Domestic Tds Provisions Wirc 25.11.2009

Overview of key domestic tax deduction provisions

CPE study circle meeting, WIRC,Bhiwandi, 25 November 2009

CA Romesh S A Sankhe

CA Romesh S A Sankhe2

Contents

Background

Analysis of TDS provisions• 192 Salaries • 193 Interest on securities• 194 Dividend• 194A Interest other than securities• 194B Winning from lottery• 194BB Winning from horse race• 194C Payment to contractors• 194H Commission or brokerage• 194I Rent• 194J Fees for professional or technical

services• 194L Compensation on acquisition of

capital asset• 194LA Compensation on acquisition of

immovable property• 201 Failure to deduct or pay

Domestic TDS provisions_WIRC_25 November 2009

CA Romesh S A Sankhe

• Chapter XVIIB of the Income-tax Act (section 192 to section 206) lays down provisions relating to tax deduction at source (“TDS”)

• If payment to resident not covered under TDS provisions, then tax is directly payable by the recipient under section 191

• Payment of any sum shall be liable for deduction of tax only under one section- CBDT circular 720, dated 30 August 1995

3

Background

Its an obligations and not an option !!!


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Analysis of TDS provisions

CA Romesh S A SankheDomestic TDS provisions_WIRC_25 November 2009


Section 192 - Salaries

• At the time of payment of salaries by any person TDS has to be made at theaverage rate of income tax payable for the financial year

• Salaries as defined u/s 17• TDS at the time of payment• TDS at an equal monthly instalment of annual tax liability

• Employer can, if furnished by the employee, consider following additionalincome while deducting tax;

• Salary from previous employer• Income chargeable under any other head of income• However , this can no way reduce the TDS payable on salary except in case of

‘loss under Income from house property’

• For the salary paid in foreign exchange Rule 115(2)(a) can be referred

Unlike other TDS provisions, the TDS liability is a t the time of payment



‘Salaries’ - Important CBDT circulars

• Rules for TDS compliance by ship owners is prescribed in CBDT letternumber 12/71, dated 5 March 1966

• TDS return can be made by Indian employer or his agent• Quarterly payment of tax may be made for High seas ships

• Excess TDS can be refunded by the department after adjusting assessee’sother direct tax liability - CBDT Circular 285, dated 21 October 1980

• Once the tax is deducted u/s 192 the deductor is bound by Section 203 toissue Form 16 - CBDT Circular 761, dated 13 January 1998

• List of exemptions/deductions to be allowed by employers while computingtotal income of employees is given in yearly CBDT circular - For theassessment year (“A.Y.”) 2009-2010, refer circular number 9/2008, dated 29September 2008 [Circular yet to be published for A.Y. 2010-2011]



‘Salaries’ - Important judicial decisions

• Once the investments made by the employee are verified, then the employerhas no further authority or obligation to examine the source of funds - StateBank of Patiala v. CIT [1999] 102 Taxman 240 (P&H)

• Each TDS instalment need not to be accurate equal monthly instalments,hence mere short deduction of TDS u/s 201(1A) can not be invoked unlessthere is shortfall in total tax deduction - Vinsons v. Third ITO [ 2004] 89 ITD267 (Mumbai ITAT)

• If any payment is chargeable under the head ‘Salaries’ u/s 9(1)(ii), then TDSprovisions would stand attracted - CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009]312 ITR 225 (SC)

• There is no provision in the act, requiring the employer to obtain any proof ofutilization of the leave travel allowance paid u/s 10(5) - CIT v. M/s Larsen &Toubro Ltd [2009] 2009-TIOL-06-SC-IT (SC)



Section 193 - Interest on securities

• At the time of credit or payment whichever is earlier, of interest on securities toresident by any person TDS has to be made

• Every interest on securities is liable to TDS, except interest on securitiesmentioned in sub clause (i) to (ix) of Section 193

• E.g. National defence bonds, National development bonds, National SavingCertificates (NSC), Gold bonds, Central or State government security except 8%bonds of 2003, etc.

• Rate of tax 10%, for financial year (“F.Y.”) 2009-10

‘Interest on securities’ - Important CBDT circular

• TDS on interest on Deep discount bonds - CBDT 4/2004, dated 13 May 2004• Tax is required to be deducted at the time of redemption• If assessee offers the income on yearly basis, then application u/s 197 can be

made to assessing officer to obtain nil/lower TDS at the time of redemption



• Every company before declaring and payment of dividend will have to makethe TDS payment

• However, no deduction will be made under this section, if• Dividend is paid to an individual by an account payee cheque and the amount

does not exceed Rs.2,500 during the F.Y.• Dividend paid to LIC and GIC• Dividend referred in Section 115-O of the Act

• Rate of tax 10%, for F.Y. 2009-10

Section 194 - Dividend

‘Dividend’ - Important CBDT circular & decision

• Liquidator before paying the liquidation amount to the shareholder, has todeduct and pay the TDS - CBDT 16/1965, dated 8 January 1965

• Contrary view, profits earned after the commencement of the winding up arenot dividends, hence not covered u/s 194 - Kanhaiya Lal Bhargava v. OfficialLiquidator [1965] 56 ITR 393 (All.)



• At the time of credit or payment whichever is earlier, of interest other than onsecurities to resident TDS has to be made by any person, not being anindividual or HUF who are not covered under tax audit

• However, no deduction will be made under the section, if• Interest paid by Bank, Co-operative society, Post office does not exceed

Rs.10,000• Any other interest, if it does not exceed Rs.5,000• Interest paid to Bank, financial corporation established under the Act, LIC, Unit

Trust of India, etc as defined in 194A (iii)• Interest paid by partnership firm to its partner• Interest paid by cooperative society to its member• Any other income defined in sub clause (i) to (x) of Section 194A


Section 194A - ‘Interest other than on Securities’



‘Interest other than on Securities’ - Important CBDT circulars

• Rules for TDS on interest payable in Joint account is prescribed in CBDTcircular 256, dated 29 May 1979

• Interest income may be aggregated in the hands of person having higher interestincome, and TDS certificate should be issued accordingly

• If the above is objected by the deductee, then separate treatment can be givenafter receiving the affidavit from the deductee

• Difference between the issues price and face value of the commercial paperand certificate is to be treated as ‘discount allowed’ and not interest - CBDTCircular 647, dated 22 March 1980



‘Interest other than on Securities’ - Important judi cial decisions

• Section 194A applies to interest paid/payable on compensation for acquisitionof land belatedly - Tuhi Ram v. Land Acquisition Collector [1992] 105 CTR 378(Punj. & Har.)

• No tax needs to be deducted at source in respect of the provision for interestpayable where recipient of such ‘interest accrued but not due’ could not havebeen ascertained at the point of time when the provision is made - IndustrialDevelopment Bank of India Vs Income Tax Officer, City III (1), Mumbai [2007]107 ITD 45 (Mumbai ITAT)

• Once interest is regarded as revenue receipt u/s 4 of the Act; TDS u/s 194A isto be paid by the recipient, hence interest on the delayed payment is coveredu/s 194A - Karnal Singh v. State of Haryana [2009] unreported (P&H HC)



• At the time of payment of winning from lottery to any person TDS has to bemade by any person, even on winning in kind, where the amount exceedsRs.5,000


Section 194B - ‘Winning from lottery’


‘Winning from lottery’ - Important CBDT circular & decision• The State Government and Union territories running lotteries are also required

to deduct tax at source from prizes won by lottery agents.- CBDT Circular 264,dated 11 February 1980

• Elements constituting a lottery are: (i) a prize or some advantage in the natureof a prize, (ii) distribution thereof by chance, and (iii) consideration paid orpromised for purchasing the chance. Thus, unless all the three elements aresatisfied, the prize scheme cannot be considered as a lottery - SampannaKuries (P.) Ltd. v. ITO [2004] 141 Taxman 615 (Ker.)/Canaan Kuries & Loans(P.) Ltd. v. ITO [2005] 142 Taxman 249 (Ker.)


• At the time of payment of winning from horse race to any person TDS has tobe made by any person, even on winning in kind, where the amount exceedsRs.5,000


Section 194BB - ‘Winning from horse race’



Section 194C - ‘Payment to contractors’


• At the time of credit or payment whichever is earlier, of any sum to anyresident for carrying out any work, TDS has to be made, however nodeduction will be made if;• Any sum paid or credited does not exceed Rs.20,000 and the aggregate amount

does not exceed Rs.50,000 in a F.Y.• On submission of PAN by the person engaged in business of plying, hiring or

leasing good carriages, this is w.e.f. 1 October 2009• Payment made by an individual or HUF who are not covered under tax audit

• However, ‘work’ will not include manufacturing or supplying a product as perthe specification of customer by using material purchased from person otherthan such customer• In case the material is supplied by customer and the same is separately mentioned

on the invoice, then TDS will not be deducted on the amount of material

• W.e.f.1 October 2009, 1% for Individual/HUF & 2% for others, for F.Y. 2009-10

Controversy of ‘Contract of sale v. 194C’ such as p rinted material etc,, seems to be addressed vide explanation (iv)(e)


‘Payment to contractors’ - Important CBDT circulars

• As per CBDT circular 558, dated 28 March 1990• This section would not apply in relation to payments made for hiring or renting of

equipments, etc• It can be applied qua payments made by a State Road Transport Corporation to

private bus owners, from whom buses are hired for plying on specified routes• Service contracts would be covered by the provisions of this section since service

means doing any work as explained above• This section will not cover contracts for sale of goods• It will cover not only written contracts but also oral contracts

• As per CBDT Circular 715, dated 8 August 1995• Payments to clearing and forwarding agents for carriage of goods are covered• Payment to courier company is covered• Payment to restaurant in the normal course for serving food etc, is not covered• Routine maintenance contracts are covered, except technical services which are

covered u/s 194J• The contract for putting up hoarding is covered u/s 194C



‘Payment to contractors’ - Important judicial decisi ons

• Construction of oil refinery plant is a composite contract hence TDS needs tobe made on the entire contract value despite of contract being splitup intothree parts i.e. supply, labor and construction - Essar Oil Ltd [2000] 77 ITD 92(Rajkot).

• ‘Work’ will not include manufacturing or supplying a product as per thespecification of customer by using material purchased from person other thansuch customer, hence supply of printed material as per customer specificationis sale and not contract - BDA Limited v ITO [ 2006] 281 ITR 99 (Mum HC)



Section 194H - ‘Commission or brokerage’


• At the time of credit or payment whichever is earlier, of any income to anyresident by way of commission or brokerage, TDS has to be made, howeverno deduction will be made if;• Payment is in the nature of insurance commission covered in 194D• Any sum paid or credited does not exceed Rs.2,500 in a F.Y.• Payment made by an individual or HUF who are not covered under tax audit• Payment made by BSNL or MTNL to their public call office franchisees, this is

w.e.f. 1 June 2007


Existence of ‘principal-agent’ relationship is a pr e-requisite for 194H


‘Commission or brokerage’ - Important CBDT circulars

• Demands raised against MTNL/BSNL on account of non-deduction of TDSunder section 194H on commission payments to franchisee PCO owners, etc.,may not be enforced till the matter is sorted out by the Board. However, theTDS deducted but not paid by MTNL/BSNL on such commission paymentshave to be deposited immediately to the Government Account. - InstructionNo. 3/2009, dated 8 May 2009.



‘Commission or brokerage’ - Important judicial decis ions

• The discount made available to the licensed stamp vendors under theprovisions of the Gujarat Stamps Supply and Sales Rules, 1987, does not fallwithin the expression “commission” or “brokerage” under section 194H -Ahmedabad Stamp Vendors Association v. Union of India [2002] 257 ITR 202(Guj.) / Kerala State Stamp Vendors Association v. Office of the AccountantGeneral [2006] 150 Taxman 30 (Ker.)

• Turnover commission paid to the dealers to achieve the targeted sales are inthe nature of trade discount and the transaction with the dealers being onprincipal to principal basis, the expression ‘Commission’ will not extend tosuch trade discount - Shree Baidyanath Ayurved Bhawan Ltd v Jt CIT (2004)83 TTJ 409 (Kolkata ITAT) / Delhi Tribunal in National Panasonic India (P) Ltd.v DCIT [2005] 3 SOT 16 (Delhi ITAT)

• Where assessee had appointed agents to sell milk on its behalf andownership of milk never passed to such agents and unsold milk was takenback by assessee from them. The assessee was required to deduct tax atsource from commission paid to concessionaires - Delhi Milk Scheme v. CIT[2008] 301 ITR 373 (Delhi).



‘Commission or brokerage’ - Important judicial decis ions

• TDS u/s 194H has to be made on amount available to agents being differencebetween air fare fixed by airlines and price at which agents are enabled to selltickets - Around the World Travels & Tours (P.) Ltd. v. Union of India [2004]141 Taxman 53 (Mad.) / CIT v. Singapore Airlines Ltd. [2009] 180 Taxman 128(Delhi)

• Discount on supply of pre-paid SIM and other products by cellular serviceproviders to distributors shall be treated as commission and accordingly willbe subject to TDS u/s 194-H of the Act. The essence of services rendered tothe pre-paid and post-paid consumers are one and the same. Therefore, if apost-paid scheme is subject to section 194H, even the pre-paid schemeshould fall within the purview of section 194H - Vodafone Essar Cellular Ltd.V. Asst. CIT-[2009-TIOL-630-ITAT-COCHIN]



Section 194I - ‘Rent’


• At the time of credit or payment whichever is earlier, of any income to anyresident by way of rent, TDS has to be made, however no deduction will bemade if;• Any sum paid or credited does not exceed Rs.120,000 in a F.Y.• Payment made by an individual or HUF who are not covered under tax audit

• Rent will include any payment for the use of land, building, machinery, plant,equipment, furniture, fittings whether or not owned by the lessee

• W.e.f.1 October 2009, 2% for rent from plant, machinery or equipment and10% for others, for F.Y. 2009-10


‘Rent’ - Important CBDT circulars

• As per CBDT circular 715, dated 8 August 1995• Income earned from subletting will also be covered u/s 194I• Income from letting of space for hoarding will be covered u/s 194I• Incase of co-ownership where the share of the co-owners is determinable, the limit

of Rs.120,000 will apply to each co-owner• No need to compute notional income on the refundable deposit given to landlord• Incase of composite contract where essence of the agreement is letting of property

and other services are incidental, then entire payment will be covered u/s 194I• Hotel accommodation will be covered u/s 194I, if taken on regular basis

• As per CBDT circular 718, dated 22 August 1995• Interest paid on refundable deposit will be covered u/s 194A• Warehousing charges will be covered u/s 194I

• As per CBDT circular 735, dated 30 January 1996• Sharing of proceeds between film distributor and theatre owners will not covered u/s

194 I, as it is film exhibition and not for using the theatre premises



‘Rent’ - Important CBDT circulars

• As per CBDT circular 5/2001, dated 2 March 2001• Where advance rent is spread over more than one financial year and tax is

deducted thereon, credit shall be allowed in the same proportion in which suchincome is offered for taxation for different assessment years based on the singlecertificate furnished for tax so deducted on the entire advance rent

• Credit for the entire balance of tax deducted at source, which has not been givencredit so far, shall be allowed in the assessment year relevant to the financial yearduring which the rent agreement gets terminated/cancelled or rented property istransferred and balance of advance rent is refunded to the transferee or the tenant

• As per CBDT circular 5/2002, dated 30 July 2007• ‘Rate contract agreements’ between travel agencies and hotel for concessional

rates will not be covered u/s 194I, however earmarked rooms will be covered

• As per CBDT circular 1/2008, dated 10 January 2008• Payment for cold storage will be covered in 194C, as the main purpose is not to use

the space but to use facility for perishable goods

• As per CBDT circular 4/2008, dated 28 April 2008• Service tax paid by the tenant is not covered u/s 194I, as it is not income for lessee



‘Rent’ - Important judicial decisions

• Payment for running the hotel, is towards running the business and nottowards use of property, hence not covered u/s 194I - Kamat Hotels (I) Ltd.[2001] 78 ITD 241 (Mum ITAT)

• Where a security deposit has been made for hiring a premises and suchdeposit was to be reduced every six months by an amount of rent whichbecame payable in accordance with agreement. Since such security depositwas not fully ‘refundable’, hence the amount should be treated as advancerent and covered u/s 194I - CIT v. Reebok India Co. [2007] 291 ITR 455(Delhi)

• Landing of aircraft or parking aircraft amounts to use of land of airport and,hence landing fee and parking fee will be covered u/s 194I - United Airlines v.CIT [2006] 152 Taxman 516 (Delhi) / CIT v. Japan Airlines Co. Ltd. [2009] 180Taxman 188 (Delhi).



Section 194J - ‘Professional fees’


• At the time of credit or payment whichever is earlier, of any sum to anyresident by way of professional or technical fees or royalty or non competefees, TDS has to be made, however no deduction will be made if;• Any sum paid or credited does not exceed Rs.20,000 in a F.Y.• Payment made by an individual or HUF who are not covered under tax audit

• Professional services means services rendered by notified professionalswhich are as under;• Professionals in legal, medical, engineering, architectural, accountancy, technical

consultancy, interior decoration, advertising and film artists (actor, lyricist, storywriter, screenplay writer, dialogue writer, dress designer), company secretary,information technology



‘Professional fees’ - Important CBDT circulars

• As per CBDT circular 715, dated 8 August 1995• Payment to recruitment agencies covered u/s 194J• Payment to share registrar covered u/s 194J• Payment for external agencies for procuring orders / referral fees covered u/s 194J• Payment for hospital for medical services are covered u/s 194J• Commission of the advertising agency from media covered u/s 194J

• As per CBDT circular 726, dated 18 October 1995• Fees to CA, lawyer, advocate by non resident will not be covered u/s 194J, if the

recipient is resident of India and non-resident does not have a business connection

• In the case of section 194J TDS has to be deducted on any sum paid asprofessional and technical fees, therefore the circular granting exemption ofTDS u/s 194I for service tax will not apply to section 194J - Letter F.No.275/73/2007-IT(B), dated 30 June 2008



‘Professional fees’ - Important judicial decisions

• The fact that the telephone service provider has installed sophisticatedtechnical equipment in the exchange to ensure connectivity to its subscriberdoes not on that score make it provision of a technical service to thesubscriber. Hence this services can not be regarded as ‘technical service’ forthe purpose of section 194J of the Act - Skycell Communications Ltd. v. Dy.CIT [2001] 251 ITR 53 (Mad.)

• No TDS has to be deducted u/s 194J, when separate bills are raised forreimbursement of actual expenses, the CBDT circular applies only forconsolidated bills - ITO v. Dr. William Schwabe India (P.) Ltd. [2005] 3 SOT 71(Delhi ITAT)

• Expression ‘fees for technical services’ as appearing in section 194J wouldhave reference to only technical service rendered by a human; it would notinclude any service provided by machines or robots - CIT v. Bharti CellularLtd. [2008] 175 Taxman 573 (Delhi)

• TPAs are required to deduct tax u/s 194J on payment to hospitals – MediAssist TPA v. DCIT [2009] unreported (Karnataka HC)



• At the time of payment of consideration on account of compulsory acquisitionof any capital asset under any law in force, to resident, TDS has to be madeby any person, where the amount exceeds Rs.100,000 in F.Y.


Section 194L - ‘Payment of compensation on acquisiti on of capital asset’


Section 194LA - ‘Payment of compensation on acquisit ion of immovable property’

• At the time of payment of consideration on account of compulsory acquisitionof any immovable property except agriculture land under any law in force, toresident, TDS has to be made by any person, where the amount exceedsRs.100,000 in F.Y.• Immovable property includes land or any building



Section 201 - ‘failure to deduct or pay’

• Incase of default in TDS the following consequences are possible;• Penalty u/s 221, if assessing officer is not satisfied with the reasons for default• Simple interest of 1% per month on the shortfall of TDS for the period till which

such default continues• Charge on assets of assessee for recovery of TDS with interest

• W.e.f. 1 April 2010, limitation for assessment as ‘assessee in default’ for non compliance of TDS incase of Indian resident can not be made;• After 2 years from the end of the F.Y. in which quarterly return is filed,• In any other cases, after 4 years from the end of the F.Y. when amount was paid

or credited• However, order for F.Y. 07-08 and before can be passed on or before 31 March

2011



‘failure to deduct or pay’ - Important judicial deci sions

• Section 201(1A) makes the payment of simple interest mandatory. It is not a penal provision ,hence there is therefore no question of waiver of such interest on the basis that the default was not intentional or on any other basis - Bennet Coleman & Co. Ltd. v. V.P. Damle, Third ITO [1986] 157 ITR 812 (Mum HC) / CIT v. Prem Nath Motors (P.) Ltd. [2002] 120 Taxman 584 (Delhi)

• Section 201 does not specify that the tax should have been paid by the deductor only, u/s 191 deductee can pay the tax directly. Hence once the due tax is paid by the deductee then TDS can not be collected from the deductor, also the interest u/s 201(1A) could not be levied after the payment of such taxes by deductor - CIT v. Adidas India Marketing Pvt Ltd [2006] 157 Taxman 519 (Delhi ITAT) / Hindustan Coca Cola Beverages Pvt. Ltd v CIT [2007] 293 ITR 226 (SC)


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Open house …

CA Romesh S A SankheDomestic TDS provisions_WIRC_25 November 2009

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The views expressed in this presentation are solely that of the speaker and do not constitute any kind of professional advice. These views or opinion expressed in this presentation should not be applied or used without a prior professional advice, as the review of the facts and existing judicial position is of utmost importance in the analysis of tax implications.

CA Romesh S A Sankhe(M) 9892 892504(E) [email protected]

Domestic Tds Provisions Wirc 25.11.2009

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