Whether Service Tax should be considered while deducting Income tax at source (TDS) or not ?

Often we have no clarity on the question that while making the payment of rent or professional or technical fees, the deduction of income tax at source (TDS) should be made on which amount? Including service tax or excluding service tax?

Representations/letters have been received from the Central Board of Direct Taxes seeking clarification as to whether TDS provisions under section 194-I and 194-J of the Income-tax Act will be applicable on the gross amount payable (inclusive of service tax) or net amount payable (exclusive of service tax).

Who is liable to deduct TDS on Rent? Any person, other than an individual or a HUF who pays Rent to a resident in India, amounting in aggregate to more than Rs. 180000 in a financial year. However w.e.f. 01/06/2002, individuals and HUF who were covered under section 44AB (a) and (b) in the preceding previous year, are also required to deduct tax at source.

 As per the Circular No. 4/2008 dated 28-04-2008  issued by the CBDT, “Service tax paid by the tenant is not a part of the income hence it does not partake the nature of income of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided that tax deduction at source (TDS) under sections 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax (only from rent and not on amount of service tax charged on rent).

  Who is liable to deduct TDS u/s 194J? Any person, other than an individual or a HUF, who pays any sum by way of Professional Fees, Fees for Technical Service, any remuneration or fees or commission paid to a director, which is not in the form of salary, royalty or any sum referred to in clause (va) of section 28 which relates to non-complete payment is liable to deduct TDS u/s 194J.

  However, the CBDT have taken a totally different stand on deduction of income tax on payments of Professional or Technical fees. As per the Circular no.275/73/2007-IT (B), dated 30th June 2008, the payments made under section 194-I differ significantly from payments made under section 194J in the way that in the case of 194I, TDS has to be deducted on any income paid as rent. However, in the case of section 194J TDS has to be deducted on any sum paid as professional and technical fees (on the gross amount paid/payable i.e. inclusive of service tax). The CBDT had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the CBDT has decided not to extend the scope of Circular No. 4/2008 dated 28-04-2008, to such payment under section 194J.

The CBDT has preferred to different treatments for similar sections and no clarification is given for the same. Therefore this being a matter of issue, a correct circular is desired to clarify that tax need to be deducted only on amount paid to payee which is on his own account for fees, charges, consideration, rent etc. as the case may be. Charges like such taxes will not be subject to TDS.

(Apoorva Desai-Apudesai92@gmail.com)

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Tags : section 194I (44) section 194J (51) TDS (907)

0 responses to “Consideration of service tax while deducting TDS”

  1. CA V.Sivaraman says:

    TDS deduction on “Income Component”
    There are 18 Sections in Income Tax Act, 1961 that provides for Deduction of Tax at Source. Out of these 18, only 3 sections [194C, 194J and 194L] use that phrase “on income comprised therein”. Further these words appear at the end of the taxing provision and naturally can not be ignored. All the other 15 do not contain this phrase.
    Now the question that arises is WHY only for these 3 sections [194C, 194J and 194L] the said phrase has been used and not for the other 15. It is very very simple, because in the case of the remaining 15 sections the question of “income and non income does not and can not arise.” In was only when Service Tax was introduced for Rent on commercial property the non income component namely the ST arose and the government promptly issued notification excluding the Service Tax from TDS provision.
    The very fact that this phrase “on income comprised therein” has been used naturally means that there can also be non income component forming part of a payment. Further, the payment situation covered under these three sections alone can have both income and non-income components. [See the example given below]
    If the legislatures’ intention was to tax on the whole payment this phrase “on income comprised therein” has no place in these sections / entire Income Tax Act, 1961. Further the Act is called “Income Tax” and not “Payment Tax”.
    The departmental circular “715 of 08-08-1995” makes this phrase “on income comprised therein” redundant [or unwanted; useless], and this can not be intention of the legislature. Otherwise they could have simply stopped with the words “of such sum as income-tax”. There would be not requirement to add a further qualifying phrase “on income comprised therein”.
    SC decision on ACC will be dealt with appropriately in the end of this article.
    Now the question is why only these 3 sections have this phrase “on income comprised therein”
    Let us take an example (as amended by Finance Act 2010):
    A CA raises a bill on his client Rs. 24,000 as Prof Fee + Rs. 4,000 towards hotel bill [bill produced as proof for reimbursement] + Rs. 2,472 towards service Tax Totalling to: Rs. 30,472.00. Then TDS is deductible. But the hotel bill which is a reimbursement and service tax can under no stretch of imagination be treated as income. Hence the TDS is to be made on Rs. 24,000.00 that is Rs. 2400.00only (even though this alone does not exceed the threshold limit) which is the “income component” of the total bill.
    Now the case of The Associated Cement Company Ltd vs The Commissioner of Income Tax, Bihar, Patna and another.
    In any dispute in order to refer a case law the facts and situation must be similar and comparable to the matter under dispute. The mere final wordings of the judgement alone can not be the criterion to quote the case law as and example.
    Primarily the period covered in this judgment relates to a period when the mind boggling tax called “SERVICE TAX” was not even conceived in the mind of the Finance Minister/s.
    Secondly this case has no place in the present context since the facts and situation covered is totally irrelevant here as explained below:
    1-> As per the agreement of ACC with Mr SP Nag, the contractor is for a lump sum per ton basis as agreed in clause 12 for the work done.
    2-> Clause 13 gives detailed working of how the rate has been arrived at for the purpose of Clause-12. Further clause -13 gives the working for escalation clause due to increase in input cost of the contractor by reason of Wage Board Recommendation. This escalation is only additional compensation to the Contactor for the latter’s compliance to the Wage Board Recommendation.
    The Contractor is primarily liable to pay wages to his workers. The Principal is not obliged to pay the wages of the workers or even the increment. The principle has to pay only at the agreed rate per ton and the escalation if any to the Contractor and not the labourer.
    To put it differently there is nothing that the contractor incurs on behalf of the principal that is being sought as reimbursement. The principal namely ACC pays only the contractual dues for the work done at per ton basis plus additional input cost to the contractor as per clause 12 and 13 read together. The additional payment due to Wage Board recommendation is his namely the contractor’s liability and not of the Principal.
    An expense can be called reimbursement only if it is the obligation of the Principal and the contractor meets it out of necessity.
    3-> The TDS is always on the amount of contract liability and not on payment or payment terms. The Act says when paid / credited which ever is earlier. The Principal Ms ACC has envisaged the payment as point of TDS which does not comply with sec-194C of the IT act.
    Further applicability of the SC judgement:
    The Following observation by SC as Point no.7 is unfortunately not correct to the limited extent it refers to the phrase “income comprised there in”.

    The above decision cannot be of any help to the appellant for it does not lay down that the percentage amount deductible under Section 194C(1) should be out of the income of the contractor from the sum or sums credited to the account of or paid to him. The words in the Sub-section ‘on income comprised therein’ appearing immediately after the words ‘deduct an amount equal to two per cent of such sum as income-tax’ from their purport, cannot be understood as the percentage amount deductible from the income of the contractor out of the sum credited to his account or paid to him in pursuance of the contract. Moreover, the concluding part of the Sub-section requiring deduction of an amount equal to two per cent of such sum as income-tax, by use of the words ‘on income comprised therein’ makes it obvious that the amount equal to two per cent of the sum required to be deducted is a deduction at source. Indeed, it is neither possible nor permissible to the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that the Parliamer could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision.
    The observation of the SC on the words “income comprised therein” is incorrect to a limited extent it can be said since the phrase “on income comprised therein” is used at the end of the taxing provision and, there are no punctuations between “…. deduct an amount equal to … of such sum as income-tax” and the phrase “on income comprised therein” the phrase can not excluded while reading or interpreting these three sections.
    It is true that it is not the intention of the legislature to thrust on the deductor the task of finding the income component in general but any layman can say that a reimbursement that is supported with document and the indirect TAX component are NOT, repeat NOT, and can NEVER constitute an income
    I can see few professionals jumping on to their feet and question how I can hold SC wrong, quoting Article 141 of the Constitution that says that the Act defined by the SC is final. My humble opinion is, first of all the SC has only given its observation on the specific part of the Section 194C and has not given its judgement on or decided the Law point.

    Further please read Article 137 that precedes Article 141:
    137. Review of judgments or orders by the Supreme Court: – Subject to the provisions of any law made by Parliament or any rules made under article 145, the Supreme Court shall have power to review any judgment pronounced or order made by it.
    After all they are human beings hence the “Lady Blindfolded” holding the Physical-Balance in hand is given as symbol for judiciary.
    This amply means that even God can mistake and He and only He has the power to rectify it, either suo-moto or on appeal.
    Now you may go through the extract of all 18 sections given under:
    Interest on securities.
    70193. The person responsible for paying 71[to a resident] any income 72[by way of interest on securities] shall, 73[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 issue of a cheque or draft or by any other mode, whichever is earlier], deduct income-tax 74[***] at the rates in force on the amount of the interest payable :
    *************************************************************************
    Dividends.
    95194. 96The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, 97[who is resident in India,] of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax 98[***] at the rates in force :
    ***********************************************************************
    [Interest other than “Interest on securities”.
    4194A. 5(1) Any person6, not being an individual or a Hindu undivided family, who is responsible for paying6 to a resident any income by way of interest other than income 7[by way of interest on securities], shall, at the time of credit of such income to the account of the payee8 or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
    ***********************************************************************
    [Winnings from lottery or crossword puzzle.
    35194B. 36The person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle 37[or card game and other game of any sort] in an amount exceeding 38[ten thousand rupees] shall, at the time of payment thereof, deduct income-tax thereon at the rates in force :
    ***********************************************************************
    [Winnings from horse race.
    194BB. 43Any person, being a bookmaker or a person to whom a licence has been granted by the Government under any law for the time being in force for horse racing in any race course or for arranging for wagering or betting in any race course, who is responsible for paying to any person any income by way of winnings from any horse race in an amount exceeding 44[five thousand rupees] shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Payments to contractors.
    47194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor48) for carrying out any work48 (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
    (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
    (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,
    of such sum as income-tax on income comprised therein.
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Insurance commission.
    50194D. 51Any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) 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 issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
    [Payments to non-resident sportsmen or sports associations.54
    194E. Where any income referred to in section 115BBA is payable to a non-resident sportsman (including an athlete) who is not a citizen of India or a non-resident sports association or institution, the person responsible for making the payment 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 issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.]
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Payments in respect of deposits under National Savings Scheme, etc.56
    194EE. The person responsible for paying to any person any amount referred to in clause (a) of sub-section (2) of section 80CCA shall, at the time of payment thereof, deduct income-tax thereon at the rate of twenty per cent :
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Payments on account of repurchase of units by Mutual Fund or Unit Trust of India.58
    194F. The person responsible for paying to any person any amount referred to in sub-section (2) of section 80CCB shall, at the time of payment thereof, deduct income-tax thereon at the rate of twenty per cent.]
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Commission, etc., on the sale of lottery tickets.60
    194G. 61[(1)] Any person who is responsible for paying, on or after the 1st day of October, 1991 to any person, who is or has been stocking, distributing, purchasing or selling lottery tickets, any income by way of commission, remuneration or prize (by whatever name called) on such tickets in an amount exceeding one thousand rupees shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent.
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Commission or brokerage64.
    194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of 65[ten] per cent :
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Rent.
    70194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to 71[a resident] any income by way of rent72, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, 73[deduct income-tax thereon at the rate of—
    74[(a) two per cent for the use of any machinery or plant or equipment; and
    (b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings:]]
    **************************************************************************
    [Fees for professional or technical services.78
    79194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—
    (a) fees for professional services, or
    (b) fees for technical services, 80[or]
    80[(c) royalty, or
    (d) any sum referred to in clause (va) of section 28,]
    shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 81[ten] per cent of such sum as income-tax on income comprised therein :
    * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
    [Income in respect of units.90
    194K. Where any income is payable to a resident in respect of units of a Mutual Fund specified under clause (23D) of section 10 or of the Unit Trust of India, the person responsible for making the payment shall, at the time of credit of such income to the account of payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent :
    * * * * * * * * * * * * * * * * * * *
    [Payment of compensation on acquisition of capital asset.
    194L. Any person responsible for paying to a resident any sum being in the nature of compensation or the enhanced compensation or the consideration or the enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any capital asset shall, at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein :
    * * * * * * * * * * * * * * * * * * *
    [Payment of compensation on acquisition of certain immovable property96.
    194LA. Any person responsible for paying to a resident any sum, being in the nature of compensation or the enhanced compensation or the consideration or the enhanced consideration on account of compulsory acquisition, under any law for the time being in force, of any immovable property (other than agricultural land), shall, at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax thereon:

    * * * * * * * * * * * * * * * * * * *
    Other sums:
    195. 98[(1) 99Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest 1[***] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head “Salaries” 2[***]) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :
    * * * * * * * * * * * * * * * * * * *

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