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete), the person responsible for

making the payment shall, deduct income-tax thereon at the rate of ten

per cent.

Section 194H Any person, who is responsible for paying, to a resident, any income

by way of commission deduct income-tax thereon at the rate of fiveper cent.

Section 194I Any person, not being an individual or a Hindu undivided family, who

is responsible forpaying 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 ordraft or by any other mode, whichever is earlier, deduct income-tax

thereon at specified rate.

Section 194J Any person, not being an individual or a Hindu undivided family, whois responsible for paying to a resident any sumby way of 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 of draft or byany other mode, whichever is earlier, deduct an amount equal to five

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

Section 195 Any person responsible for paying to a non-resident, not being a

company, or to a foreign company, any interest or any other sum

chargeable under the provisions of this Act (not being incomechargeable under the head "Salaries" ) 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 rates inforce.

As discussed above that in some cases TDS have to be deducted when any sum of

amount is paid and in other cases, TDS has to be deducted only on income of the nature

as specified under the relevant provisions. As per these two clarifications, it can be saidthat where the TDS have to be deducted on sum of amount then no deductions etc. have

to be made and TDS have to be deducted on total sum paid subject to any contrary

provisions i.e. inclusive of Service tax. But where the TDS have to be made on incomethen TDS should be deducted only on income and should not be deducted on Service

Taxes etc.

3 An AnalysisThe clarifications of CBDT are self contradictory. In Circular No. 4/2008, dated 28-4-

2008, CBDT clarified that Service tax paid by the tenant doesnt partake the nature ofincome of the landlord. The landlord only acts as a collecting agency for Government for

collection of service tax. So the question is whether Service Tax partake the nature of


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income u/s 194J. Whether the payee u/s 194J does not acts as a collecting agency for

Government for collection of service tax?

Section 190 of Income tax provides as under:

190.Deduction at source and advance payment.

(1) Notwithstanding that the regular assessment in respect ofany income is

to be made in a later assessment year, the tax on such income shall bepayable by deduction or collection at source or by advance payment or by

payment under sub-section (1A) of section 192, as the case may be, inaccordance with the provisions of this Chapter.

(2) Nothing in this section shall prejudice the charge of tax on such income

under the provisions of sub-section (1) of section 4.

Section 4 of Income tax provides as under:

4. Charge of Income-tax.

(1) Where any Central Act enacts that income-tax shall be charged forany assessment year at any rate or rates, income-tax at that rate or

those rates shall be charged for that year in accordance with, andsubject to the provisions (including provisions for the levy of additional

income-tax) of, this Act in respect of the total income of the previous

year of every person:

Provided that where by virtue of any provision of this Actincome-tax is to be charged in respect of the income of a period

other than the previous year, income-tax shall be chargedaccordingly.

(2) In respect of income chargeable under sub-section (1), income-tax

shall be deducted at the source or paid in advance, where it is sodeductible or payable under any provision of this Act.

Income tax has to be paid on incomes computed as per the provisions of section 4 and 5of the Income tax Act, 1961 and the tax on such income shall be payable by deduction or

collection at source or by advance payment or by payment under sub-section (1A) ofsection 192, as the case may be, in accordance with the provisions of Chapter XVII of

Income tax Act. So deduction and collection of tax is only one of the modes of collectionof income tax. But the main essence of provisions is on income. The department can not

collect TDS on that amount on which income tax is not leviable.


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In respect of foreign payments, in the case ofCITv. Cooper Engg. Ltd.1it was held that

in order that section 40(a)(i) be applicable to any assessee, it was necessary that paymentmade shall be chargeable to tax in India. If the amount paid was such which could not be

taxed in India, then the same should not be subjected to the provisions of section 40(a)(i).

In the case ofSonata Information Technology Ltd. v. Dy. CIT2, also it was held that the

payment made for purchase of software did not amount to royalty within ambit ofsection 9(1)(vi) and, therefore, in such case assessee had no liability to deduct tax at

source under section 195 and as such provisions of section 40(a)(i) could not be applied.

Similarly in case ofIMP Power Ltd. v. ITO3, it was held that as the legal fees paid to

solicitors in UK was not chargeable to tax under Act in India, assessee was under no

obligation to deduct tax at source under section 195 from payment and therefore it could

not be disallowed by invoking section 40(a)(i). Thus where the payment is not chargeableto income tax, then TDS provisions are not applicable.

Supreme Court in Associated Cement Co. Ltd. v. CIT4

had held that person responsiblefor deducting tax is not required to estimate the income comprised in the payment. But

this decision is not applicable on Service tax. In this case it was held that, the paymentmade to the labourers engaged by the contractor for loading the cement bags for

transportation fall within the ambit of the term "any work", and therefore, TDS wasdeductible under section 194C. In para 5, the court noted:

"We see no reason to curtail or to cut down the meaning of the plain words usedin the section. 'Any work' means any work and not a 'works contract', which has a

special connotation in the tax law. Indeed, in the sub-section, the 'work' referred

to therein expressly includes supply of labour to carry out a work. It is a clearindication of the Legislature that the 'work' in the sub-section is not intended to be

confined to or restricted to 'works contract'. 'Work' envisaged in the sub-section,therefore, has a wide import and covers 'any work' which one or the other of the

organisations specified in the sub-section can get carried out through a contractor

under a contract and further it includes obtaining by any of such organisationssupply of labour under a contract with a contractor for carrying out its work which

would have fallen outside the 'work', but for its specific inclusion in the sub-

section."

The Supreme Court further held that:

"Indeed, it is neither possible nor permissible for the payer to determine what partof the amount paid by him to the contractor constitutes the income of the latter. It

is not also possible to think that Parliament could have intended to cast such

impossible burden upon the payer nor could it be attributed with the intention ofenacting such an impractical and unworkable provision. Hence, on the express

1[1968] 68 ITR 457 (Bom.), see also NQA Quality Systems Registrar Ltd. v. Dy. CIT

[2005] 2 SOT 249 (Delhi).2 [2006] 7 SOT 465 (Mum.)3 [2006] 9 SOT 156 (Mum.)4 [1993] 201 ITR 435


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language employed in the sub-section, it is impossible to hold that the amount of

two per cent required to be deducted by the payer out of the sum credited to theaccount of or paid to the contractor has to be confined to his income component

out of that sum."

The ratio of this decision is that where any sum of amount is paid, which compriseincome; it is neither possible nor practical for the deductor to ascertain the amount of

income. But where sum of amount is paid, which does not comprise income element at

all, then TDS on that income could not be forced at all. The CBDT clarification is beyondall imaginations of Good Governance of any Government. Following example will also

clarify the basic fallacy of CBDT reasoning.

On 20.04.2008, Mr. A provided professional consultancy to Mr. B, amounting to Rs.

20,00,000. Mr. A raise bill for Rs. 22,47,200 (Including Service Tax of 12.36%) Mr. Bmade the payments to Mr. A on 25.04.2008, by making following adjustment:

Total Bill = 22,47,200

TDS @ 11.33% = 2,54,608Payment = 19,92,592

Service tax received by Mr. A (25.04.2008) = 2,47,200 28008 = 2,19,192Service tax payable to Government (5.05.2008) = 2,47,200

TDS Refund = 28,008

But the date and amount of TDS refund is not certain. So the question is that whether this

illegal collection of Income tax is allowable under article 265 of the Constitution of India.Whether this is the true spirit of law? Why the CBDT is munching the wording of TDS

provisions?

In this regard it would be apposite to refer to the decision of the hon'ble Supreme Court in

the case of Transmission Corporation of A.P. Ltd. v. CIT5. Speaking through Justice

M.B. Shah the hon'ble apex court observed as under:

The scheme of sub-sections (1), (2) and (3) of section 195 and section 197 leaves

no doubt that the expression "any other sum chargeable under the provisions of

this Act" would mean "sum" on which income-tax is leviable. In other words,the said sum is chargeable to tax and could be assessed to tax under the Act .

The consideration would be-whether payment of the sum to the non-resident

is chargeable to tax under the provisions of the Act or not ? That sum may beincome or income hidden or otherwise embedded therein. If so, tax is required to

be deducted on the said sum, what would be the income is to be computed on the

basis of various provisions of the Act including provisions for computation of thebusiness income, if the payment is a trade receipt. However, what is to be

deducted is income-tax payable thereon at the rates in force. Under the Act, total

5 [1999] 239 ITR 587


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income for the previous year would become chargeable to tax under section 4.

Sub-section (2) of section 4, inter alia, provides that in respect of incomechargeable under sub-section (1), income-tax shall be deducted at source where it

is so deductible under any provision of the Act. If the sum that is to be paid to the

non-resident is chargeable to tax, tax is required to be deducted.

The decisions of Supreme Court are based on the basic assumption that it is very difficult

to decide the portion of income in the total sum. But where part of payment contains no

income at all and also the assessee is just doing thankless job of Government in collectionand deposit of taxes, then such type of clarification are not justified.

Service Tax -TDS

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