TDS (Tax Deduction at Source) – Some Practical and Procedural Issues:

Article explains Whether a particular transaction is subject to TDS or not, Whether a particular transaction with certain organizations/agencies is subject to TDS or not,  Whether TDS is applicable on reimbursement of expenses, How to do Identification of appropriate Section, Whether TDS is applicable to the component of GST on services, Disparity in consequences in respect of payments made to Residents and Non-residents without complying TDS provisions, Lower deduction/No deduction of TDS, PAN Correction in statement of TDS (TDS Returns) and TDS on interest income to senior citizens.

Chapter XVII-B of the Income Tax Act, 1961 deals with Tax Deduction at Source.  Of late we come across various aspects relating to TDS while recording entry in the books of accounts or while releasing payments in the ordinary course of business or while filing TDS Returns.

In this article the author is trying to discuss some of those issues and the way outs for due compliance.

Tax Deductions

1. Whether a particular transaction is subject to TDS or not?

This question arises when there is a conflict with respect to a particular transaction falls under “contract for sale” or “contract for work/service”.  Contract for sale involves transfer of property in goods for consideration for which TDS provisions are not applicable. In contrast Contract for work/service involves adding some value to the property by doing some workmanship or performance of an express task or service and is subject to TDS.

It can be better explained with the following example:

A Construction company contacted B Elevator Company for a Lift facility in its ongoing Venture.  In response, B Elevator company gave two different quotations. One is for supply of lift and another is for erection and installation of lift.  Here supply of lift is not subject to TDS as it is a mere contract of sale.  However the contract for erection and installation of lift involves some workmanship which is subject to TDS.   It is always advisable to conclude contracts separately for supply and service instead of composite contracts to avoid litigation.

However certain aspects require professional judgment.  Hence we have to examine the nature of transaction on case to case basis.

The following are some of the peculiar issues:

SNo. Nature of Transaction Applicability of TDS Nature of Transaction Applicability of TDS
1 Subscription to Journals No Advertisement in Journals
2 Membership fee to certain organizations No Training fee Yes
3 Software procured in CD form No Payment for customized software Yes

2. Whether a particular transaction with certain organizations/agencies is subject to TDS or not?

As per Section 196 any sums payable to Government or RBI or certain corporations are not subject to TDS.  The extract of section 196 is reproduced here under for ready reference.

“Notwithstanding anything contained in the foregoing provisions of this Chapter, no deduction of tax shall be made by any person from any sums payable to-

  • The Government, or
  • The Reserve Bank of India, or
  • A corporation established by or under a Central Act which is, under any law for the time being in force, exempt from income-tax on its income, or
  • A Mutual Fund specified under clause (23D) of section 19,

Where such sum is payable to it by way of interest or dividend in respect of any securities or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it.”

However, a question may arise in respect of entities whose income is exempt u/s10 whether payments to such entities are also exempt from TDS or not? To deal with this issue we have to refer circular No. 18/2017 dated 29-05-2017.   It has been clarified that in case of entities whose income is unconditionally exempt u/s 10 of the Income Tax Act, 1961 and who are statutorily not required to file return of income as per Section 139, no TDS is required while making payment to such organizations.   Sums payable to only those organizations which meet these dual/twin conditions are not subject to TDS.  To clear any doubts, the relevant notification under which such organization is exempt from tax u/s 10 has to be referred.

3. Whether TDS is applicable on reimbursement of expenses:

In the present scenario, Business organizations avail the services of consultants, advocates, professional bodies like ICA (Indian Council of Arbitration).  And also to concentrate on core business activities, assessees may go for outsourcing certain routine activities.  As per the terms of contract certain amounts are to be reimbursed to them.  The main question here is whether reimbursement of expenses attracts TDS Provisions (Under Sec.194C/194J as the case may be)

Question No. 30 in Circular No.715, dated 8.8.1995 issued by CBDT deals with this issue.  The same is reproduced below for ready reference.

 “Question 30 : Whether the deduction of tax at source under sec­tions 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?

 Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.”

As per the aforesaid circular, TDS is applicable on reimbursement of expenses too.  However, to deal with this aspect one has to analyze the basic principle whether the reimbursement of expenses is “income” in the payee hands.   The answer is NO.    As per Charging Section 4 (2) TDS shall be made only on income.  In all TDS related Sections 192 to 195 (except Section 194 which deals with Dividend payments) starts with “person/any person responsible for paying any income chargeable……..”. If we carefully read the starting lines in the above sections they convey that TDS provisions come into picture only on incomes which are chargeable to tax.  Thus it can be concluded that only those amounts that fulfill the character of “income” are subject to TDS.  Many Tribunals and High courts reiterated this fundamental issue.  One such recent verdict is CIT vs DLF Commercial Project Corporation in ITA 627/2012 & ITA 507/2013 (Del HC).

However in order to overcome the view of the CBDT vide above circular and also to avoid litigation, it is advisable to have a separate bill/invoice for reimbursement of expenses.

4. Identification of appropriate Section:

We may come cross a situation where it is required to decide as to whether a particular transaction is subject to TDS u/s 194C or 194J.  This doubt arises while dealing with AMC Contracts.  If the nature of work is routine and normal maintenance, it falls u/s 194C.  In contrast if it requires technical/professional expertise, the payments are subject to section 194J.

Let us take a case study:

X Company awarded a contract to Y Company for procurement of materials.  As per contract, X company issues purchase requisition to Y. Y is having a team who in turn does market research and analysis in pricing trends and arrives at estimates; Y accordingly gives advertisement and collects quotations from vendors.  Based on the quotations, purchase order is placed to lowest quotation.   Y collects agreed % of value of Purchase Order (PO) for this job as its remuneration.

There arise 3 issues:  Whether the payment to Y is subject to TDS

1. u/s 194C since it is contractual payment?

2. u/s 194J since the assignment involves some research and analysis activity which requires professional expertise?

3. u/s 194H since the payment is nothing but commission by way of prefixed %?

Here, we have to carefully examine the contractual terms.

If the contract is awarded to Y for mere placing PO on suppliers, and Y on his own undertakes analysis activities, then the payment to Y is subject to TDS u/s 194C.

However as per conditions of the contract if Y has to undertake certain analysis before placing orders which requires expert knowledge, the payments are subject to TDS u/s 194J.

Merely contractual payments involve % payment, the question of Section 194H does not arise.

5. Whether TDS is applicable to the component of GST on services:

The Government of India introduced GST wef 01.07.2017 by replacing/subsuming various indirect taxes.  One amongst such indirect taxes is service tax.  There were different views on TDS applicability on Service Tax component.  CBDT, after considering the Rajasthan High Court judgment in the case of CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (Income-tax Appeal No.235, 222, 238 and 239/2011), clarified that no TDS is recoverable on service tax component vide Circular 1/2014 dated 13.01.2014.  To align the same analogy,    CBDT vide Circular 23/2017 dated 19.07.2017 clarified that TDS is not recoverable on component of GST on services.  However the above principle holds good only in respect of

  • Agreement or contract, where the component of GST on services indicated separately and
  • payments to resident service providers

6. Disparity in consequences in respect of payments made to Residents and Non-residents without complying TDS provisions:

As per Section 40(a)(ia) in case of any sum on which tax is deductible but paid/credited to any Resident without complying TDS provisions, only 30% of such sum shall be disallowed in computing the income of the assessee. However when it comes to non-resident payments, the whole amount shall be disallowed u/s 40(a)(i) in computing the income of the assessee.

As per proviso to Section 201(1) any person who fails to deduct the whole or any part of TDS on the sum paid/credited to a Resident shall not be deemed to be an assesse in default in respect of such tax if such resident:

  • Has furnished his return of income under section 139
  • Has taken into account such sum for computing income in such return of income; and
  • Has paid the tax due on the income declared by him in such return of income;

And the person furnishes a certificate (Form 26A) to this effect from an accountant.

However there is no such relief in respect of payments made to non-residents.

7. Lower deduction/No deduction of TDS:

Sometimes payee may obtain certificate u/s 197 from Income Tax authorities wherein the payer is authorized to deduct TDS at nil or lower rate as the case may be.  In those cases one has to verify the following aspects before acting upon based on the above certificate:

  • Whether the certificate is addressed to the Payer and contains the TAN of the payer;
  • Validity of the certificate ie., starting date and ending date;
  • Maximum value for which the lower/nil deduction is applicable;
  • Ensure the authenticity of certificate on TDS CPC Portal.

Apart from the above, the certificate number should invariably be quoted in the TDS Return for the payments/credits made during the tenure of authorization to avoid notices from TDS CPC.

8. PAN Correction in statement of TDS (TDS Returns)

Vide Finance Act, 2010, Section 200A inserted in Chapter XVII-B for processing of statements of tax deducted at source. CBDT framed scheme for TDS Return processing and issued Notification No. 03/2013 dated 15.01.2013. Accordingly Centralized processing Center was established at Ghaziabad (TDSCPC) for processing TDS Returns filed by deductors and determine the tax payable by or the refund due to them, if any.

Section 200 of the Income tax Act, 1961 enables the deductor to file correction statement for rectification of any mistake or to add, delete or update the information furnished in the TDS Return. However it is observed in some cases, where the deductor makes correction in PAN of the deductees, TDSCPC sending short deduction demand in case the correction in PAN is more than 2 alphabets and/or 2numeric characters.

To address this issue, one may refer the SLP No. 18631 of 2014 Guj HC decision in the case of Purnima advertising agency Pvt Ltd.  Vs DCIT (TDS) wherein the Hon’ble Guj HC categorically stated that putting the limitation of permitting corrections of only four characters has no rationale” and disposed of the case in favor of the assessee.

9. TDS on interest income to senior citizens:

The rate of income tax applicable on income between Rs. 2.5/3 lakhs to Rs. 5 lakhs is  5% in case of individuals/HUFs or AOPs or BOIs.

Retired employees invest their superannuated benefits in bank deposits and earn interest for their livelihood.  The only source of income in case of retired employees in general is the interest income.  As per Section 194A the rate of TDS applicable on interest income is 10%. The interest income to retired employees may not be more than Rs.5lakhs per annum.  This results higher deduction of TDS even though the applicable rate of income tax is 5%.

This disparity to some extent addressed in the Finance Bill, 2018.  Clause 47 of Finance Bill, 2018 proposed to amend Section 194A to increase the threshold limit of Rs. 10000 to Rs. 50000 in case of senior citizens.  However no change is proposed in TDS rate.  Hence the only option left to senior citizens is to file Form 15H.

Note: In this context the author is referring the employees who superannuate at the age of 60 years.

After going through this article, a question may arise that in some aspects the author has referred circulars issued by CBDT and in other case has expressed views contrary to the Circulars.  The following explanation will clear this aspect.

The revenue departments have been empowered to issue circulars to clarify the position of law and these circulars are binding on the Department but not on the assessee.    The same proposition is reiterated by a five member bench of Supreme Court in the case of Commissioner of Central Excise vs Ratan Melting & Wire Industries [2008 (231) E.L.T. 22(SC)].

Hence assessees may refer circulars issued by CBDT to have clarity on the provisions and also may claim any benefit of the circulars so issued.

Disclaimer: The entire contents of this article are solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. The author has undertaken utmost care to disseminate the true and correct view and doesn’t accept liability for any errors or omissions.

Republished with Amendments

TDS on Property Purchase

Author Bio

Qualification: CA in Job / Business
Location: Andhra Pradesh, IN
Member Since: 03 Mar 2018 | Total Posts: 2

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  1. Brajesh Shrivastava says:

    I need help regarding tds rate applicability in following case.

    I have made tds payment as per following.
    Lease rent agreement started 01/04/2020 and lease end date 30/06/202 @ rent 25k, while i have made payments for Apr to Jun, no tds deducted @10% as it was not exceeding 240k threshold.

    however in July-20, agreement got renewed, hence tds becomes applicable, and during payment in July-20, I have deducted tds(Including eariler payment) @ 7.5%(Current Rate)
    Kindly confirm whether tds rate in July for eariler payments (Apr to Jun) should be 10% or 7.5%.

  2. Jt says:

    Hi.I worked in a company from 14-02’2015 to 14-02- 2020. For Financial year 2019-20 Company deducted TDS on my salary but didn’t deposit it to the government, hence not issuing ‘Form 16’. My ‘Form 26 AS’ also has no TDS credit for FY 19-20 I have no pay slips as a proof that company had deducted TDS but I have bank statement .At present I am not working in the company . so I want to know what is the legal remedy I have to recover from them so that I can file the IT return and I don’t get demand notice from income tax department.pls reply what should I do

  3. ANSHUL GOUR says:

    my clinet under job work contract services deposited tds in next year of year in which i consider the incoices in my turn over. So as i considered in f y 17-18 and paid tax as tds was not deposited.but my client deposited the tds in next f y that is in 2018-19
    and the same is excluded by my consultant by giving reason that this tds and turnover showing in 26as pertains to P Y . SO MY QUERY IS CAN I TAKE THAT TDS CREDIT BY REVISING THE RETURN NOW

  4. PARAS CHHAJED says:

    Please guide as to whether TDS is required u/s 194A on interest paid by bank to University established by State Government ? Thanks

  5. MAHESH JINDAL says:

    i have one questing in case of TDS
    1. while considering threshhold amount for TDS, whether we have to consider tax part also to calculate the threshhold limit.
    2. some of the vendors supplying goods as well as services, so while calculating threshhold we should consider both the invoices i.e. material and service or only service invoice.

  6. CA Sanjay Jain 9811589067 says:

    TDS on RESIDENTS – All the controversies on rate of TDS can be resolved if a universal rate of TDS say 2% is specified for all sections ( presently 1,2,5,10, 20 ). The online information syatem of tax department is now ROBUST and the fear of loosing revenue , which primarily was higher tds rate prescribed by law , is now NOT ACTUALLY REQUIRED. The entire effort and cost involved in obtaining a lower TDS certificate can also be saved .This will make tax administration simpler and will be welcomed by Trade and Industry and add to EASE OF DOING BUSINESS.

    These provisions are genuinely required and not inequitable as given in above Article so that the Govt is able to realize the Tax due to it as per law from NON Residents .

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December 2021