Tax Deduction at Source

Recent IssuesGautam Nayak

Chartered AccountantBCAS Lecture Meeting

21st November 2007

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Recent Amendments

With effect from 13-7-2006Definition of “rent” u/s.194I amended to include payments for use of machinery, plant, equipment, furniture, fittings, whether or not owned by payee –applicable for use either separately or togetherSection 194J extended to royalty[s.9(1)(vi)], and non-compete payments [s.28(va)]

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Recent Amendments…..

With effect from 1-6-2007TDS deductible from interest on 8% Savings (Taxable) Bonds 2003 exceeding Rs.10,000Limit u/s.194A increased to Rs.10,000 where payer is a bank/ post office (for notified scheme)TDS u/s.194C extended to individual/HUF (main contractor) who was liable to tax audit in earlier year –no TDS on payments for personal purposesRate of TDS on Commission or Brokerage increased from 5% to 10%

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Recent Amendments….

With effect from 1-6-2007…..TDS u/s.194I reduced to10% for rent of machinery/ plant/ equipmentRate of TDS u/s.194J increased from 5% to 10%

With effect from 1-4-2008Interest u/s.201(1A) amended from 12% per annum to 1% per month or part thereof

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Recent AmendmentsSome Issues

What payments now remain outside the purview of TDS?

Sale of Goods Circular No.13 of 2006 dated 13.12.2006BDA Ltd. v. ITO(TDS) 281 ITR 99(Bom)CIT v. Dabur India Ltd. 283 ITR 197(Del)

Electricity – Commr. Of Sales Tax, MP vs. MPSEB, Jabalpur (1969) 1 SCC 200 (SC) – electricity is goodsSoftware - Licence for Shrink Wrapped is Goods -TCS v. State of AP 271 ITR 401(SC)

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Recent AmendmentsSome Issues

Payments outside the purview of TDS…. Statutory payments – fees, cess, taxes, etc.Services using technology – telephone, internet, etc.

Skycell Communications Ltd. v. Dy. CIT 251 ITR 53 (Mad)Hutchison Telecom East Ltd. v. ACIT 16 SOT 404 (Kol) –leased line charges?

Clearing house charges, stock exchange charges, demat charges?Subscription to databases?

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Recent AmendmentsSome Issues

Hire charges of plant/machinery/ equipment covered by both s.194I and s.194J – which section to apply?

Applicability of section 194I to pure unconnected lease of movablesSpecific provision vs. General provision

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Recent AmendmentsSome Issues

Hire of ship – which section applicable –s.194C, s.194I or s.194J?

Bareboat CharterKlaus Vogel Commentary – RoyaltyBareboat Charter cum Demise – West Asia Maritime Ltd. v. ITO 109 TTJ (Chen) 617 – royalty – ship is equipment

Voyage CharterTransportation contract vs. contract of hireDisposal and Control over vessel Bombay HC decision in INSA’s case 39D BCAJ 555 (Aug 07) - Ship is not “plant” for s.194I

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Recent AmendmentsSome Issues

Time CharterDisposal and Control over vessel – under whose instruction is the master of the vesselVAT - Great Eastern Shipping Co. Ltd. v. State of Karnataka 136 ITR 519 (Kar) – tug with crew given for use by port trust – maintenance by owner –transfer of right to useCIT v. Pompuhar Shipping Corpn. Ltd. 282 ITR 3 (Mad) – hire, not contract for work (pre 194C amdt)Poompuhar Shipping Corpn. Ltd. v. ITO 108 TTJ (Chen) 970 – Ship is equipment qua the business -terms of agreement – use & hire of vessel

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Recent AmendmentsSome Issues

Hire of machinery/car with operator/driver –s.194C, s.194I or s.194J?

Contract of transportation v. contract of hire Control and Disposal over machinery/vehicleCBDT Circular No.558 dated 28.3.1990, 183 ITR (St.) 158VAT implications

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Recent AmendmentsSome Issues

Which section applicable – s.194A, s.194I or s.194J to:

Hire purchase paymentsWhether hire (rent) or finance with interest?Muthoot Leasing & Finance Ltd. 84 ITD 477 (Coch)

Finance lease chargesWhether rent or finance with interest?

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Impact of e TDS & e Filing

Credit for TDS on basis of TDS returns filed Form 26AS online viewEntry of TDS details in tax return – practical difficultiesGrant of refunds – verification of TDS for refunds exceeding Rs.25,000Remedy if TDS return not filed by deductor or PAN not correctly mentionedApplicability of Bombay HC decision in YashpalSahni v. Rekha Hajarnavis 293 ITR 539

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Recent Notifications

PAN details required – 90% for salaries, 70% for others, for e TDS returns after 30.9.2007

Can deductor be made liable for penalty for late filing if details not furnished by deductees? Is there any penalty at all for late filing – Crest Communication Ltd. v. ADIT 111 TTJ 93 (Mum)Penalising all deductees for default by fewMinimum no. of PAN not required for s.195 returns

Notification No.238/2007 dated 30.8.2007 – e TDS returns mandatory w.e.f. 1.9.2007 for all persons subject to tax audit for earlier year & in cases where deducteesrecords exceed 50

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Amount on which tax deductible

Whether tax is to be deducted on amount inclusive of service tax or excluding service tax?Nature of service tax – tax payable by the service providerSimilar to excise dutyWhether manner of accounting for service tax would make a difference?

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Assessee in Default & Interest u/s. 201(1A)

Hindustan Coca- Cola Beverage P. Ltd. v. CIT 293 ITR 226 (SC)CBDT Circular No.275/201/95- IT(B) dated 29.1.1997Tax cannot be recovered from deductor if paid by deducteeInterest only till date of payment of tax by deducteeWhen tax can be regarded as paid – advance tax paid, self assessment tax paid, return filed?Position as regards s.40(a)(ia) disallowance if tax paid by deductee and not deducted by deductor

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Certificates u/s.197

CBDT Instruction No.8/2006 dated 31.10.2006“Assessing Officers are issuing certificates for lower deduction or no- deduction of tax at source under s.197(1) indiscriminately and in contravention of the methodology and procedure laid down..”

“Certificates to be issued strictly as per manner prescribed under rules 28AA & 28AB with prior administrative approval of Range JCIT/Addl. CIT”

Practical Experience

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Manner of Credit for TDS –Recipient following cash system

S.199 – credit for TDS in year income assessableWhether TDS to be treated as income received in year of deduction?If so, whether credit for pro- rata TDS or entire TDS?Pardeep Kumar Dhir v. ACIT 109 TTJ (Chd) (TM) 445

Amount of receipt Rs.2,05,592TDS thereon Rs. 11,413Receipt included in income Rs. 11,413TDS credit claimed Rs. 11,413TDS credit allowed by ITAT Rs. 662

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Manner of Credit for TDS –Recipient following cash system

Varsha G. Salunkhe 98 ITD 147 (Mum)(TM) Sections 198 and 199 do not in any way change the year of assessability of incomeNeither income could be added nor credit given in relevant assessment year

Assessee following project completion methodToyo Engineering India Ltd. v. JCIT 100 TTJ 373 (Mum)Nexus between TDS & income is notional/conceptual rather than specific/immediateSince WIP impregnated with element of income, credit in that year in which included in WIP

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TDS on Interest on Securities –When Deductible?

If due date of payment of interest not 31st March, entry passed by issuer for interest accruedWhether TDS to be deducted at time of credit on 31st

March?Payee not known, may change till due dateTax deductible at time of payment Industrial Development Bank of India v. ITO 293 ITR (AT) 267 (Mum)

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Franchise Arrangements

Payments to Franchisees by Franchisor S.194C (for work) or 194I (usage of space)?ITO v. Bhasin Motors India (P.) Ltd. 16 SOT 319 (Del)Discount allowed on sale of SIM cards – whether commission? ACIT v. Bharati Cellular Ltd. 294 ITR (AT) 283 (Kol)

Payments to Franchisor by FranchiseesIf payment as percentage of turnover, royalty/FTS (s.194J)?Common Advertisement reimbursement – s.194C?

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Bill Discounting Charges

Whether interest within the meaning of s.2(28A) and therefore liable for deduction u/s.194A?ITO v. Kanha Vanaspati Ltd. 108 TTJ (Del) 816Borrowing of money or sale of assets? Does recourse make a difference?CBDT Circular No.65 dated 2.9.1971 not considered“Where bills discounted, and payment made immediately to holder, property in bill passes to bank – net payment made by bank is price paid for the bill”

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Payments to Clearing & Forwarding Agents

Whether fees for professional or technical services or whether contract of work?Services relating to storage, dispatch, transportation, loading & unloadingC & F agent not professional – CIT v. Jeevanlal Lallubhai& Co. 206 ITR 548 (Bom) – whether manager?Hindustan Lever Ltd. v. ACIT 4 SOT 785 (Del) National Panasonic India (P.) Ltd. v. Dy.CIT 94 TTJ (Del) 899Glaxo Smithkline Consumer Healthcare Ltd. v. ITO 12 SOT 221 (Del)

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Thank You!