No TCS on provision of ANY service due to drafting anomaly in Section 206C of IT Act

I am sure that you are completely surprised by the title that the collection of TCS on services is doubtful so please do let me explain. Since the objective of the write-up is to discuss TCS on the provision of services (and not for any transaction of sale of goods), it should be read from the perspective of service provider and service receiver only.

The Hon’ble Finance Minister Shri Arun Jaitley has amended Section 206C of the Income Tax Act, 1961 in order to reduce the quantum of cash transaction in sale of any goods and services and for curbing the flow of unaccounted money in the trading system and to bring high value transactions within the tax net. The Finance Act, 2016 has amended Section 206C(1D) to provide that the seller shall collect the income-tax at the rate of 1% from the buyer on sale in cash of any goods or for providing of any services exceeding Rs. 2,00,000/-. The amended provision has come into effect from 01-06-2016. The relevant provision of Tax Collected as Source (TCS) under Section 206C(1D) as amended by Clause 88 of Finance Act, 2016 (which is underlined to highlight the same), is reproduced below:

(1D) Every person, being a seller, who receives any amount in cash as consideration for sale of bullion or jewellery or any other goods (other than bullion or jewellery) or providing any service, shall, at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax, if such consideration,—

(i) for bullion, exceeds two hundred thousand rupees; or

(ii) for jewellery, exceeds five hundred thousand rupees; or

(iii) for any goods, other than those referred to in clauses (i) and (ii), or any service, exceeds two hundred thousand rupees:

Provided that no tax shall be collected at source under this sub-section on any amount on which tax has been deducted by the payer under Chapter XVII-B.

The main features are:

  • The liability is on seller
  • When consideration is received in cash
  • The transaction should be for sale of goods or provision of any service
  • The consideration should exceed the threshold limit of Rs. 5 Lacs (jewellery) or Rs. 2 Lacs (others)
  • Seller shall collect from the buyer
  • TCS calculated @1% of sale consideration

In simple words, it appears that the provision of TCS @ 1% which was earlier applicable (since 01-07-2012) on sale of bullion & jewellery has been extended to sale of all goods and provision of any services, subject to threshold limit of Rs. 2 Lacs, if any amount of sale consideration is received in cash. It is pertinent to mention that as per the proviso, TCS is not applicable on those transactions where the service receiver deducts TDS. Many service transactions are liable for TDS u/s 194C, 194J, etc. wherein the new provision has no implication. However, all the transaction of services is not covered under TDS (like health services) and even if TDS is applicable but the receiver fails to deduct TDS, in that case TCS is applicable.

Consequently, amendments have been made in the definition of ‘buyer’ and ‘seller’ by way of Explanation after Section 206C. The amendments made by Finance Act, 2016 is underlined to highlight the same, and extracted below:

“(aa) ‘buyer’ with respect to—

(i) sub-section (1) means a person who obtains in any sale, by way of auction, tender or any other mode, goods of the nature specified in the Table in sub-section (1) or the right to receive any such goods but does not include,—

(A) a public sector company, the Central Government, a State Government, and an embassy, a High Commission, legation, commission, consulate and the trade representation, of a foreign State and a club; or

(B) a buyer in the retail sale of such goods purchased by him for personal consumption;

(ii) sub-section (1D) or sub-section (1F) means a person who obtains in any sale, goods of the nature specified in the said sub-section”;

“(c) ‘seller’ means the Central Government, a State Government or any local authority or corporation or authority established by or under a Central, State or Provincial Act, or any company or firm or co-operative society and also includes an individual or a Hindu undivided family whose total sales, gross receipts or turnover from the business 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 the goods of the nature specified in the Table in sub-section (1) or sub-section (1D) are sold or services referred to in sub-section (1D) are provided”.

With due respect to the lawmaker, the author is of the view that there is blunder in drafting the above amendment which may have serious repercussion. Though, the parliament has been careful in amending the definition of ‘seller’ to include provision of service, but inadvertently forgot to make similar amendment in the definition of ‘buyer’. Upon plain reading, it is clear that the definition of ‘buyer’ is exhaustive (and not inclusive) and with respect to sub-section 1D, it means a person who obtains any goods pursuant to any contract of sale. To put it in different perspective, buyer do not include service recipient because provision of service is quite distinct from a transaction of sale. Since the definition is exhaustive, it has to be given restrictive meaning within the four corners of the definition and cannot be extended beyond what is covered. It means that the person from whom tax is to be collected is uncertain and undefined. The seller (service provider) is liable to deposit TCS with the government but the service receiver may object to pay the same to the service provider on the ground that the law has excluded him from the definition of buyer.

It is settled law that in taxing statutes, no words can be added or deleted and strict literal interpretation should be applied. The following are few judicial pronouncements by the Hon’ble Supreme Court, which are self explanatory.

The Supreme Court in the case of Sales Tax Commissioner Vs. Modi Sugar Mills [ AIR (1961) SC (1047)] observed:

“10. …In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed that it cannot imply anything which is not expressed, it cannot import provisions in the statutes as to supply any assumed deficiency.

In case of Goodyear India Ltd. v. State of Haryana – [(1990) 2 SCC 71]:

“Words must say what they mean, nothing should be presumed or implied, they must say so. The true test must always be the language used”.

In case of Sneh Enterprises Vs. CCE, New Delhi [2006 (202) ELT 7 (SC)]:

“While dealing with a taxing provision, the principle of ‘Strict Interpretation’ should be applied. The Court shall not interpret the statutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which are not attracted. It is also trite that while two interpretations are possible, the Court ordinarily would interpret the provisions in favour of a tax-payer and against the Revenue.”

In case of UOI Vs. Dharamendra Textile Processors [2008 (231) ELT 3 (SC)]:

“13. It is a well-settled principle in law that the court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous. A statute is an edict of the legislature. The language employed in a statute is the determinative factor of legislative intent.

14.…As observed in Crawford v. Spooner (1846) 6 MOO PC 1, the courts cannot aid the legislature’s defective phrasing of an Act, they cannot add or mend, and by construction make up deficiencies which are left there. (See State of Gujarat v. Dilipbhai Nathjibhai Patel – 1998 (3) SCC 234). It is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so. [See Stock v. Frank Jones (Tipton) Ltd. – 1978 (1) ALL ER 948.]…

17. While interpreting a provision the court only interprets the law and cannot legislate it. If a provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary. [See CST v. Popular Trading Co. – (2000) 5 SCC 511] The legislative casus omissus cannot be supplied by judicial interpretative process”.

22.… Jervis, C.J., remarked, “if the precise words used are plain and unambiguous, in our judgment, we are bound to construe them in their ordinary sense, even though it do lead, in our view of the case, to an absurdity or manifest injustice. Words may be modified or varied, where their import is doubtful or obscure. But we assume the functions of legislators when we depart from the ordinary meaning of the precise words used, merely, because we see, or fancy we see, an absurdity or manifest injustice from an adherence to their literal meaning”. (See Abley v. Dale, ER p. 525)”

In the case of Doypack Systems Pvt. Ltd. Vs. UOI [ 1988 (36) ELT 201 (SC)]:

“In the words of Lord Scarma,  “We are to be governed not (by) Parliaments intentions but by Parliament’s enactment’s”. …As Lord Reid has said in Black-Clawson International Ltd. v. Papier-werke Waldhof Achaffenburg A G(1975 A.C. 591 at 613) ”We often say that we are looking for the intention of Parliament, but that is not quite accurate. We are seeking the meaning of the words which Parliament used. We are seeking not what Parliament meant but the true meaning of what they said.”

Secondly, the provision requires collection of tax @1% of the ‘sale consideration’. However, in case of provision of service, there is no sale involved, making it uncertain, on what amount TCS of 1% should be collected by the service provider.

Therefore, the author is of the considered view that unless necessary amendments are made to rectify the defects in Section 206C of the Income Tax Act, 1961, the legal liability to collect TCS @1% cast upon service provider in respect of receipt of cash consideration exceeding Rs. 2,00,000/- against provision of service from service recipient remains doubtful. The flaw is incapable of correction by way of executive action like issue of any circular or notification and should be duly amended by the parliament, sooner the better. However, the intention of the author is to simply point out the flaw, so that corrective measures may be taken, if required and is in no way suggesting anyone to refuse to pay TCS as it would definitely lead to litigation and other views on the matter are also possible.

Disclaimer: This article is the property of the author and is for the purpose of information only. No one shall publish, reproduce or use it in any manner, for any purposes, without the permission of the author. The author shall not be responsible or liable for anything done or omitted to be done on the basis of this article. The author is mainly practicing as a Service Tax Consultant having located at Rourkela, Odisha.

***

Author        : Manoj Agarwal

Address      : Ganpati Campus, Lal Building Road, Rourkela – 769012, ODISHA

Contact       : +91-9937041788

E:mail          : ServiceTaxExpert@yahoo.com

(Article was initially Published on 08.06.2016 and republished on 12.06.2016 with Amendment in the Article to make the provisions more clearer for our readers.)

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  • Rajagopal

    Posted this by me on 4.6.2016 in yahoo group of CAs. Pl try to high light my points also
    Analysis of clause 1D of section 206C
    ‘Every person, being a seller’
    Seller is defined-mentioned clearly certain persons. It is not inclusive definition. But this clause starts with every person, it means all. Seller definition is not warranted. It is defined to exclude individuals and HUF not coming under tax audit
    ‘Receives any amount in cash as consideration for sale’
    It is actual cash received against one or more bills
    ‘At the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration’
    Here the sale consideration is such amount received in cash.
    ‘If such consideration exceeds Rs.2,00,000’
    Here the sale consideration is amount recd as cash as mentioned above, not the bill amount because the word ‘such consideration’ is used.
    Conclusion Rs.200000 limit is actual cash recd not the bill amount
    CA Rajagopal FCA

  • Rajagopal

    Posted by me in yahoo CAs group on 4.6.2016
    pl high light my points also
    University comes under the definition of Seller.

    206C(1D)

    (1D) ————————————————at the time of receipt of such amount in cash, collect from the buyer, a sum equal to one per cent of sale consideration as income-tax, if such consideration,—

    (i) —————————– or

    (ii) ——————————–[or)

    (iii) for any goods, other than those referred to in clauses (i) and (ii), or any service, exceeds two hundred thousand rupees:

    By reading the above, you have come to the conclusion of 260C(1D) applicability

    In my opinion, University may not be liable due to the following. These are purely drafting deficiencies, may require amendments. Till such amendment, one can rely on these.

    1) Section 260C(1D) is applicable to seller carrying on business or profession because the section 260C comes under BB.—Collection at source

    Profits and gains from the business of trading in alcoholic liquor, forest produce, scrap, etc.82

    University is not carrying on business

    2) buyer” with respect to—

    (i) —————-

    (ii) sub-section (1D) 1[or sub-section (1F)] means a person who obtains in any sale, goods of the nature specified in the said sub-section;

    So the student is not buyer of goods under any sale

    Rajagopal

  • Anonymous

    Firstly, with due respect for the observation made by the author, the law is to be read in the spirit in which it was brought into existence.

    Secondly, the point where TCS @ 1% on sale consideration is mentioned and then later where observation is made that there is no mention made of provision of service, the clause (1D) (iii) as mentioned above states that ” for any goods, other than those referred to in clauses (i) and (ii), or any service, exceeds two hundred thousand rupees”.

    The mere non-mentioning of provision of service will not hold the law to be incomplete in nature, though sufficient corrections can be made to remove any sort of confusion.

  • Amit Bajaj

    Dear Manoj,

    appericiate your article. but would like to suggest to go through the principle of purposive construction which means that if strict interpretation of a provision leads to absurdity and defeats the objects of the legislature which were intended to be achieved by the enactment of law then such interpretation would be made as would upheld the objects of the legislature which are intended to be achieved.

    For better understanding of this doctorine the words of Lord Justice Denning reported in (1949) 2 ALL ER 155: Seaford Court Estates v. Asher are worth menitioning here as follows:

    “A judge must not alter the material of which the Act is woven but he can and should iron out creases. When a defect appears, a judge cannot simply fold his hands and blame the draftsman. He must set to work on the constructive task of finding the intention of the Parliament and then he must supplement the written words so as to give force and life to the intention of the Legislature.”

    • Manoj Agarwal

      Bajaj Sir,

      With due respect, there are numerous judgement of Hon’ble Supreme Court wherein the court has refused to go into the parliament’s intent.’

      Doypack Systems Pvt. Ltd. Vs UOI [AIR 1988 SC 782: 1988 (36) ELT 201 (SC)]:
      In the words of Lord Scarman “We are to be governed not (by) Parliaments
      intentions but by Parliament’s enactment’s. As Lord Reid has said in Black-Clawson International Ltd. v.
      Papier-werke Waldhof Achaffenburg A G(1975 A.C. 591 at 613) ”We often say
      that we are looking for the intention of Parliament, but that is not quite
      accurate. We are seeking the meaning of the words which Parliament used. We are
      seeking not what Parliament meant but the true meaning of what they said”.

    • Manoj Agarwal

      Hon’ble Supreme Court in Case of Sneh Enterprises: [2006 (202) ELT 7 (SC)]

      While dealing with a taxing provision, the principle of ‘Strict Interpretation’
      should be applied. The Court shall not interpret the statutory provision in such
      a manner which would create an additional fiscal burden on a person. It would
      never be done by invoking the provisions of another Act, which are not
      attracted. It is also trite that while two interpretations are possible, the
      Court ordinarily would interpret the provisions in favour of a tax-payer and
      against the Revenue.

  • Pratik Shah

    Very aggressive interpretation …. Why to bring unnecessary litigation…. In my view, please don’t interprate definition of buyer where main provision is expressly providing the legislative intent…

    • Manoj Agarwal

      Dear Mr. Pratik Shah, Litigation is always unnecessary and unwanted…Who wants to go into litigation? But why can’t the government draft the law without ambiguity? As a professional, it is my duty to point out any flaw, which in my opinion is a flaw. Others may differ from my opinion, but unless the issue is decided by judiciary, you and me can’t be judgmental about it.

      Ruling of Supreme Court in case of Sneh Enterprises [2006 (202) ELT 7(SC)] “While dealing with a taxing provision, the principle of ‘Strict Interpretation’
      should be applied. The Court shall not interpret the statutory provision in such a manner which would create an additional fiscal burden on a person. It would never be done by invoking the provisions of another Act, which are not
      attracted. It is also trite that while two interpretations are possible, the
      Court ordinarily would interpret the provisions in favour of a tax-payer and
      against the Revenue.”

      Ruling of Supreme Court in case of Dharemendra Textile Processors [2008 (231) ELT 3 (SC):
      13. It is a well-settled principle in law that the court cannot read anything
      into a statutory provision or a stipulated condition which is plain and
      unambiguous. A statute is an edict of the legislature. The language employed in
      a statute is the determinative factor of legislative intent. Similar is the
      position for conditions stipulated in advertisements.

      14. Words and
      phrases are symbols that stimulate mental references to referents. The object of
      interpreting a statute is to ascertain the intention of the legislature enacting
      it. (See Institute of Chartered Accountants of India v. Price Waterhouse – 1977
      6 SCC 312). The intention of the legislature is primarily to be gathered from
      the language used, which means that attention should be paid to what has been
      said as also to what has not been said. As a consequence, a construction which
      requires for its support, addition or substitution of words or which results in
      rejection of words as meaningless has to be avoided. As observed in Crawford v.
      Spooner (1846) 6 MOO PC 1, the courts cannot aid the legislature’s defective
      phrasing of an Act, they cannot add or mend, and by construction make up
      deficiencies which are left there. (See State of Gujarat v. Dilipbhai Nathjibhai
      Patel – 1998 (3) SCC 234). It is contrary to all rules of construction to read
      words into an Act unless it is absolutely necessary to do so. [See Stock v.
      Frank Jones (Tipton) Ltd. – 1978 (1) ALL ER 948.] Rules of interpretation do not
      permit the courts to do so, unless the provision as it stands is meaningless or
      of doubtful meaning. The courts are not entitled to read words into an Act of
      Parliament unless clear reason for it is to be found within the four corners of
      the Act itself. (Per Lord Lorebum, L.C. in Vickers Sons”)

    • Manoj Agarwal

      Dear Mr. Pratik Shah,

      Litigation is always unwanted and unnecessary, yet inevitable. One of the main reason for litigation is improper drafting of law. As a professional, it’s my duty to point out any flaw in drafting, which in my opinion is a flaw. You have a right to agree or disagree, but one should not be judgmental of others opinion.

      Kindly read the rulings of Hon’ble Supreme Court in case of Sales Tax Commissioner Vs. Modi Sugar Mills [AIR 1961 SC 1047] wherein at para 10 it held: “In interpreting the taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statue and interpret them. It must interpret a taxing statute in the light of what is clearly expressed that it cannot imply anything which is not expressed it cannot import provisions in the statutes so as to supply any assumed deficiency”.

      Also read the judgement of Larger Bench of Supreme Court in case of UOI Vs. Dharamendra Textile Processors [2008 (231) ELT 3 (SC)]

  • Ramachandran Venkataraman

    apart from the legality of the amendment which is always disputable, suppose if buyer pays in cheque or electronic transfer perhaps TDS is not collected!

  • Mayank Garg

    According to me, service value > 2lac will already be subjected to TDS u/s 194c or 194J, this would be specifically excluded from TCS provisions. No implications

    • Manoj Agarwal

      All the transaction of services are not covered under TDS. And
      even if TDS is applicable but the receiver fail to deduct TDS, in that
      case TCS is applicable. Also, individuals & huf not liable to tax
      audit are not covered under TDS provisions (as receiver) but TCS will be
      applicable to them (if provider is not an individual or huf not liable
      to tax audit)

  • Amresh Vashisht

    For services TDS is there . The transactions which attracts TDS dont fall for 206 C (1D) .

    • Manoj Agarwal

      Sir, all the transaction of services are not covered under TDS. And even if TDS is applicable but the receiver fail to deduct TDS, in that case TCS is applicable. Also, individuals & huf not liable to tax audit are not covered under TDS provisions (as receiver) but TCS will be applicable to them (if provider is not an individual or huf not liable to tax audit)

  • MOHIT JAIN

    1. I hold different view.

    2. In the context of TCS, charge to collect the same is on the part of Seller

    3. To facilitate the collection of TCS, in case of services having consideration in excess of Rs.2,00,000 and any part of such consideration is being received in cash, necessary amendments have been made in section 206C(1D) and in definition of seller in Explanation to section 206C.

    4. The definition of buyer in explanation to section 206C assume importance only in the context of section 206C(1), whereby legislature intend to exempt certain buyers from levy of TCS.

    5. Since the charge is on seller, it is not necessary to amend the definition of buyer, unless law maker intends to carve out something from buyer. It is word of general import.

    6. I believe that TCS liability is on seller wef 1.6.2016 in case of services stated above.

  • hmm, Interesting points as you described.