TDS - is not tedious

1. Background of deduction of tax at source

1.1 What is Tax Deducted at source i.e TDS?

TDS is one of the modes of collection of taxes, by which a certain percentage of amounts are deducted by a person at the time of making/crediting certain specific nature of payment to the other person and deducted amount is remitted to the Government account. It is similar to "pay as you earn" scheme also known as Withholding Tax in many other countries, one of the countries is USA. The concept of TDS envisages the principle of "pay as you earn". It facilitates sharing of responsibility of tax collection between the deductor and the tax administration. It ensures regular inflow of cash resources to the Government. It acts as a powerful instrument to prevent tax evasion as well as expands the tax net.

1.2 Objective of deduction of tax at source is to collect tax in advance

(A)The present study is aimed at an exhaustive look at the provisions contained in chapter XVIIB of Income Tax Act, 1961, relating to deduction of tax at source.

(B)The main object of deduction of at source was to collect tax at the time the income like salaries, interest on securities or dividend are paid, so that the Government could have a regular inflow of cash resources, collect tax in advance, prevent evasion of tax and also place the responsibility of deducting and depositing tax on the shoulders of persons other than the payees.

1.3 TDS method convenient for Revenue to collect the tax due

This method of deduction of tax at source was found convenient by the Income Tax Department which was able to collect tax in advance i.e at the time of making payments.

2. Widening of TDS net

The net of tax deduction was later spread wider by insertion of provisions for such deduction in respect of a number of other categories of income.

Section 194IAwas inserted by Finance Act, 2013 w.e.f 1.6.2013 to provides that “Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or 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 one per cent of such sum as income-tax thereon.

However, No deduction shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.

3. Detailed discussion on some specific provisions explaining TDS applicability and related rulings to strengthen the analysis of legitimate provisions

Section 194 C: Payments to contractors ( ), newly substituted by Finance Act, 2009

3.11 Legitimate Part

1. Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (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.

2. Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

3. Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

(i)  on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii)  on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

4. No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

5. No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed Rs. 30,000/-,

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds Rs. 75,000/-, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

6. 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, on furnishing of his Permanent Account Number, to the person paying or crediting such sum.

Sub-clause (e) of clause (iv) of the Explanation, provides that, "work" shall include—

manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

3.1.2 Analysis Part

1. The Finance Act, 2009 has removed the distinction between contract and sub- contract. The word “contract” shall also include “sub- contract”. Therefore, all the provisions applicable to “contract” shall also be applicable to “sub – contract”. 

2. The rates of TDS as under:

i. 1% where payment is made to an individual or HUF.

ii. 2% where payment is made to others.

3. The definition of “work” is expanded to include certain cases of job work. The definition shall include:

“Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. However, it shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.”

Finance Act, 2009 has bought amendment in Section 194C. The definition of work has amended with respect to manufacturing contract or supply contract; however amendment shall not apply to contracts other than manufacturing contract and supply contract like construction contract. Finance Act, 2009 provides a full stop to an on-going litigation as to whether TDS is deductible u/s 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, Finance Act, 2009 provides that “work” shall  include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for ‘sale’. This will however not apply to a contract which does not entail manufacture or supply of an article or thing, e.g.: construction contract.  

4. To prevent avoidance of tax, it is provided that the tax will be required to deduct where the amount credited or paid to a contractor or sub – contractor exceeds Rs. 30,000/- in a single payment or Rs. 75,000/- in the aggregate during a financial year.

Section 194 I : TDS on Rent ( )

3.2.1 Legitimate Part

1. Any person, not being an individual or a Hindu Undivided Family, who is responsible for paying to a resident any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of making payment thereof in cash or by issue of cheque or draft or by any other mode whichever is earlier, deduct income tax thereon at the rate of-

i. 2% for the use of any machinery or plant or equipment; and

ii.10% for the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings.

Provided no deduction shall be made where the amount of such income or as the case may be, in aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 180,000/-.

For the purpose of this section "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any,—

(a) land; or

(b) building (including factory building); or

(c) land appurtenant to a building (including factory building); or

(d) machinery; or

(e) plant; or

(f) equipment; or

(g) furniture; or

(h) fittings,

Whether or not any or all of the above are owned by the payee

3.2.2 Analysis Part and clarifications form CBDT

1. Where share of each co-owner in the property is definite and ascertainable, the limit of Rs. 1,80,000/- will be applicable to each co-owner separately.

2. CBDT vide Circular No. 718, dated 22-8-1995 clarifies the following issues:

i. In case where the tenant makes a non-refundable deposit tax would have to be deducted at source as such deposit represents the consideration for the use of the land or the building, etc., and, therefore, partakes of the nature of rent as defined in section 194-I. If, however, the deposit is refundable, no tax would be deductible at source. It is further clarified that if the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A of the Income-tax Act.

ii. The term ‘rent’ as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, the warehousing charges will be subject to deduction of tax under section 194-I.

iii. In case rentals include municipal tax, ground rent, etc., on what amount the tax is to be deducted at source? - The basis of tax deduction at source under section 194-I is “income by way of rent”. Rent has been defined, in the Explanation (i) of section 194-I, to mean any payment under any lease, tenancy, agreement, etc., for the use of any land or building. Thus, if the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.

iv. Whether TDS is required to be deducted on advance rent? - Where an advance of rent has been paid before 1-6-1994, there is no requirement for deduction of tax at source. However, the said issue was further clarified vide Circular No.5/2001, dated 2-3-2001. A number of representations has been received by the Board pointing out the problems being faced by the assesses in getting due credit for tax deducted at source under the provisions of section 199 of the Income-tax Act, 1961 in respect of tax deducted in terms of section 194-I of the Act. Difficulty arises since such advance rent is taxable in more than one financial year and the tax is deducted in the first year. The Board clarifies that where advance rent is spread over more than one financial yea and tax is deducted thereon, the credit for tax shall be allowed in the same proportion in which such income is offered for tax for different assessment years based on the single certificate furnished for the tax so deducted on the entire advance rent.

Difficulty also arises when subsequent to deduction of tax at source on advance rent pertaining to more than one financial year, the rent agreement gets terminated resulting into refund of the balance amount to the tenant. The Board clarifies that in such a case the landlord in whose name the TDS certificate stands can claim the deduction of TDS not claimed so far even if the rental income is not included in his total income because of cancellation of the rent agreement. The landlord should claim the TDS in the assessment year relevant to the financial year in which rent agreement gets terminated.

3. CBDT vide Circular No. 4, dated 28-3-2008 clarifies service tax paid by the tenant doesn’t 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.

Prior, the above clarification is applied only to service tax on “rent”. Service tax on professional fees etc. is to be included in professional fees etc. and TDS is to be deducted on the gross amount including service tax but vide Circular No.1, dated 13-1-2014, CBDT clarifies that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

4. CBDT vide Circular No. 1, dated 10-1-2008 clarifies the applicability of provisions of section 194-I to payments made by the customers on account of cooling charges to the cold storage owners.

i. Representations have been received from various quarters regarding applicability of the provisions of Section 194-I to cooling charges paid by the various customers to the owners of cold storages.  It has been represented that the cold storage owners provide a composite service, which involves preservation of essential food items including perishable goods at various temperatures suitable for specific food items for required periods and storage of goods being incidental to the activity of preservation.  The cooling of goods is controlled through mechanical process.  The customer brings its packages for preservation for a required period and takes away its packages after paying cooling charges.  The customer does not hire the building, plant/machinery etc. in any manner and does not become a tenant of any kind.

ii. The matter has been examined.  The main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage of such goods is only incidental in nature.  The customer is also not given any right to use any demarcated space/place or the machinery of the cold store and thus does not become a tenant. Therefore, the provision of 194-I is not applicable to the cooling charges paid by the customers of the cold storage.

iii. However, since the arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194-C will be applicable to the amounts paid as cooling charges by the customers of the cold storage. This may be brought to the notice of the Assessing Officers under your charge. 

Section 194 J :TDS on fees for professional or technical services ( Paid to Residents Only)

3.3.1 Legitimate Part

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, or

c. Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible u/s 192, to a director of a company, or

d. Royalty, or

e. 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 10% of such sum.

3.3.2 Analysis Part

1. No deduction shall be made where the amount of such sum, or as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by aforesaid person to the account of or to, the payee, does not exceed Rs. 30,000, in case of payment made for referred to in (a) to (d) above.

2. Finance Act, 2012 had amended the provisions and provides that any sitting fees paid to the director subject to TDS @ 10% w.e.f. 1.7.2012. No threshold limit has been provided for the said payment, the amendment not only covers the payment towards sitting fess yet covers all the payments to directors which not taxable as salary.

3. Section 40(a)(ia) which disallows the expenditure if TDS is not deducted or paid covers all the payments specified under section 194J, however it does not covers the following payments:

a. Non-compete fees referred to in section 28(va)

b. Sitting fees to directors

Therefore, if no TDS is deducted in the above two items, the same shall not be disallowed under section 40(a) (ia).However, penalty and interest for non-deduction of TDS shall apply.

4. Finance Act, 2012 has added following three explanations to the definition of royalty under section 9:

i. Explanation 4. -"For removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a license) irrespective of the medium through which such right is transferred".

ii. Explanation 5. – “For removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not –

a. the possession or control of such right, property or information is with the payer;

b. such right, property or information is used directly by the payer;

c. the location of such right, property or information is in India.

iii. Explanation 6. – “For removal of doubts, it is hereby clarified that the expression ”process” includes and shall be deemed to have always included transmission by satellite(including up-linking, amplification, conversion for down – linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

Analysis of amendment made by Finance Act, 2012

a. Explanation 4 to Section 9 added by Finance Act, 2012 clarifies that payment received for transfer of:

- All or any right to use a computer software

- Including granting a license for computer software

- Is royalty.

Therefore, if software is purchased by an India form a resident in India, then the payment received is royalty and shall liable for deduction of TDS @ 10% u/s 194J.

b. Explanation 5 to Section 9 :- In various judgements the Honourable Supreme Court of India decided that payment made to foreigners for use of their servers located outside India is not taxable in India, because

- Possession of servers is not with Indians

- Server is not used directly by Indians

- The location of server is outside India

Amendments made by Finance Act, 2012 with retrospective effect overrule all the rulings and provides that payment made to foreigners shall be treated as royalty even if:

- Possession of servers is not with Indians

- Server is not used directly by Indians

- The location of server is outside India

c. Explanation 6 to Section 9: India T.V channels make use of satellite of foreigner to transmit their programs. Now the payment made to foreigner for transmission of programs by satellite is treated as royalty liable to tax for deduction under section 195.

5. NOTIFICATION NO. 88/2008, dated 21-8-2008

In exercise of the powers conferred by clause (a) of the Explanation to section 194J of the Income Tax Act, 1961, Central Board of Direct Taxes hereby notifies the services rendered by following persons in relation to the sports activities as “Professional Services” for the purpose of the said section, namely: –

a. Sports Persons,

b. Umpires and Referees,

c. Coaches and Trainers,

d. Team Physicians and Physiotherapists,

e. Event Managers,

f. Commentators,

g. Anchors and

h. Sports Columnists.