TDS ACAC 18062010

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Practical aspects of TDSand Controversies

Tushar P. Hemani

Advocate, High Court

1Tushar P. Hemani, Advocate

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PresentTaxationSystem

Every citizen is liable to pay Income Tax on his

income as per Chapter XVII which containsMachinery provisions in the aid of the substantive

provisions of sections 4, 5, 28, 145 laying down

the charge of income tax.

As per S. 4(1) of the Act, Income tax shall becharged in respect of the total income of the

previous year;

As per S. 4(2) of the Act income tax shall bededucted at source or paid in advance in respect

of Income which is chargeable u/s 4(1) of the Act.

Tushar P. Hemani, Advocate 2

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UnderstandingtheconceptofTDS

Recurring and regular revenue for

GovernmentKeeps a check on tax evasion

Helps in widening the tax base

Pay as you earn scheme and Earlycollection of the revenue by the government

Reporting of correct income

Easy and cheapest mode of collection and

recovery of tax


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Importance of TDS In Global taxation system, including that

of India, TDS is a very important andincreasingly useful way to collect taxes

with least effort on the part of

governments. India is no exception. In india, TDS collections are ever

increasing. Around 33% to 38.5% of the

net direct tax collection comes from TDSwith a CARG of around 25%


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TDS Provisions S. 192: Salary: Any person responsible for

paying Salaries is required to deduct tax atsource on the amount payable to employees.

Tax is required to be deducted at the time of

actual payment of salary. Payer or Deductorhas to calculate the Salary Payable to each

employee in advance in April of each year,

including Salaries, Allowances, Perquisitesetc. which form part of the salary.


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S. 192 Total amount of tax deducted should not be

less than the amount of tax deductible fromsalary except where the loss under the head

Income from House Property has been

taken into account. Where an employee is in employment of

more than one employer, tax will be

deducted at source by the employer, whichthe employee chooses or the presentemployer.


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S. 192 After allowing the legitimate deductions from the salary,

total tax payable on Annual Salary is to be calculated

and T.D.S. to be made from monthly salary in equal 12

installments. During the year if bonus or any arrears is

paid or salary is increased separate deduction or

proportionate increase in deduction is to be made. IfT.D.S. is not made in equal installments, but deducted

from last months of the year, the Payer is liable to pay

the interest for short / non deduction of T.D.S. or even

penal actions. Time limit for Payment of T.D.S. : 7 days from the date

of payment of Salary.


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Section 193 Interest on Securities

Any person responsible for paying interest

on securities to a resident is required todeduct tax at source at the rates in force on

amount of interest payable.

The Tax is required to be deducted at thetime of credit of such income to the payees

account or at the time of payment of

interest on securities whichever is earlier.


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Section 194 Dividends

The Principal Officer of the Indian Company or acompany, which has made prescribed arrangements

for declaration and payment of dividend in India isresponsible for deducting tax at source from dividendpayable to a shareholder, who is resident in India.

No tax is to be deducted at source u/s 194 from

Dividend payable to any individual shareholder if thedividend is paid by the company by an account payeecheque and the aggregate amount of dividenddistributed/paid or likely to be distributed/paidduring the financial year does not exceed Rs.2,500/-

No TDS in respect of dividends referred to u/s 115Oof the Act.


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Section 194A Interest other than

Interest on Securities

Any person (except on individual or a HUF) responsible for payinginterest other than interest on securities to a resident is required todeduct tax at source

However, w.e.f. 1st June, 2002, an Indian or a HUF whose totalsales, gross receipts or turnover from business or profession exceedsRs. 40 lakhs or Rs.10 lakhs respectively, during the financial yearimmediately preceding the financial year in which such interest iscredited or paid shall be liable to deduct tax at source

TDS is required to be deducted either at the time of credit of suchincome to the payees account or at the time of payment, whicheveris earlier.

No tax is deducted in case where the aggregate amount of interestdoes not exceed Rs.5,000/-. In case of term deposits with banks orCooperative Society and Housing Finance Companies, no tax is

required to be deducted upto an aggregate interest of Rs.10,000/-. No tax is required to be deducted in case of interest paid/credited to

any banking company/financial corporation, LIC, UTI, etc.


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Section 194B Winning from Lottery

or Crossword Puzzles

Any person responsible for paying

income by way of winning fromLottery/crossword puzzle or card game

or any other game is required to deduct

tax at source. No tax is deductible if the amount of

payment is Rs.5,000/-* or less.

* Rs.10,000 w.e.f. 01/07/2010.


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Section 194C Payment to

Contractor/Sub-contractors

Anyperson(otherthanindividualandHUF)payinganysumtoanyresidentcontractors forcarryingoutanywork (includingsupplyof labourforcarryingoutanywork)inpursuanceofacontract between the resident contractor and specifiedpersonisrequiredtodeducttaxatsource. Likewise,incaseofpayment made by a resident contractor to a resident sub

contractorforcarryingoutthewholeoranypartoftheworkundertakenbythecontractororforsupplyingwhetherwhollyorpartlyany labour,whichthecontractorhasundertakentosupply,taxisrequiredtobededucted.


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However, an individual or a HUFwhosetotalsalesorgrossreceiptsorturnoverfrom business exceeds Rs.40 lakhs or whose gross receipts from professionexceedsRs.10lakhsduringthefinancialyearimmediatelyprecedingthefinancialyearwhichsuchsumiscreditedorpaidtotheaccountofsubcontractorshallbeliabletodeducttaxatsource.

Tax is required tobedeductedeither the timeof creditof the sumpaid to theaccountof thepayeeorat the timeofpayment incashorbychequeorbyanyothermode,whicheverisearlier.

With effect from 1stOctober,2004,Section194ChasbeenamendedtoprovidethattaxwillberequiredtobedeductedatsourcewheretheamountcreditedorpaidtothecontractororasubcontractorexceedsRs.20,000*inasinglepaymentorRs.50,000*intheaggregateduringthefinancialyear.

Nodeductionshallbemadefromanysumcreditedorpaidorlikelytobecreditedorpaidduringthepreviousyeartotheaccountofacontractorduringthecourse

of business of plying, hiring or leasing goods carriages, on furnishing of hisPermanentAccountNumber,tothepersonpayingorcreditingsuchsum.

*Rs.30,000&Rs.75,000respectivelyw.e.f.01/07/2010


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Section 194H Commission or Brokerage

Any person other than an individual or Hindu

Undivided Family who is responsible for payingon or after 1st June, 2001, to a resident, any

income by way of commission (other than

insurance commission referred to in section

194D), or brokerage, is required to deduct tax.

No deduction is required to be made where theamount of such income or the aggregate of the

amounts of such income credited/paid duringthe financial year does not exceed Rs.2,500/-

or Rs.5,000 w.e.f. 01/07/2010.


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Section 194 I Rent

Any person other than an individual or Hindu Undivided Familyresponsible for paying rent to resident any income by way ofrent is required to deduct tax.

Rent means any payment by whatever name called, under anylease, sub-lease, tenancy or any other agreement orarrangement for the use of (either separately or together) any:

1. land, or

2. building (including factory building), or

3. land appurtenant to a building (including a factorybuilding), or

4. machinery, or

5. plant, or

6. equipment, or7. furniture, or

8. Fittings

Whether or not any or all of the above are owned by the payee.


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Any hire charges paid for hiring Motor Cars would alsoget covered under the ambit of TDS u/s 194-I. Rent

now covers the hire charges for machinery or plant orequipment within its ambit.

From 1st June, 2002 an individual or a HinduUndivided Family whose total sales or gross receipts orturnover from business exceeds Rs.40 lacs or whose

gross receipts from profession exceeds Rs.10 lacsduring the financial year immediately preceding thefinancial year in which such sum is credited or paidshall be liable to deduct tax at source.

No deduction shall be made where the amount ofsuch income or the aggregate of amounts of suchincome credited/paid during the financial year does notexceed Rs.1,20,000/- or Rs.1,80,000 w.e.f. 01/07/2010


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S. 194J Fees for Professional

or Technical Services

Any person other than individual or HUF responsible for paying to aresident fee for professional services or fee for technical services isrequired to deduct tax on the income comprised therein.

Professional services means services rendered by a person in thecourse of carrying on legal, medical, engineering or architecturalprofession or the profession of accountancy or technical consultancyor interior decoration or advertising or such other profession as isnotified by the Board for the purpose of section 44AA or of thissection.

Fees for technical services shall have the same meaning as inExplanation 2 to clause (vii) of sub-section (1) of section 9 For thepurpose of this clause Fees for technical services means: anyconsideration (including any lumpsum consideration) for therendering of any managerial, technical or consultancy services

(including the provisions of services of technical or other personnel),but does not include consideration for any construction, assembly,mining or like product undertaken by the recipient or consideration

which would be income of the recipient chargeable under the headsalaries.


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The tax is required to be deducted at the time ofcredit of such income to the account of the payee or

at the time of payment in cash or by issue of chequesor drafts or by any other mode whichever is earlier.

No tax is required to be deducted in case amount ofsuch sum or aggregate of amount of such sumscredited or paid during the financial year does notexceed Rs.20,000/- or Rs.30.000 w.e.f. 01/07/2010.

With effect from 1st June, 2003 no individual or HUFshall be liable to deduct tax on fees for professionalservices in case such sum is credited or paid

exclusively for personal purposes of such individualor any member of HUF.


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Rates of TDS

Section Type of payment Up to 30.06.10 w.e.f 01.07.10 Company , Firm,

Cooperative

Society, Local

authority

HUF

Individual

192 Payment for Salary ---- -----

194A Payment for Interest

(interest on security)

10,000 10,000 10 % 10 %

194C Payment to

Contractor

20,000 (50,000 in a

year)

30,000 (75,000 in a

year)

2% 1%

194H Payment of

Commission/ Brokerage

2,500 5,000 10% 10%

194I Payment of rent 1,20,000 1,80,000 10% 10%

194J Payment of any

professional fee

20,000 30,000 10% 10%


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S. 195 Other sums 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 income chargeable under the headSalaries)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 theissue of a cheque or draft or by any other mode,whichever is earlier,deduct income-tax thereon at the rates in force.


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No such deduction shall be made in respect of any dividends referred toin S. 115O

S. 195(2) Where the person responsible for paying any such sumchargeable under this Act (other than salary) to a non-residentconsiders that the whole of such sum would not be income chargeablein the case of the recipient, he may make an application to theAssessing Officer to determine, by general or special order, theappropriate proportion of such sum so chargeable, and upon suchdetermination, tax shall be deducted under sub-section (1) only on that

proportion of the sum which is so chargeable. S.195(3) Subject to rules made under sub-section (5), any person

entitled to receive any interest or other sum on which income-tax has tobe deducted under sub-section (1) may make an application in theprescribed form to the Assessing Officer for the grant of a certificateauthorising him to receive such interest or other sum without deduction

of tax under that sub-section, and where any such certificate is granted,every person responsible for paying such interest or other sum to theperson to whom such certificate is granted shall, so long as thecertificate is in force, make payment of such interest or other sumwithout deducting tax thereon under sub-section (1).


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S.195 withholding tax

- Tax is required to be withheld at the time of makingpayment to non-resident or foreign company in

respect of interest or any sum which is liable to tax inIndia.

- If tax is not withheld in accordance with S.195, thenthe said sum is disallowed u/s 40(a)(i) of the Act.

- Assessee may make an application to Assessingofficer to determine the amount on which tax isrequired to be withheld and accordingly Assesseemay deduct tax and remit money.

- Assessee may after obtaining certificate from

Chartered Accountant may remit money either withholding tax or without deducting tax dependingupon case to case

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Stepstodeterminetaxabilityofremittanceof

amount:Is Income taxable in India as per Income Tax Act, 1961 ?

For example remittance being made for import of goods to X in USA

Is there any treaty with the country of which the non-resident is a resident?There is treaty with USA.

Does the treaty exempt the income from tax in India or

does it prescribe a lower rate of tax ?

There is no PE, hence not liable to tax in India.

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S. 197 Obtaining a Certificate of Lower

Rate from the AO

For tax-deductible u/s 192, 193, 194, 194A, 194C, 194D,194G, 194H, 194-I, 194J, 194K, 194LA or 195.

The recipient can apply in Form No.13 to the AssessingOfficer to get a certificate authorizing the payer to deducttax at lower or deduct no tax as may be appropriate.

The certificate of lower rate shall be issued directly tothe person responsible for paying income, under an advice

to the applicant. However in the case of entities covered by Rule 28AB, the

Assessing Officer may issue a certificate to the recipientauthoring payment of income without deduction of tax atsource. The recipient may furnish copies of such

certificate to the person responsible for paying the incomefor the purpose of no deduction of tax at source.


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S.197A No Deduction to be made

If a person (other than firm or company

or Sr. Citizen) receiving interest orincome from units, submit a declaration

in Form No.15-G to the person

responsible for paying such sums, no T.D.S. shall be made from such

payment. A person can submit such

declaration only if total of such sums isnot exceeding the maximum amount,

which is not chargeable to tax.


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A senior citizen can submit such declaration inForm No.15'H' and a limit of income as specified

above, for this purpose is not applicable to senior

citizen, but his tax liability should be 'NIL'.

The Payer or Deductor, to whom Form No.15'G'

and 15'H' are submitted, he is required to sendthese forms to the Commissioner of his

jurisdiction, before 7th of the next month, in which

he has received such declarations.

Normally the Banks and Financial Institutionsshould obtain such Form No. 15G or 15H as the

case may be, in April every year.


C f F il

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Non deduction or failure

to pay TDS

Non-Deduction

Consequences of Failure toDeduct/Part Deduct or Pay

Deduction andFailure to pay

Deduction andDelay in Payment

Shortfall inDeduction

Penalty-271C Disallowance of

Expenditure,subject to 40(a)(i)/ 40(a)(ia)

Interest-201(1A)

Penalty-271CProsecution-276B

Interest-201(1A)Disallowance of


Penalty-271CDisallowance of


Interest-201(1A)


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Consequences

Amounts not deductible u/s 40(a)(ia) in computing theincome under Profit and Gains of business or profession

when TDS is deductable and has not been deducted.

After deduction, has not been paid during the previous yearor time prescribed under section 200 (1) read with Rule 30. For Non Government Payer : Within one week from last day of

the month in which deduction is made, or;

credited on the date of making up of accounts upto within 2months of the expiry of the said months, except

Salary (192) winning from Lottery (194), winning from HorseRacing (194BB), payment of NSS (194EE) Repurchase of MutualFund (194F)

Within one week from the last day of the month in which the

deduction was made. However, these will be allowed in the year of payment.


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Liability u/s 201

If an assessee does not deduct tax at source ordeduct and fails to pay to the CentralGovernment:

201(1) Penalty assessee to be treated asassessee in default u/s 221 and penalty isequal to the amount of tax in arrears; and

201(1A) Interest @ 1% per month

After deducting not paying also leads to a chargebeing credited on the assets of the payer.


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Section 271C: Penalty for failure to deduct tax

at source as required or under the provisions ofChapter XVII-B. Penalty Equal to Tax or fails to

pay the whole or part to the Govt. treasury of

taxes referred to in S.115O and S.194B.

Section 276B: Fails to pay to the credit ofCentral Government, tax deducted at source by

him as required by or under the provisions of

Chapter XVII-B. Imprisonment Period 3months to 7 years and with fine.


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Other insignificant

TDS provisions S. 194BB Winnings from horse race.

S. 194D Insurance commission. S. 194E Payments to non-resident sportsmen or

sports associations

S. 194EE Payments in respect of deposits under

National Savings Scheme, etc

S. 194F Payments on account of repurchase of

units by Mutual Fund or Unit Trust of India

S. 194G Commission, etc., on the sale of lotterytickets


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Other insignificant

TDS provisions S. 194K Income in respect of units.

S. 194L Payment of compensation on acquisition ofcapital asset.

S. 194LA Payment of compensation on acquisition ofcertain immovable property

S. 196 Interest or dividend or other sums payable toGovernment, Reserve Bank or Corporation

S. 196B Income from units.

S. 196C Income from foreign currency bonds or sharesof Indian company

S. 196D Income of Foreign Institutional Investors fromsecurities.


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CaseStudy1

S. 195 / 201 liability cannot be avoided on ground ofnon-taxability of recipient - CIT vs. SamsungElectronics 320 ITR 209 (kar.)

Facts / IssueThe assessee made payments to a foreign company forpurchase of shrink-wrapped/ready-made software

without deduction of tax at source u/s 195 (1). The AO

held that the payments were chargeable to tax in thehands of the foreign company as royalty u/s 9 (1) (vi)and that the assessee was liable u/s 201 for non-deduction of tax and interest thereon. On appeal, thisview was confirmed by the CIT (A) though the Tribunal

(94 ITD 91) held that the payments for software, beinga purchase of a copyrighted article and goods as heldby inTata Consultancy Services 271 ITR 401 (SC), wasnot liable to tax in India and consequently there wasno obligation on the assessee to deduct tax at source

u/s 195 (1). 33Tushar P. Hemani, Advocate

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Held:-(i) The effect of the judgment of the Supreme Court in TransmissionCorporation of India 239 ITR 587 is that the moment there is a

payment to a non-resident, there is an obligation on the payer todeduct tax at source u/s 195 (1). The only way to escape the liability isfor the payer to make an application to the AO u/s 195 (2) for non-deduction or for deduction at a lower rate. If the payer does not makean application and obtain an order u/s 195 (2), it is not open tohim to argue that the payment has not resulted in taxable income

in the hands of the non-resident recipient and that, therefore,there is no failure on the part of the payer to deduct tax u/s 195(1);

(ii) In an appeal by the payer against an order u/s 201 imposingliability on the payer for failure to deduct tax u/s 195 (1), there is

absolutely no scope for the appellate authority to adjudicatewhether the non-resident recipient was chargeable to tax or notand the rate at which it was so chargeable. If the appellate authorityin the payers case determines the tax liability of the recipient, theremay arise conflicts if in the assessment of the recipient a different viewis taken as to its taxable status;

(iii) The Tribunal committed an error in determining in the appeals filedby the payer that the payment to the non-resident was not liable to taxand thereby holding the payer was not liable u/s 201 for non-deduction u/s 195 (1).


Th bli i d d h / 95 ( ) i

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The obligation to deduct the tax at source u/s 195 (1) arisesonly when the payment is chargeable to tax. SamsungElectronics not followed - Van Oord Acz India (P.) Ltd. Vs.

CIT 189 Taxman 232 (Del.)

Held:-

(i) The observations of the Supreme Court in TransmissionCorporation of AP 239 ITR 387 have to be read in thecontext of the question before the Court i.e. whether tax wasdeductible on the gross trading receipts or only on the pureincome profits. The Court was not concerned with a case

where the receipt was not chargeable to tax in the hands ofthe recipient at all. On the other hand the observations ofthe Court make it clear that the liability to deduct tax atsource arises only when the sum payable to the non-resident is chargeable to tax;

(ii) Even the plain language of s. 195 shows that the tax atsource is to be deducted on the sum chargeable under theprovisions of the Act. One can, therefore, reasonably saythat the obligation to deduct tax at source is attractedonly when the payment is chargeable to tax in India;


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(iii) The determination by the AO under s.195(2) of the Act istentative in nature. In case it is ultimately found in the

assessment proceedings relating to the recipient that he wasnot liable to pay any tax on the sums received, the assesseecannot be treated in default inasmuch as s. 195(1) of theAct casts an obligation to deduct the tax at source on thesum chargeable under the provisions of this Act;

(iii) As regards Samsung Electronics 185 Taxman 313 (Kar),the context was different. The assessees wanted to show intheir own assessment proceedings that the amount paid

by them was not assessable to tax at the hands ofrecipient. No doubt, they would be precluded to do so.However, when in the assessment proceedings relating torecipient itself, it is opined by the income tax authoritiesthat the tax is not payable at all on the amounts so received,provision of s. 195 would not be attracted. Even otherwise,because of the analysis of what TransmissionCorporation of AP decides, we, with due respect, are notin agreement with some of the observations made in theaforesaid judgment of the Karnataka High Court


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CaseStudy2

TDS on foreign salary is required even though assessee is not the payer- CIT vs. Eli Lilly & Co. (India) (P.) Ltd. 178 Taxman 505 (SC)

Facts :- The assessee-employer obtained expatriate-employees from a foreigncompany and the said employees, continuing to be employees of the foreigncompany, received salary and allowance in their home country in foreigncurrency.

Issue:-Whether the assessee was obliged to deduct tax thereon at source u/s 192?

Held:-

(i) Though the payment of salary to the expatriate was made by the foreigncompany outside India, the TDS provisions did apply as the Act had extra-territorial operation as there was a nexus between the said salary and therendering of services in India;


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(ii) U/s 9 (1) (ii), salary received abroad is deemed to arise in India if itis for services rendered in India. This charging provision has to be read

with the machinery provision of s.192 and both are part of anintegrated code;

(iii) S. 192 requires the employer to deduct tax after estimating thesalary payable to the employee. The act of estimation is akin tocomputation of income. In making the estimate, s. 9 (1) (ii) has to be

taken into account;

(iv) On facts, as it was found that the salary paid by the foreigncompany was for services in India the same was deemed to accrue inIndia u/s 9 (1) (ii) and the assessee ought to have deducted tax u/s192 though it was not the payer;

(v) Levy of interest u/s 201 (1A) is mandatory and has to be calculatedfrom the date of default to the date of payment either by the assessee orthe payee-employee;

(vi) However, levy of penalty u/s 271C is not mandatory orcompensatory or automatic. Penalty can be levied only if there is nogood and sufficient reason for the failure to deduct tax at source. Onfacts, as the issues were controversial and the assessees acted bonafide, penalty could not be imposed


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CaseStudy3

Employer not required to check proof when deducting TDSu/s 192 CIT vs. Larsen & Toubro Ltd. 313 ITR 1 (SC)

Issue:-

The question came up for consideration was whether the assessee-employer was under statutory obligation to collect evidence to showthat its employees had actually utilized the amount(s) paid towardsleave travel concession/conveyance allowance?

Held:-

The beneficiary of exemption under section 10(5) is an individualemployee. Further, there is no circular of the CBDT requiring theemployer under section 192 to collect and examine the supportingevidence to the declaration to be submitted by an employee(s). [Para2]

For the above reasons, it was to be held that the assessee-employerwas under no statutory obligation to collect the evidence to show thatits employees had actually utilized the amounts paid towards leavetravel concession/conveyance allowance


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CIT(TDS) vs. Reliance industries ltd. 308 ITR82 (guj.)

Gujarat High Court held that where assessee-company had distributed free food/meal couponsto its employees for purchase of meals only at

specified eating points; such coupons were nottransferable; and value of each coupon did notexceed monetary limit provided by rule 3(7)(iii),merely because some of employees had misused

said facility by using coupons for other purposes,assessee-company could not be treated to be indefault for non-compliance with requirement ofdeducting tax at source under section 192.


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CaseStudy4

No sub-contract, No person is liable to deduct tax at sourceunder section 194C(2) even if payment is being made to aresident - CITv.Ambuja Darla Kashlog Mangu TransportCo-op. Society[2010] 188 TAXMAN 134 (HP)

Facts:-

Assessee was a registered co-operative society constituted bytruck operators - It entered into contracts with companiesfor transportation of their goods - Such companies made

payments to assessee after deducting tax at source undersection 194C - Thereafter, assessee paid that entire amountto its members, who had actually carried goods, withoutdeducting tax at source under section 194C

Issue:-Is the payment covered u/s 194C(2) of the Act and thereforetax is required to be deducted at source?


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Held:-

If the entire working of the society was seen, it

was apparent that the society had entered into acontract on behalf of the members. The society was nothing, but a collective name for all themembers and the contract entered into by the

society was for the benefit of the constituentmembers and there was no contract between thesociety and the members.

For the foregoing reasons, section 194C(2) was not

attracted and the assessee-society was not liableto deduct tax at source on account of paymentsmade to the truck owners who were also membersof the society.


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CaseStudy5

Word work in section 194C has to be understood in alimited sense and would extend only to service contracts

specifically included in said section by way of Explanation III- East India Hotels Ltdv.Central Board of Direct Taxes[2009] 320 ITR 526 (BOM.)

Facts:-

The petitioner-company operated a number of five star

deluxe hotels all over India. It, as a chain of hoteliers, offeredvarious facilities, apart from boarding and lodging, to itsguests like house-keeping of highest standard, selectedrestaurants, bank counter, beauty saloon, etc

Issue:-Is every customer of the petitioner-hotel, while makingpayment to the hotel for occupying its room and availingother facilities provided by the hotel, required to deductincome-tax at the rate specified in section 194C?


Held:-

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If the term any work in section 194C is wide enough to include alltypes of work, then it would mean that even the hair cutting work done

by a barber would be a work covered under section 194C and theperson making payment to the barber would be covered under section194C.

Such a wider interpretation is uncalled for, especially when the revenueitself had considered frominception that section 194C is restricted to the works done by

contractors/sub-contractors.Apart from the above, the CBDT, by its Circular No. 715 dated 8-8-1995, has clarified that the payments made by persons other thanindividuals and HUFs for hotel accommodation taken on regular basiswill be in the nature of rent subject to TDS under section 194-I. Thus,there is inconsistency in the stand of the CBDT as to whether theservices rendered by a hotel to its customers are covered under section194C or under section 194-I.As noticed, the facilities/amenities made available by the hotel to itscustomers do not constitute work within the meaning of section 194C.Consequently, the Circular No. 681, dated 8-3-1994, to the extent itheld that the services made available by a hotel to its customers arecovered under section 194C, must be held to be bad in law.

For all the aforesaid reasons, the petition was to be allowed byquashing the Circular No. 681, dated 8-3-1994 to the extent it heldthat section 194C applies to payments by the customers to the hotel foravailing the facilities/amenities made available by the hotel.


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CaseStudy6

Whether TDS on service tax is deductibleor not?

In this circular, board has clarified that tax deduction at

source (TDS) under sections 194-I of Income Tax Act wouldbe required to be made on the amount of rent paid/payable

without including the service tax. [Circular no. 4 dated 28-4-2008]

CBDT has issued another clarification vide circular F. NO.275/73/2007IT(B) dated 30-6-2008, wherein CBDT hasclarified that the scope of benefit of Circular no. 4 dated 28-4-2008 can not be extended to the payment made undersection 194J (Fees for professional and technical services).

Also Ref.

CBDT Circular No. 715 dated 08.08.1995 : Question No. 30.CBDT Circular No. 718 dated 22.08.1995 : Question No. 4.


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Therefore, TDS is to be deducted on the grossamount inclusive of service tax where the payment

is being made u/s 194J. From the reading of boththe clarifications, the reasons for two stands in two

situations can be discussed as under:

Section 194J speaks about deduction of tax at

source (TDS) on any sum which is paid to the

recipient whereas Section 194I speaks about the

deduction of tax at source (TDS) on any income

paid as rent.


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Case

Study

7

HINDUSTAN COCA COLA BEVERAGE PVT

LTD Vs COMMISSIONER OF INCOME TAX(293 ITR 226) held that in the case of short

withholding of taxes, though the appellant-

assessee (deductor of taxes) was rightly held

to be an 'assessee in default', there could be

no recovery of the tax alleged to be in default

once again from the appellant (deductor of

taxes) if the deductee had already paid taxeson the amount received from the appellant

(deductor of taxes).


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This is based on the provisions of the circularNo. 275/201/95- IT(B) dated 29.1.1997 issued

by the Central Board of Direct Taxes wherein

the circular declares "no demand visualized

under Section 201 (1) of the Income- tax Act

should be enforced after the tax deductor hassatisfied the officer-in-charge of TDS, that

taxes due have been paid by the deductee-

assessee.


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However, this will not alter the liability to

charge interest under Section 201 (1A) ofthe Act till the date of payment of taxes by

the deductee-assessee or the liability for

penalty under Section 271C of the Income-

tax Act.

Honble the Supreme Court has approved

decision of Gujarat High Court in the caseof Rishikesh Co-operative Hosuing ScoietyLtd. (253 ITR 310).


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In Madumilan Syntex Ltd. vs. Union of India (2007) 160 Taxman 71(SC)

The

next

contention

that

since

TDS

had

already

been

deposited

to

the

account of the Central Government, there was no default and noprosecutioncanbeorderedcannotbeaccepted.xxx

Oncea statute requires topay taxand stipulatesperiodwithinwhich such

payment

is

to

be

made,

the

payment

must

be

made

within

that

period.

If

the payment is not made within that period, there is default and anappropriateactioncanbe takenunder theAct. Interpretationcanvassedbythe learnedcounselwouldmaketheprovisionrelatingtoprosecutionnugatory.


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CaseStudy8Reimbursement

Reimbursement of incidental expenses in addition topayments of Fees for Technical Services (FTS)/Royalty.

Reimbursement of cost of services of a third partyengaged by the non-resident.

Reimbursement of allocated cost (i.e. costs- sharingarrangements).

Payments for services rendered at cost.

Reimbursement of living allowance, etc. of a persondeputed to India by the non-resident.

Direct payments by the non-resident of expenses andsalaries of foreign technicians.


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Payments representing pure reimbursement and notcontaining any profit element in-built into it would not

constitute "income". So No TDS However, it may be regarded as income if the reimbursement

is not over and above, but in lieu of, the payment of fees for

the services rendered by the foreign company. If the only

payment to the foreign company is the reimbursement ofexpenses, such as the salary of the foreign personnel deputed

for providing services to the Indian company, then it is likely

that such payments would not be regarded as pure

reimbursement and would accordingly be chargeable to tax.

Also costs sharing arrangements would be liable to tax unlessit can be documented that cost allocated were at actual and

not a percentage etc. of total costs.


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Some Decisions:

CIT vs. Siemens AG (Mum) 220 CTR 425 (Mum) ITO Vs Dr. Willimar Schwabe India (P) Ltd.

(2005) 3 SOT 71

CIT vs. Tata Engineering and Locomotive Co. Ltd.(245 ITR 823) (Bom) CIT vs. Industrial Engg. Projects (P) Ltd. (202 ITR

1014) (Del)

CIT vs. Dunlop Rubber Co. Ltd., reported in 142ITR 493 (Cal.)


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CaseStudy9

If entire income is liable to TDS,

though not deducted, interestu/s.234B is not chargeable.

Motorola Inc. vs. DCIT (2005) 95 ITD

(Delhi SB) 269.


d

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CaseStudy10

Section 198, 199 do not determine year ofchargeability to tax Sections 4, 5, 28, 145 are

charging sections and determine the year of

chargeability to tax.

Income to be determined as per method of

accounting regularly followed, credit of TDS iscoupled with it.

Smt. Varsha G. Salunke vs. DCIT (2006) 281ITR (AT) (Mum) 55 (TM)


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CaseStudy11

Packing materials printed and manufactured as

per the directions of the customer, is a sale and

not a works contract, so no TDS.

Circular No. 715 dated 08/08/95 Question No. 15

Balsara Home Products Ltd. Vs. ITO (2005) 94 TTJ970 (Ahd)

DBA Ltd. vs. ITO (2006) 281 ITR (Bom.) 99

CIT vs. Dabur India Ltd. (2006) 283 ITR (Del) 197


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CaseStudy12

Specific provision will override the generalprovision contractors payment specifically

covered u/s.194C, will not be covered undergeneral provisions of section 194J.

Each section regarding TDS under Chapter XVIIdeals with the particular kind of payment to theexclusion of all other sections in this Chapter. Thus, payment of any sum shall be liable fordeduction of tax only under one section

CIT vs. Prasar Bharti (2007) 208 CTR 317 (Del)Glaxo Smithkline Healthcare Services Ltd. vs.

ITO (2007) 12 SOT 221 (Del)

CBDT Circular No. 720 dated 30th August 1995.


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CaseStudy13

ImpactofwithdrawalofCircularNo.786 whether the payment to NR is income in thehands of the NR and as such liable to tax in

India or not?

Apply provisions of S. 9 to check taxability. Whether the NR has a PE in india?

Once it is established that income of the NR

is not liable to tax in India, then the payeris not required to deduct tax thereon while

making payment to the payee NR.Tushar P. Hemani, Advocate 58

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CaseStudy14

Can excess TDS be claimed as refund ?

CBDT CIRCULAR: NO. 285 [F. NO. 275/77/79-

IT(B)], DATED 21-10-1980 -PROCEDURE FOR

REGULATING REFUND OF AMOUNTS PAID IN

EXCESS OF TAX DEDUCTED AND/OR

DEDUCTIBLE


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CaseStudy15

Prosecution S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla & Anr., (2005) 8 SCC 89 :

JT (2005) 8 SC 450, wherein this Court held that essential averments must

be made in the complaint that the person against whom complaint is made was in charge of and responsible for the conduct of business of theCompany. Without such averment, no criminal liability would arise.

Municipal Corporation of Delhi v. Ram Kishan Rohtagi & Ors., AIR 1983SC 67

"So far as the Manager is concerned, we are satisfied that from the very

nature of his duties it can be safely inferred that he would undoubtedly bevicariously liable for the offence, vicarious liability being an incident of anoffence under the Act. So far as the Directors are concerned, there is noteven a whisper nor a shred of evidence nor anything to show, apart from thepresumption drawn by the complainant, that there is any act committed bythe Directors from which a reasonable inference can be drawn that theycould also be vicariously liable. In these circumstances, therefore we find

ourselves in complete agreement with the argument of the High Court thatno case against the Directors (accused Nos. 4 to 7) has been made out exfacie on the allegations made in the complaint and the proceedings againstthem were rightly quashed."


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Standard Chartered Bank & Ors. V. Directorate of Enforcement & Ors.,(2005) 4 SCC 530 : JT (2005) 5 SC 267.

"As the company cannot be sentenced to imprisonment, the court cannotimpose that punishment, but when imprisonment and fine is the prescribedpunishment the court can impose the punishment of fine which could beenforced against the company. Such a discretion is to be read into theSection so far as the juristic person is concerned. Of course, the courtcannot exercise the same discretion as regards a natural person. Then thecourt would not be passing the sentence in accordance with law. As regardscompany, the court can always impose a sentence of fine and the sentence of

imprisonment can be ignored as it is impossible to be carried out in respectof a company. This appears to be the intention of the legislature and we findno difficulty in construing the statute in such a way. We do not think thatthere is a blanket immunity for any company from any prosecution forserious offences merely because the prosecution would ultimately entail asentence of mandatory imprisonment. The corporate bodies, such as a firmor company undertake series of activities that affect the life, liberty and

property of the citizens. Large scale financial irregularities are done byvarious corporations. The corporate vehicle now occupies such a largeportion of the industrial, commercial and sociological sectors thatamenability of the corporation to a criminal law is essential to have apeaceful society with stable economy.


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TDS ACAC 18062010

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