A Critical Analysis Of Tds On Freight Payments Under Section 194 (6) Of The Income Tax Act, 1961
MEANING AND IMPORTANCE OF TDS IN GENERAL
Tax Deducted at Source (TDS) is a system introduced by Income Tax Department, where the person responsible for making specified payments such as salary, commission, professional fees, interest, rent, contract payments etc. is liable to deduct a certain percentage of tax before making payment or giving credit in part or full to the receiver either at the time of payment or at the time of credit whichever is earlier if the same payment or credit is above respective specified threshold limits of payment or credit.
This system of TDS enables the Government in many aspects:
i. Advance collection of Taxes against certain revenues from the recipients through the payers as agents of the Government even if no I T Return is filed by the recipient and this helps the Government in mobilisation of a significant portion of total finances required by the Government for various activities of the Government.
ii. It also provides a transparent data base to the Income Tax Department about the incomes of the recipients and possible mismatch of revenue in case of the persons who are filing their Income Tax Returns and also possible noncompliance of tax Laws by the persons who are not filing their I T Returns as the deductors need to file their respective TDS Returns on quarterly basis containing PAN numbers and other relevant details of the recipients.
iii. It also helps the GST Department to look into the possible revenue mismatches of the dealers and also helps to detect possible violators of GST Laws like GST Registration, non discharging of commensurate GST Liabilities and other aspects.
TDS ON FREIGHT CHARGES
The matter of TDS on Freight Charges has always been an issue full of contentions and disputes. It had been very difficult at times for the Government to impose TDS on Freight payments due to country wide strikes by the Transporters many a times. Freight Charges may be classified into two categories:
i. Freight Payment to Owners of Goods Carriages
ii. Freight Payment to persons other than Owners in respect of Goods Carriages
TDS on Freight Payment for Goods Carriage are regulated by Section 194C, Sub Section 6 of the Income Tax Act, 1961.
SEC. 194C, SUB SECTION 6 OF THE I T ACT, 1961:
“No Deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number to the person paying or crediting such sum”
A reading of above clearly indicates that where the Contractor owns ten or less goods carriages during the relevant year and is engaged in the business of plying, leasing or hiring of goods carriages during the year and furnishes a declaration to that effect along with his Permanent Account Number to the person availing his services, than the person availing his services for Goods Carriage SHALL NOT deduct any Tax at Source from these contractors irrespective of amount paid or credited to each of them. Since the law has stated the words and phrases “NO DEDUCTION SHALL BE MADE” that amounts to a sort of legal restriction on deduction of Tax at Source on these payments. Hence, in the opinion of the author, deducting TDS on Freight for goods carriages in a case where the recipient fully complies with the Section 194C, Sub Section 6 of the Income Tax Act, 1961 will amount to become ILLEGAL because of the above words and phrases present in the sub section i.e., “NO DEDUCTION SHALL BE MADE”
The matter of non-deduction of TDS on Freights on Goods Carriages where the Section 194C, Sub Section (6) is fully complied with has its applicability only in those cases where the recipient is being credited or he is receiving any sum in the course of business of plying, hiring or leasing goods carriages where such recipient contractor owns ten or less goods carriage. Here ownership of Goods Carriages is a very important factor. The matter may be analysed under different situations:
i. CONTRACTOR “A” engaged in the business of plying, hiring or leasing of goods carriages through goods carriages owned by him only and the number of goods carriages so owned does not exceed 10.
ii. CONTRACTOR “B” engaged in the business of plying, hiring or leasing of goods carriages through goods carriages owned by him as well as goods carriages taken by him on hire from other persons and the number of own goods carriages does not exceed 10.
iii. CONTRACTOR “C” engaged in the business of plying, hiring or leasing of goods carriages through goods carriages taken by him on hire from other persons and he does not have any goods carriages in his own name.
The spirit behind Section 194C (6) was to give immunity from TDS to small transporters who are engaged in the business of plying, hiring or leasing of goods carriages and where the number of goods carriages owned by them are 10 or less in number. Hence in this case, Contractor “A” fulfils those criteria of business and ownership of goods carriages and will be exempted from TDS if he furnishes a declaration to that effect along with his Permanent Account Number to the person paying or crediting such sum.
Confusions will arise as to Situation Number (ii) i.e., CONTRACTOR “B” and (iii) i.e., CONTRACTOR “C”. As regards CONTRACTOR “C”, since the element of ownership does not at all exist and the word used is “and” in the sub section, we can come to a safe conclusion that he will not be immune from TDS and the payer of the sum will have to deduct TDS on freight in this type of case if other parameters like amount of Freight per Bills exceeding Rs. 30,000/- or aggregate amount exceeding Rs. 1,00,000/- in a Financial Year. The author is not going to deep analysis of those general provisions of TDS on Contracts which do not fall under Sub Section 6 of Section 194C of the Act. Here someone may argue that NOT OWNING ANY GOODS CARRIAGE MEANS OWNING 0 (NIL) NUMBER OF TRUCK WHICH IS LESS THAN 10 AND IMMUNITY FROM TDS SHOULD BECOME APPLICABLE. But the author does not admire that view as if this could have been the intention of the legislature, then in a case where a transporter is operating only on the basis of third-party goods carriages which may go into hundreds and thousands of goods carriages with volumes in
crores will also get an immunity which in the opinion of the author is not the spirit behind. Hence in the strong opinion of the Author, in situation (iii), TDS will be applicable as the same will be covered by normal TDS provisions as applicable to contract receipts and shall not be covered by Sub Section 6 of Section 194C of the Act depending upon whether the single freight bill exceeds Rs. 30,000/- or aggregate amount exceeds Rs. 1,00,000/- or not.
Once the opinion of the author is clear in Situation (iii) of CONTRACTOR C, the matter of CONTRACTOR B is easy to resolve. He has two categories of Freight Income. One segment comes from Own Goods Carriages which are 10 or less than 10 in number and the other segment comes from Hired Goods carriages not owned by him. The segment of freight charges which in this case comes from Own Goods Carriages will be immune from TDS provisions. However, the segment of Freight Receipt from Hired Trucks will be considered as normal Contract Receipt and will not be covered by Sub Section 6 of Section 194C and TDS applicability will depend upon whether the threshold limit of Rs. 30,000/- per bill or Rs. 1,00,000/- in aggregate has been exceeded or not.
A standard format of declaration to be taken from Freight Recipient U/S 194C (6) of the Income Tax Act, 1961 is advised as follows:
FORMAT OF DECLARATION UNDER SEC 194C SUB SECTION 6 OF I T ACT
ABC Company Limited
Mr A Prabhakar
I, Mr. A Prabhakar, Proprietor/ Partner/ Director of M/s …………………………..(Name of the company or firm) having my business address as ……………………………………., (hereinafter referred to as “The Contractor”) do hereby make the following declaration as required by sub section (6) of section 194C of the Income Tax, 1961 for receiving payments from the payer without deduction of tax deduction at source (TDS).
1. That name of party authorized to make this declaration in the capacity as proprietor/ partner/ Director.
2. That the contractor is engaged by the payer for hiring or leasing of goods carriage for its business.
3. That I have not owned more than ten goods carriage vehicles at any time during the year till date.
4. That if the number of goods carriages owned by the contractor exceeds ten at any time during the previous year ………………………. the contractor shall forthwith, in writing intimate you of this fact.
5. That the Income Tax permanent account number (PAN) of the contractor is …………………… A photocopy of the same and the photocopies of Registration Certificates of my Goods Carriages are furnished to the payer along with this declaration.
I the above-named declarant do hereby verify that the contents of paragraphs one to five above are true to my own knowledge and belief and no part of it is false and noting material has been concealed in it.
Name and Signature of the Declarant
The format as given above is only advisory. The same may be customised according to requirements without however compromising with the requirements of Section 194C, Sub Section 6 of the Income Tax Act, 1961.
SECTION 194C, Sub Section 7 of the Income Tax Act, 1961
Sub Section 7 of Section 194C requires that the person paying the freight to the recipient who is engaged in the business of plying, hiring or leasing of goods carriages shall furnish, to the prescribed income tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed. It thus mandates on the deductor to incorporate in Quarterly Form 26Q the details of freight so credited or paid on which TDS has not been deducted on the basis of Declaration of number of goods carriages and PAN by the recipient.
NON-COMPLIANCE OF SECTION 194C, SUB SECTION 7
As laid down in Section 200, if the payer is liable to deduct any sum of TDS under Chapter XVII of the Income Tax Act, 1961 needs to furnish the Statement of TDS in the prescribed form to the prescribed authority within the prescribed time. However, in the opinion of the author, if the payer has taken declarations and PAN from the recipient as to ownership of less than 10 numbers of goods carriages, he is restricted from deducting any TDS U/S 194C. As such since he is not deducting any TDS, he will not be required to incorporate the information in TDS Return of that part of freight on which he is not liable to deduct TDS.
According to Section 271H, a person (Deductor) may be directed by the Assessing Officer to pay by way of penalty if he-
(a) Fails to deliver or cause to be delivered a statement within the time prescribed in Section (3) of Section 200 …………………………; or
(b) Furnishes incorrect information in the statement which is required to be delivered or caused to be delivered under Sub Section (3) of Section 200 or …………………………………………
The penalty referred to above shall be a sum which shall not be less than ten thousand Rupees but which may extent to one lakh rupees.
At times, Assessing Officers or TDS Officers try to hit this provision in case of non-compliances under section 194C (6) of the I T Act, 1961 read with Section 200 (3) of the I T Act, 1961. But in the considered opinion of the author, Under Section 200(3) of the Income Tax Act, 1961, the Deductor is liable to furnish the Return only if he has deducted tax at source in view of the words and phrases “Any person deducting any sum” having been used in the section. Since in case of cases covered under Section 194C (6) of the Act, the payer of freight is not deducting any TDS in view of his obtaining the declaration and PAN of recipient, Penalty U/S 271H cannot be invoked by the Department even if otherwise he is required to furnish the details as required in Section 194C (7) of the I T Act, 1961. However, this is the independent view of the author and contrary view is also possible in each case.
SECTION 40 ( ia ) OF THE I T ACT, 1961:
Section 40 ( ia ) of the I T Act, 1961 provides as hereunder:
“Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,—
(a) in the case of any assessee—
(ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139 :
The disallowance U/S 40 (ia) will not be applicable in cases covered under Section 194C, Sub Section 6 of the I T Act, 1961 even if the provisions of Section 194C, Sub Section 7 are not complied with because Sub Section 7 of Section 194C is quite independent of Sub Section 6 of Section 194C of the I T Act, 1961. Sub Section 7 of Section 194C no where stipulates that non deduction of Income Tax at Source in cases covered under Section 194C (6) of the Income Tax Act, 1961 will be allowed only if Section 194C (7) has been complied with. And if such would have been the intention of the legislature, specific provision would have been made in Section 194C (6) to that effect or instead of providing separate sub section 97), the same could have been made a part of Section 194C (6) by way of a proviso with the normal words “PROVIDED THAT” in Section 194C (6) itself. Moreover, taking a declaration and PAN is a precondition of not deducting TDS and Furnishing of Declaration details to the Income Tax Department is
only an afterward condition to be complied with after elapse of certain time but by that time the payer might have already paid or credited the sum to the account of the Goods Carriage owner and afterwards TDS will not be possible. In that case, if Sub Section 7 would have been a pre-condition for allowance of freight, then it would amount to first imposing the legal restriction on deducting TDS and then penalising for not deducting TDS because details was not furnished. The same cannot be the spirit in law under any honest interpretation of legal framework.
To sum up, in all those cases where any sum is credited or paid or likely to be credited or paid to the account of a contractor during the course of his business of plying, hiring or leasing of goods carriages where such contractor owns ten or less than ten goods carriages at any time during the previous year and furnishes a declaration to that effect along with his PAN to the person paying or crediting such sum, no TDS shall be deducted by the person paying or crediting such sum and no part of this freight credited or paid can be disallowed under Section 40 (ia) of the I T Act, 1961 in computing the income of the person crediting or paying such sum even if the person crediting or paying such sum has not afterwards complied with Section 194C Sub Section 7 of the Income Tax Act, 1961.
DISCLAIMER: The views and opinions expressed in this write up are the views and opinions of the author only gathered by him in the course of his experience as a Practising Chartered Accountant. Any body using this write up during his deliberations or submissions in any legal dispute will do at his own risk and the views and opinions of the authors should not be considered as any expression of legal opinion under any professional assignment.
AUTHOR: CA RATAN KUMAR AGARWALA, B.Com., FCA, DISA (ICA)