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The annual circular is issued by the CBDT every year guides employers on how to compute the taxable salary and the tax Short or excess deduction can be adjusted from subsequent salaries within the same year.
CIT vs Marubeni P. Ltd [294 ITR 157] A.P State electricity board [20 ITD 318] (Hyd) Vinsons [89 ITD 267](Mum)
Illustration
Suppose Income chargeable under the head Salaries is Rs. 4,50,000 out of which, Rs. 50,000 is on account of non-monetary perquisite. Employer opts to pay tax on such perquisite. Income 4,50,000. Tax on salaries 46,350 Average rate of tax [(46,350/4,50,000)100] 10.3% Tax payable on Rs. 50,000 (10.3% of 50,000) Rs 5,150 Amount to be deposited per month Rs 430 (5,150/12)
With effect from 1st June 2007, interest on 8% Savings (Taxable) Bonds,2003, liable to TDS if interest exceeds Rs. 10,000/- during the year. Exemption to Provident fund whose income is exempt u/s 10(25) Interest on Deep Discount Bond to be deducted at the time of redemption. In case of Joint Owners of a security, tax credit is allowable in proportion to the income offered to tax (New Rule recently notified Rule 37BA which is discussed subsequently) Where the person who is to receive the interest cannot be identified at the stage at which the provision for interest accrued but not due is made, TDS is not required to be deducted IDBI [10 SOT 497]
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Rates of TDS
At what rate to deduct?
Particulars Recipient other than Domestic Company 10% Domestic Company 10%
Interest on debentures/securities issued by or on behalf of Local Authority/statutory corporation, Listed debentures and 8% Savings (Taxable) Bonds, 2003
Coverage
Inter - Corporate Deposits/Loans Public Deposits Loans Suppliers on late payment of bills (also where payments routed through the bank) Service fees in respect of loans and commitment charges on the unutilized portions of the credit facilities
ITO v Arihant Trust & Others [214 ITR 306](Mad)
Interest
section 2(28A)
Interest means Interest payable in any manner In respect of money s borrowed or debt incurred including a deposit, claim or other similar right or obligation Includes any service fee or other charge in respect of money s borrowed or debt incurred or in respect of any credit facility which has not been utilised
Some issues
Where the loan transactions of directors are routed through the company, the company cannot contend that it acted merely for collecting and disbursement purpose Notwithstanding the agreement between the company, directors and the lender, TDS is applicable under section 194A
Century Building Industries [163 Taxman 188](SC)
Tax has to be deducted on the Gross Interest payable by a person and not on the net interest after mutual set off between the parties.
S.K. Sundararamier and Sons [240 ITR 740](Mad)
However, Finance transaction in the garb of hire purchase would be subjected to TDS
Circular No 738. dated 25/3/96
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Form 15H / 15G must precede the date of credit or payment of interest
Sudershan Auto & General Finance [60 ITD 177](Delhi)
194 B Gift (prize by way of winnings from lottery) given in kind (i) If prize is given partly in cash and partly in kind - Tax will be deducted from cash prize with reference to the aggregate amount of the cash prize and the value of prize in kind. And where in the part of cash is not sufficient to meet the liability for tax deduction in respect of whole of the winnings then payer has to collect the balance from the payee. (ii) Where the prize is wholly in kind - The payer has to collect the liability for tax deduction from payee. Example Mr. X wins a Maruti-Zen value of Rs.3,70,000/- on August 20, 2008, in a draw of lot organized by Maruti Udyog. Tax liability on prize in kind comes to Rs.1,14,330/- (i.e., 30.9% of Rs.3,70,000/-) which may be recovered by the Maruti Udyog from Mr. X and the same can be deposited with the government on account of tax deduction.
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Payments to Transport Contractors No TDS on furnishing PAN. Otherwise, TDS as per the above rates. w.e.f 01/04/2010 - @20% Person responsible for making payment to transporter to furnish prescribed information.
What is Work ?
Work includes: Advertising Broadcasting and telecasting including production of programmes for broadcasting and telecasting Carriage of goods and passengers by any mode other than railways Catering Manufacturing a product according to specification of customer by using material purchased from customer Work includes but is not limited to a Works Contract The word any preceding the word work indicates that each and every type of work is covered
Birla Cement Works v. CBDT [248 ITR 216](SC)
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For instance, transport contract and service contracts are contracts for carrying out work but are not works contracts
Printing of books
Where paper is supplied by the customer, it is a contract for work Where paper is provided by the printing press, it is a contract for sale However, Q. No. 15 of Circular No. 715 dated 08-08-1995 suggests Tax to be deducted u/s 194C which will have to be interpreted in light of the amendments in Section 194C.
Reimbursement of expenses
The term Any Sum refers to the Gross Amount paid under the contract. Hence, reimbursement of expenses would also attract TDS Reimbursement of actual expenses cannot be deducted out of the bill amount for the purpose of tax deduction at source
CBDT s Circular No. 715
The percentage deduction prescribed in law is with reference to the amount of payment and not income comprised in the payment Associated Cement Co. Ltd. v. CIT [201 ITR 435]
Service tax
Since section 194C refers to any sum paid, TDS will be attracted on the service tax portion also Circular No. 4/2008 states that TDS should not be made on service tax element of rent. Since the circular specifically mentions rent, it cannot be applied for the purpose of section 194C
Advertising contracts
A person makes payment to an advertisement agency. The agency makes payments to its artists and the media. What are the TDS implications? Payment to agency 1% / 2% u/s 194C Payment to artists Section 194J Payment by agency to media (Print/Electronic) No TDS Payment directly to media TDS applicable u/s 194C(Q. no. 1, 2 & 3 of Circular 715) Payment to Doordarshan is not liable to TDS as it is a government agency
Q. no. 4 of Circular No. 715
Payment made for production of program for the purpose of broadcasting and telecasting - TDS u/s 194C
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Advertisement Hoardings
Contract for putting a hoarding is an Advertisement contract and is covered under section 194C However, if the space for hoarding is taken on rent and then sub-let, the payment will be covered under section 194I
Q. no. 5 of Circular No. 715
Payment made for sponsorship for debate, seminar or other functions held in college, schools etc. is in the nature of carrying out work of advertisement and liable to TDS
Q. no. 18 of Circular No. 715
TDS would apply in case of advertisement issued in souvenirs brought out by organizations
Q. no. 19 of Circular No. 715
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Some Issues
Payments made to courier agency is for carriage of goods. Hence, TDS under section 194C is applicable
Q. no. 8 of Circular No. 715
Food served by hotels, restaurants or cafes does not attract TDS under section 194C
Q. no. 11 of Circular No. 715
Whether 194C would apply if specific contract entered into with hotel fixing day, date, no of people and rate? Can this be construed as contract of catering or food served by hotel in the normal course ? Payments to banks for discounting bills, collecting payments through cheques or drafts, L/C commission are not covered under section 194C
CBDT s Circular No. 681
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GR issued by contractors
Can each GR issued by transporter be regarded as a separate contract? If goods are transported on a one-off basis, each GR can be treated as a separate contract If goods are transported continuously in pursuance of a contract for a specified period or quantity, all GRs relating to that contract will be aggregated for the purpose of TDS - CBDT s Circular No. 715
Points to be noted
Existence of agency relationship is implied Commission should be distinguished from discount
Ahmedabad Stamp Association [176 CTR 193](Guj)
If retention is made on a principal to principal basis, it is not in the nature of commission and TDS is not required
CIT v Samaj [77 ITD 358](Cuttack)
No TDS if the amount paid or likely to be paid during the financial year does not exceed Rs. 1,20,000 in aggregate
What is Rent?
Any payment, by whatever name called Under any lease, sub-lease, tenancy or any other agreement or arrangement For the use ,either separately or together, of any Land Building Land appurtenant to a building Machinery or Plant Equipment, Furniture or Fittings Whether or not owned by the payee
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Service tax
No TDS on service tax element of rent
Circular No. 4/2008
Rent Deposits
No TDS in case of refundable deposits However, if deposit is non-refundable, it partakes character of rent and liable to TDS at the time of payment of deposit Reebok India Company [291 ITR 455](Del). Deposit was to be adjusted after certain period. Court held it to be advance rent liable for TDS upfront. Interest, if any, on deposits will be covered under section 194A No Notional income on deposits
Circular No. 718
If municipal taxes etc. are paid to the landlord, is it in the nature of rent and requires TDS under section 194I ? Treatment in case of Society Maintenance charges borne by tenant whether TDS u/s 194C or 194I ?
Advance rent
Difficulty in claiming TDS credit in case of advance rent since income is spread over more than one year TDS Credit is allowed in the same proportion in which advance rent is offered to tax Credit for all such years will be allowed based on the single TDS certificate
Circular No. 5/2001
Where the employee pays the hotel bills and the company reimburses the same, TDS will not be applicable
(Circular No. 5/2002) Agreement entered with a hotel to fix the room tariffs - Such agreements are in the nature of rate-contracts and such cases are not covered under accommodation taken on a regular basis
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Co-owned property
If the share of each co-owner can be ascertained, the limit of Rs. 1.2 lacs will apply to each co-owner separately
Circular No. 715
Trade Fair
Payments made for trade fair/exhibition Liable to TDS u/s 194I.
Internet Charges
Payment of internet charges are not under any lease or tenancy. Usage of internet facility cannot be said to be leased-out by the ISP to the user. The user does not have any rights over the communication network. Hence, section 194-I / 194J was not applicable. Skycell communication [251 ITR 53](Mad) HFCL Infotel Ltd [99 TTJ 440](Chd) Wipro Ltd. [80 TTJ 191](Banglore) Position now set to change Delhi Special Bench decision in the case of New Skies Satellites NV (Unreported) holding that payments made by telecasting companies to satellite companies for telecommunication constitutes Royalty
Cold storages provide a composite service Preservation of goods and their storage Storage is only incidental to the main purpose of preservation No hiring of building, plant or machinery Customer is not given any right to use a demarcated space or machinery The arrangement is contractual in nature and attracts TDS under section 194C and not under section 194-I
Circular No. 1/2008
Whether above circular could taken help of in case of preservation of files, documents, etc? Sudit K. Parekh &
Co. 69
Section 194J - TDS from Fees for Professional and Technical Services
Exclusions
No TDS if fees for professional services are paid by an Individual or HUF for personal purposes of the individual or member of the HUF No TDS if the payment does not exceed Rs. 20,000 in aggregate during the financial year The limit of Rs. 20,000 applies separately to the items covered by the section
Professional services
Services rendered by a person in the course of carrying on a: Legal profession Medical profession Engineering profession Architectural profession Accountancy profession Technical consultancy profession Interior decoration profession Profession of Information Technology Profession of Company Secretary Film artistes Sports person, Umpires and Referees, Coaches and trainers, Team Physicians and Physiotherapists, Event Managers, Commentators, Anchors and Sports Columnists (Notification 2085(E) dated 21st August 2008)
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Section 194 J
Since section 194J refers to any sum paid , TDS is applicable even on reimbursement of expenses including service tax
Circular no. 715
Royalty
Consideration for
Transfer of all or any rights including granting of a license in respect of a patent, invention, model, design, secret formula or process or trademark or similar property Imparting of any information concerning the working or use of the above Use of any patent, invention, model, design, secret formula or process or trademark or similar property Imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill
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Royalty
Use or right to use any industrial, commercial or scientific equipment but not including the amounts referred in section 44BB Transfer of all or any rights, including granting of licence, in respect of copyright, literary, artistic or scientific work including films and video tapes for use in connection with radio broadcasting but not including consideration for sale, distribution or exhibition of cinematographic films Rendering of services in connection with above
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Payment for use of machinery or equipment Whether TDS u/s 194I or 194J (Royalty)? Whether Payment for fees for PMS would be liable for TDS? Whether Professional fees or fees for Technical Service?
Software charges
If IPR of the developer is transferred to the user, no TDS since it is a transfer of a capital asset Purchase of shrink wrapped software or copyrighted article does not amount to royalty No TDS Tata Consultancy Services [271 ITR 401](SC) Lucent Technologies [82 TTJ 163] Nokia, Erricson and Motorola [95 ITD 269] Sonata Information Technologies [103 ITD 324](Banglore) Against Samsung Electronics [185 Taxman 313](Karnataka) Head Start [285 ITR 530](AAR) IMT Labs [287 ITR 450](AAR)
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Some Issues
Payment to Agencies providing Recruitment Services whether through Internet or Otherwise Liable to deduct TDS u/s 194J
Circular 715
Fees paid to Training Institute Whether can be considered as Technical Service ?? Transaction fees paid to Stock Exchange an the basis of volume of transactions is payment for use of facilities provided by stock exchange and not for any services, either technical or managerial, hence provisions of section 194J are not attracted
Kotak Securities Ltd. [25 SOT 440](Mum) Dun & Bradsteet [272 ITR 99](AAR)
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Consequences of default
Assessee deemed to be an Assessee in default for not deducting the TDS or not depositing the Tax Interest under section 201(1A) at the rate of 1% per month or part of the month from the date on which tax was deductible to the date of payment
As per rule 119A(b), any fraction of a month shall be deemed to be a full month
Interest is mandatory and there is no precondition of reasonable cause for non payment in time of tax deducted
Pantagon Engineering P Ltd [212 ITR 92]
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Consequences of default
Penalty under section 221 Not exceeding amount of tax in arrears Penalty under section 271C (Only for failure to deduct tax) Amount equal to tax which a person fails to deduct. This penalty is not for failure to deposit tax. Whether both penalties can be levied simultaneously? Disallowance of certain expenditure under section 40(a) The order passed u/s 201 after the expiry of Four years from end of relevant F.Y. was held as time barred S.B.I [106 ITD 589](Mum) The date of payment of tax by the recipient should be considered as end point for computing period of default for charging interest u/s 201(1A) Manav Greys Exim P Ltd [75 TTJ 115] Adidas India Marketing P Ltd [288 ITR 379](Del)
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Section 195 (1) : Scope and Conditions Wide scope of the section Conditions for application of Section 195
a) any person Includes a person having no taxable income b) a non-resident Includes NRIs does not include NOR c) sum chargeable to tax (Other than Salaries)
2. 3. 4.
5.
6.
Certain Cross Border Payments Withholding Tax Issue (cont d ) Business Income (of NR) Off-shore Supply : 288 ITR 408
If title to goods passed outside India and payments outside India not taxable Signing in India is not relevant Performing of certain activities in India (loading, unloading, inland transportation) not relevant
Payment to foreign agents Operations outside India (CBDT circulars 23 and 786) Not taxable in India (125 ITR 525), (267 ITR 725) Contrary view taken by AAR in case of Wallace Pharma [278 ITR 97] and Rajiv Malhotra [285 ITR 564](AAR)
SC in Transmission corporation has declared legal position with respect to WHT on payments to non-residents
Binding on all High Courts in India Tax authority not required to determine income of non-resident for determining WHT WHT provisions seek to withhold a tentative amount as tax before determination of actual tax liability of non-resident
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Practical Issues
Tax authorities could attempt to enforce on all cross border payments Hopefully CBDT takes proactive steps to suitable address arising issues
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Thank you
Manish Shah, Partner Sudit K Parekh & Co. Mumbai. Tel: +91 22 66178000 Email: manish.shah@skparekh.com