Updates on TDS

CA N. C. Hegde,

Deloitte Haskins & Sells

17 April 2011

Borivli Kandivali (East)

Study Circle

Contents

• Overview of TDS provisions

‒ Sections 192, 194A, 194C, 194H, 194I, 194J

• Sec 195 – Non-residents & TDS

• Sec 197 – Certificate for deduction of tax at lower/NIL rate

• Sec 40(a)(i) – Consequences of failure to deduct TDS

• Sec 199 – Tax credit

• Other developments

• Recent Amendments

Sec 192 – TDS on Salary

Extra-Territorial Jurisdiction of Provisions of the Income

Tax Act

4

Facts:

• Expatriates were seconded to the Indian JV by the foreign enterprise. The JV had deducted tax at

source on the salary payable in India u/s 192 but did not deduct tax on the home salary paid to

expatriates.

• The department took a position the JV/BO should have deducted tax on the home salary as well .The

department also initiated penal proceedings for non-deduction of tax at source. The tribunal and the

High Court ruled in favour of the JV

Issue:

• Whether the JV is liable to deduct Indian tax on home salary and whether provisions dealing with TDS

which are in nature of machinery provisions for collection of taxes are independent of the charging

provisions, which determines chargebility of income under the head “Salaries” in the hands of the

expatriates.

Decision:

• The Supreme Court held that the provisions relating to TDS, which are in nature of machinery

provisions to enable collection and recovery of tax forms an integrated code with the charging

provisions which determines charge to tax in the hands of expatriates.

• The Supreme Court ruled that an Indian company is responsible for withholding tax on remuneration

paid to its expatriates by a foreign company outside India if the services are rendered solely in India.

Section 192 has extra-territorial jurisdiction when salaries taxable u/s 9(1)(ii) are payable outside India.

CIT vs. M/s Eli Lilly & Co . (India) P. Ltd.[(312 ITR 225)(SC)]

Payment of tax deducted on salaries

5

Facts:

• The assessee paid salary to its employees during the relevant assessment year ("AY") but did not

deduct tax in each month

• The assessing officer ("AO") imposed interest on the assessee under section 201(1A) of the Income-

tax Act ("ITA")

• The CIT(A) upheld the order of the AO. However, the Tribunal held in favour of the assessee

Issue:

• Is the assessee an “assessee in default” u/s 201 because it did not deduct tax in each month?

Decision:

• Subsection (3) to section 195 of the ITA states that the person responsible for making payment under

subsection (1), (1A), (2) , (2A) and (2B) may at the time of making any deduction, increase or reduce

the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any

previous deduction or failure to deduct tax during the financial year

• Subsection (3) makes it abundantly clear that if there is a failure to deduct in a financial year, the same

can be deducted by way of adjustment during the financial year

• Accordingly, the mandate to deduct tax u/s 192 stands extended to the end of the financial year.

• Accordingly, the assessee is not an assessee in default

CIT v. Enron Expat Services Inc. [2011] (330 ITR 496) (Uttarakhand)

Payment to doctors under fixed salary and guarantee

money scheme

6

Facts:

• The assessee engaged doctors on fixed salary and guarantee money scheme (FCG). The AO took the

view that these doctors were employees of the assessee in view of the stipulation of the agreements

between the assessee and the doctors

• The AO held that the assessee could have deducted TDS on the payments as per the provisions of

section 192 . Accordingly,, the AO levied interest u/s 201(1A)

• No provident fund, profession tax or ESI was deducted from payments to these consultant doctors.

Whereas these deductions were made from payments made to the full time resident doctors of the

assessee

• Consultant doctors were not eligible for gratuity whereas the resident doctors were eligible for the same

• These doctors filed their individual returns and paid taxes on their income from the assessee. In case of

consultants where professional fees exceeded Rs.10 lakhs, accounts were subject to tax audit

• The AO held that the retainership agreement was for rendering services and that was in the manner of

an employer/employee relationship. The CIT (A) allowed the appeal of the assessee

Issue:

• Does payment to consultant doctors constitute “salary” or “payment for professional services”?

Payment to doctors under fixed salary and guarantee

money scheme

7

Decision:

• There are two types of agreements. One of the covenant is stated to be in the nature of

employer/employee agreement and the other is stated to be FGC contract. The distinction between the

two inter alia include:

In case of the employee doctors, there is a list of allowances (basic, HRA, etc). The consultant

doctors are paid a lumpsum fee

The employee doctors‟ agreement had a clause for leave entitlement unlike the FGC contract

Employee doctors are not entitled for any other full time employment

Consultant doctors were not employed by service rules but were expected to follow the code of

conduct

• The terms and conditions in respect of the doctors under FGCs are not akin to the salaried employees.

Their relationship with the hospital cannot be said to be an employer-employee relationship. Tax ought

to have been deducted u/s 194J

• The contract between the two parties cannot be said to be in the nature of a “service contract” but “a

contract for medical service”

• When there is a specific clause provided in the agreement for payment as “fee for services”, then there

is no reason to read the said clause as “fees of services” and then there should not be any reason to

treat the said payment by the assessee as payment of salary

ITO (TDS-1), Ahmedabad v. Apollo Hospitals International Ltd (2011-TIOL-59-ITAT-MUM)

Responsibility of correctness of employee claims

8

Facts:

• The AO held that an employer should check whether the amounts were actually spent and be

responsible for not having deducted tax at source on the amount additionally liable on the savings, if

any made by the employee

Decision:

• SC held that the employer is not under any statutory obligation to check that the employees had actually

utilized the amount paid towards travel concession or conveyance allowance

CIT vs. Larsen & Toubro Ltd [2009] (313 ITR 1) (SC)

Conveyance allowance vis-à-vis free transport service by the employer

9

Facts:

• The AO contended that employees cannot enjoy double benefit by way of conveyance facility and

transport allowance and such use of transport facility would be in the nature of perquisite liable to tax

under section 17(2) (iii) of the ITA

Issue:

• Whether an employee can claim benefit of both „conveyance allowance‟ and transport facility provided

by the employer?

Decision:

• It is not possible to compute the value of the facility attributable to each employee since it is provided

collectively throughout the year. Computation mechanism fails and hence the employer cannot be

treated as assessee in default for failure to deduct tax at source.

Transworks Information Services Ltd. vs. ITO (126 TTJ 900)(Mum ITAT)

Sec 194A – TDS on Payments of Interest

Do discounting charges fall under the definition of “interest”?

11

Facts:

• The tax payer, an Indian company, gets its sales bills discounted from its Singapore associate

companies. These companies charge discounting charges for undertaking these transactions

Issue:

• Whether the discounting charges are to be disallowed under section 40(a)(ia) since they are in the

nature of “interest‟ and tax is not withheld by the Indian taxpayer?

Decision:

• Interest is sum payable in respect of money borrowed or debt incurred. The bill discounting is a process

in which the sale consideration receivable on sale of goods is discounted, which is not debt incurred or

money borrowed.

• The Interest Tax Act, 1974 specifically includes discounting charges in the definition of interest.

However interest defined under ITA does not include discounting charges.

• Wherever the legislature was conscious of the fact that even the discount of bills of exchange is to be

included within the definition of interest, the same was basically so provided for, hence the omission of

these words in the definition provided under the ITA, enumerates the intention of the legislator to keep

the same out of the ambit of “interest‟ under the ITA.

Do discounting charges fall under the definition of “interest”?

12

• The same rationale is also laid down in the Circular no. 65 issued by Central Board of Direct Taxes in

relation to section 194A of ITA.

• Therefore, discounting charges are not in the nature of interest. Hence in the absence of Singapore

company's PE in India, the Indian payer is not under obligation to deduct tax at source u/s 195.

Accordingly, the same amount cannot be disallowed by invoking section 40(a)(i) of the ITA.

DCIT v. Cargill Global Trading (I) (P) Limited [2009] 34 SOT 424

TDS from payment of interest on time deposits by banks using CBS Software

13

CBDT vide Circular number 3/2010 dated 2 March 2010 has clarified on the issue of deduction of tax at

source from payment of interest on time deposits by banks using Core-Branch Banking Solutions (CBS)

software

• No tax is required to be withheld where:

‒ Interest on time deposits is calculated on daily or monthly basis and for macro monitory purpose only

‒ No constructive credit is given to the depositor‟s/ payees account

• Tax is required to be withheld on the income (exceeding limits specified under section 194A) where:

‒ Interest is accrued at the end of the financial year or at periodic intervals as per practice of the bank

or

‒ as per the depositor's / payee's requirement or on maturity or on encashment of time deposits;

whichever event takes place earlier

Sec 194C – TDS on Payments to Contractors

Is payment for hiring of vehicles a contractual payment or rent?

15

Facts:

• AO held that the assessee has deducted the TDS on payment made for hiring of vehicles for

transportation of its employees under the provisions of section 194C, whereas this arrangement falls

within the provisions of section 194I for rental of motor vehicles

• On appeal, the CIT(A) held that the assessee should not be treated the assessee is in default u/s 201(1)

as well also not liable for any levy of interest under section 201(1A)

Issue:

• Is payment for hiring of vehicles for transportation of employees liable to TDS under section 194C or

194I of the ITA?

Decision:

• The provisions of section 194Cshall apply to all types of contracts for carrying out work including

transport contract, service contract etc. Transport contract would also include contract for loading and

unloading of goods and also cover contracts for plying buses along with the staff

• The CBDT has, after examining the terms and conditions of the agreement between State Road

Transport Corporation and the owners of the private buses only, clarified that in such cases the

provisions of section 194C are applicable

• Provisions of section 194C do not apply to the payments made to the airline or the travel agents for

purchase of tickets for air travel of individual. The provisions shall, however, apply when the payments

are made for chartering an aircraft for carriage of passengers or goods

Is payment for hiring of vehicles a contractual payment or rent?

16

• Provisions of section 194I is confined to the payment for rent on hiring of land or building, furniture but

not for the transport vehicle particularly when the same is in the nature of providing and availing the

transport services

• The expression plant and machinery used in the explanation to section 194I refers to only the plant and

machinery used by the assessee in its business by hiring them but not the hiring of transport service

• The Tribunal also held that there was a force in the alternative contention of the assessee that the AO

cannot demand u/s 201(1) when the entire tax has been paid by the recipient of the amount by way of

advance tax and TDS to the revenue (number of decisions relied on)

ACIT (TDS) vs Accenture Services P Ltd.(2010-TIOL-618-ITAT-MUM)

Provisions of section 194-I is confined to the payment for rent on hiring of land or building,

furniture but not for the transport vehicle particularly when the same is in the nature of providing

and availing the transport services

Whether hire of trucks without contract for carriage is covered under Sec 194C?

17

Facts:

• The assessee hired trucks and made payment for transportation. The AO held that the assessee was

liable to deduct tax u/s 194C, in absence of which deductions had to be disallowed u/s 40(a)(ia)

• The above view taken by the AO was upheld by the CIT(A) but the Tribunal decided the matter in favour of

the assessee. As a result appeal was filed by Revenue before the High Court contending the that total

freight payments exceeded the amount stipulated u/s 194C(3) and TDS was liable to be deducted

Decision:

• The provisions of Section 194C come into play only where either a written or oral contract between the

parties for transportation and carriage of goods is established. A GR is equivalent to a contract which is

envisaged for the purpose of Section 194C. However, in order to prove the applicability of Section 194C, it

is further to be seen whether the contract in question has resulted in payment exceeding the prescribed

limits in a financial year

• There is no material on record brought by the AO to prove that there was any written or oral agreement

between the assessee and the transporter for carriage of goods. There is no material to establish that any

payment exceeded the prescribed limits during the financial year. As per the decision of the HC in case of

United Rice Mill Ltd (322 ITR 594) laid down that Section 194C cannot be invoked to hold the assessee

liable for deduction of tax only on the assumption that assessee was having agreement with the parties

through whom transportation of goods was carried out

T L Verma & Co. Pvt. Ltd. (2011-TIOL-170-HC-P&H-IT)

Do hire charges with respect to hire equipment automatically call for TDS u/s 194C?

18

Facts:

• As per revenue, hire charges in respect of equipment hired by the assessee contained a portion of labour

charges incurred by the owners towards operation of the same. Hence it was a composite contract of

hiring of vehicles/machineries along with labour. Consequently, Section 194C would apply

• CIT (A) took the view that, out of the total hire charges if 10% was treated as charges paid towards labour

element involved and TDS had not being deducted as required, the whole sum was to be disallowed

• The Tribunal, on the other hand, found that the total sum paid by the assessee was only by way of hire

charges for the equipment taken on hire and therefore, the relevant TDS provision applicable was only

Section 194I (section 194I was not applicable in AY 2005-06; the AY under considertaion)

Decision:

• The HC held that neither the AO nor the CIT(A) could assert that there was any material to suggest that

there was any contract between the assessee and those individuals, by way of a composite contract for

labour as well as hiring of the vehicles

• In the absence of any such acceptable material, the conclusion of the AO in treating the hiring of

equipment as one falling under the category of sub-contract for provision of labour or the conclusion of the

CIT(A) that at least 10% of the total payment would have been incurred by way of labour charges by the

respective owners, cannot be accepted

• Section 194I came to provide for TDS on respect of machinery/ equipments only with effect from 1.6.2007

and not applicable to his case since it relates to AY 2005-06

D Ranthinam (2011-TIOL-150-HC-MAD-IT)

Do facilities provided by hotels –fall under the term “carrying out work”

19

Facts:

• The assessee offers various facilities to its guest apart from boarding and lodging

• The question before the Bombay High Court was whether the same should be subject to TDS u/s 194C

Decision:

• The word “carrying out work” u/s 194C is limited to any work which on being carried out culminates into a

product or result (reliance was placed on the decision of the SC in case of Associated Cements)

• Circular 681 dated 3 March 1994 to the extent it applies to a customer availing the services of a hotel,

should be held contrary to section 194C

• The word work has to be understood in the limited sense and would extend only to the service contracts

specifically included in (the then) Explanation III to section 194C

East India Hotels Ltd and another v. CBDT and another (320 ITR 526)

All service contracts do not automatically fall under the purview of section 194C.

Sec 194H - TDS on Commission, Brokerage, etc

Can discount on supply of SIM cards and recharge coupons be termed as “commission”?

21

Facts:

• Taxpayer has appointed distributors for rendering services, such as, getting customers for the taxpayer,

collection of documents, delivery of SIM cards, collection of charges, etc

• Taxpayer has two types of transactions – 1) Providing prepaid connections and 2) Providing post paid

connections

• Under the post paid scheme, the taxpayer pays commission to distributors for services rendered, after

withholding tax under the ITA

• Under the prepaid scheme, the taxpayer supplies SIM cards and recharge coupons to distributors at a

discounted price

• The taxpayer is neither paying nor crediting any commission or charges in the account of the

distributors

• Distributors are not bound to sell the SIM cards or recharge coupons at the Maximum Retail Price.

Thus, discount cannot be treated as charges or commission. Hence, no taxes are required to be

withheld from the discount given to distributors

• Tax cannot be recovered from the discount, as it is not “paid” but is reduced from the price

Issues:

• Whether discount for supply of SIM cards and recharge coupons is “commission” liable to withholding of

tax under the ITA?

Can discount on supply of SIM cards and recharge coupons be termed as “commission”?

22

Decision:

• Supply of SIM card is only for the purpose of rendering continued services by the taxpayer to the

subscriber of the network. SIM card has no intrinsic value or use to the customer

• Distributor acts as a middleman by arranging for customers, collecting documents, etc. on behalf of the

taxpayer

• The taxpayer renders services to the subscribers based on contracts entered into between subscribers

and distributors. Thus, the distributor is an agent who canvasses business for the taxpayer

• In substance, discount given at the time of supply of SIM Cards or recharge coupons to the distributors

is payment received by the distributor for services rendered to the taxpayer

• Income earned by the distributor is not in course of purchase / sale of goods, but it is a consideration

received for services rendered to the taxpayer

• Terminology used is immaterial and payment received by the distributor is payment for services

rendered, which falls within the purview of commission as per section 194H

• Tax needs to be withheld under section 194H even though the “discount” is not paid but is reduced from

the price

Vodafone Essar Cellular Limited (332 ITR 255)

“Discount” may not paid but is reduced from the price paid to the distributor. This discount takes

the form of brokerage and should be subject to TDS

Whether difference between commercial price and published price can be classified as commission or not ?

23

Facts:

• Airlines had an agreement with agents to sell tickets at the minimum fixed commercial price which was

lower than the published price

• However, agents could sell at a higher price subject to a maximum of published price at their discretion

• As per IATA rules, agents were entitled to commission at 9% on the published price

• Airlines deducted tax on the payment of this 9% commission. However, Revenue contended that the

difference between commercial price and published price was also in the nature of commission and liable

to TDS

Decision:

• The agents of the assessee (airline) were entitled to sell tickets at any price between the fixed commercial

price and the published price. As a result the assessee would have no information regarding the final rates

at which tickets were sold

• It would be impracticable and unreasonable to accept the assessee to collect feedback from its numerous

agents on the prices at which tickets are sold

• Thus, it was held that the difference between the commercial price and the published price could neither

be considered as commission or brokerage in the hands of the agents and hence was not liable to TDS

CIT v. Qatar Airways (332 ITR 253)

Commission and Supplementary Commission received by travel agents

24

• It was held that tax should be deducted at source under Section 194H on amount available to agents

being difference between airfare fixed by Airlines and price at which agents are enabled to sell tickets

Around the World Travels & Tours Pvt. Ltd. vs. UOI (141 Taxman 53) (Mad.)

• Held that supplementary commissions retained by the travel agents over and above the net fare made

over to Airlines is liable to tax deduction at source under Section 194H as commission and interest

under Section 201(1A) is leviable in case of default

• Air tickets sold by airlines company to the travel agent „at a concessional rate‟ held to be a sale

transaction on principal to principal basis, does not amount to commission, not liable to TDS

CIT vs. Singapore Airlines Ltd. & Other airlines (22 DTR 129) (Del.) (2009)

Sec 194I - TDS on Rent

Roaming costs – technical services/ rent?

26

Facts:

• AO noticed that the assessee had failed to deduct tax at source on payments made by the assessee

company to other mobile service providers towards „national roaming costs‟ and observed that payment

of national roaming costs made to other cellular service providers for allowing use of their network

would amount to payment made for technical services within the meaning of section 194J and the

assessee ought to have deducted tax from such payments u/s 194J

• Alternatively, the AO also contended that these payments should be treated in the nature of hiring of

plant and machinery and, therefore, section 194I would apply

• CIT (A) stated that section 194I was applicable and the national roaming charges paid by the assessee

to other cellular service providers should be treated as payment of rent for the use of the equipment of

the other cellular service providers. It is not necessary that the payer of the roaming charges or the rent

should be in exclusive domain and control of the asset

Issue:

• Should the payment by one service provider to another towards roaming charges be considered

towards usage of services or equipment?

Roaming costs – technical services/ rent?

27

Decision:

• The explanation of the term „rent‟ means any payment by whatever name called under any lease, sub-

lease or tenancy or „any other agreement or arrangement for the use of‟ assets mentioned therein. The

emphasis of the provision is upon the „use‟ of the asset and so long as this condition is satisfied the

payment would be classified as „rent‟

• The intention appears to rope in payments under a lease, sub-lease, or tenancy all of which involve a

transfer of interest in the property even if such payments are termed differently by the parties.

• Further, the Tribunal observed that the assessee is placed in a position of a mere facilitator between its

subscriber and the other service provider, facilitating a roaming call to be made by the subscriber. The

assessee cannot be said to have used the equipment which is involved in providing the roaming facility.

The assessee collects the roaming charges from its subscriber and passes it on to the other service

provider.

• The Tribunal also relied on the clarification issued by the CBDT in Circular No.715 dated 8th August

1995 wherein the board stated that section 194I would not apply to rate-contract agreements. The

Board itself has recognized that rent is something which is paid for earmarked premises, and in the

case of roaming charges, a subscriber does not get any earmarked service provider and the assessee

also does not commit itself to the subscriber to provide for any particular service provider. The choice of

the service provider who will provide the roaming facility to the subscriber is left to the subscriber.

Therefore, the payment of roaming charges by the assessee to the other service providers cannot be

considered as rent within the meaning of section 194I and there was no liability on the part of the

assessee to deduct tax from the same under that section.

Roaming costs – technical services/ rent?

28

Decision:

• The CIT(A) had not decided the issue of applicability of section 194J. Hence the AO should examine the

issue afresh in light of the decision of the Supreme Court in case of Supreme Court in CIT vs. Bharti

Cellular Ltd (330 ITR 239)

• Finally, the Tribunal also stated that after the judgment of the Supreme Court in the case of Hindustan

Coca Cola Beverage (P) Ltd. vs. CIT (293 ITR 226), there is no merit in the contention that taxes can be

recovered from the deductor even though taxes were paid by the deductees. If upon verification it is

found that the taxes have been paid by the payees fully in respect of the roaming charges received by

them from the assessee, nothing survives

Vodafone Essar Ltd. (9 taxmann.com 31) (Mumbai ITAT)

Payment by of roaming charges by one service provider does not fall under the definition of

“rent” as defined u/s 194I of the ITA. If complete tax payment has been done, then there is no

merit in the contention that taxes are to be recovered from the deductor.

Infrastructure claims paid to franchisees vs. „Rent‟ u/s

194I

29

Facts:

• The assessee company is engaged in the business of providing computer education and training and

for that purpose, it had entered into various agreements with the franchisees for running the education

centres at various metro cities. The assessee company for the purpose of convenience, had

categorised the fees shared (i) as marketing claim and (ii) as infrastructure claim

• AO treated the infrastructure claims paid to the franchisees as “rent paid” and held that the assessee

company was liable to deduct tax u/s 194I

Decision:

• Held that the agreement was in fact a franchisee agreement and it could not be said that the rent was

being paid by the assessee company to the licensee franchisee. There was no payment of rent by the

assessee company to the licensees/franchisees and hence the provisions of section 194I cannot be

made applicable

CIT vs. NIIT Ltd. (184 Taxman 472) (Del.)

Sec 194J - TDS on Fees for Professional or Technical Fees

Meaning of the term of „technical services‟

31

Facts:

• The assessee-company is a shipping agent handling vessels at various Indian ports

• Assessee made payment to NSICT

• NSICT entered into technical service agreement with P & O Australia under which P & O Australia was

to provide technical know-how to the assessee

• AO opined that NSICT was rendering / providing technical and specialized services to its customers

including the assessee along with machines and technical manpower and hence tax was deductible u/s

194J

Issues:

• Whether the payment would be covered u/s. 194J and liable for TDS?

Meaning of the term of „technical services‟

32

Decision:

• Payments made to NSICT were for container movement and there were no professional or technical

services involved in the movements of containers

• The contention was restricted only to the technical services and not towards managerial or

consultancy services. AO has not pressed the later part of the Expl. 2, which deals with

provision of services of technical or other personnel

• The expression „other personnel‟ in this provision must fall within the category of `services of technical

personnel‟. It cannot be considered as any personnel unrelated to the managerial, technical or

consultancy services

• NSICT personnel, may not have possessed some technical expertise, and hence cannot be considered

as `other personnel‟

• Both the `managerial‟ and `consultancy‟ services are possible with human endeavor, the word `technical‟

should also be seen in the same light.

• There should be direct and live link between payment and receipt/use of technical services/information

Merchant Shipping Services Pvt. Ltd. [2011] (9 taxmann.com 17) (Mum.)

To qualify u/s.194J, payment for technical services should be a consideration for acquiring or

using technical know-how, simpliciter provided or should be made available by human element

Payments to NSE towards leaseline/VSAT/transaction

charges

33

Facts:

• While making the assessment, the AO made disallowance u/s 40(a)(ia) for non-deduction of tax on

payment made to NSE for lease line charges, VSAT charges and transaction charges

• AO stated that the services rendered by the stock exchange are technical in nature and therefore section

194J is applicable

• In appeal, CIT (A) allowed the appeal of the assessee following the decision of the I.T.A.T Mumbai in the

case of Kotak Securities Private Limited

Decision:

• CIT (A) has rightly deleted the addition applying the decision of Kotak Securities Private Limited and

Angel Broking observing that transaction fees paid to the stock exchange could not be said to be fees

paid in consideration of stock exchange rendering any technical services to the assessee. Therefore,

provisions of section 9(1)(vii) and section 40(a)(ia) are not applicable

Vinod K Nevatia (2011-TIOL-65-ITAT-MUM)

Alchemy Share & Stock Brokers Pvt. Ltd. (2011-TIOL-49-ITAT-MUM)

Ashok Kumar Damani (2011-TIOL-10-ITAT-MUM)

Third Party Administrator‟s(TPA‟s) – Scope u/s 194J

34

Facts:

• The TPA provides services such as hospitalization services, cashless access services, processing and

settlement of claims

• The TPA makes payment to hospitals for rendering medical services to the policy holders

Decision:

• Though a hospital by itself, being an artificial entity, is not a “medical professional”, it provides medical

services by engaging the services of doctors and qualified medical professionals. These are services

rendered in the course of the carrying on of the medical profession

• The TPA is required to deduct tax at source under section 194J

• Circular No. 8/2009 dated 24.11.2009 is applicable

• The circular is set aside to the extent it states that a failure to deduct tax on payments made by TPAs to

hospitals u/s 194J will necessarily attract a penalty u/s 271C

Dedicated Health Care Services TPA vs. ACIT (324 ITR 345) (Bom.)

Sec 195 – Withholding Tax on Payments to Non Residents

Payments to non-residents would be subject to

withholding tax only if the income is chargeable to tax

36

Facts:

• The revenue authorities raised an additional contention before the High Court that unless the payer

makes an application to the tax officer under Section 195(2) and has obtained a permission for non-

deduction of the tax at source, it was not permissible for the payer to contend that the payment made to

the non-resident did not give rise to “income” taxable in India and that there was no need to deduct any

tax

Issues before Supreme Court:

• Whether the HC was right in holding that the moment there is remittance the obligation to deduct tax at

source arises

• Whether merely on account of such remittance to the non-resident abroad by an Indian company, could

it be said that income chargeable to tax under the ITA arises in India

Decision:

• Section 195 imposes a statutory obligation on any person responsible for paying to a non-resident, any

interest (not being interest on securities) or any other sum (not being dividend) chargeable under the

provisions of the ITA, to deduct income tax at the rates in force. Section 195 contemplates not merely

pure income payments, but also covers composite payments which has an element of income

embedded or incorporated in them

• A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not

chargeable to tax under the ITA

Payments to non-residents would be subject to

withholding tax only if the income is chargeable to tax

37

Decision:

• “Sums chargeable” under the provisions of the ITA would refer to such amounts, which should have an

element of income in them as required under the provisions of the ITA, and the treaty provisions, and

hence would be liable to tax under the ITA

• The expression “sum chargeable under the provisions of the ITA” has to be read in conformity with the

charging provisions, i.e., Sections 4, 5 and 9

• Where the payment made by the resident to the non-resident was an amount which was not chargeable

to tax in India, then no tax is deductible at source even though the assessee had not made an

application

• The application of Section 195(2) pre-supposes that the person responsible for making the payment to

the non-resident considers that tax is payable in respect of some part of the amount to be remitted to a

non-resident, but is not sure as to what should be the portion so taxable or the amount of tax to be

deducted

• The obligation to deduct tax at source is limited to the appropriate proportion of income chargeable

under the ITA forming part of the gross sum of money payable to the non-resident

• The SC rejected the contention of the department, that the assessee make an application in every case

of remittance even when the income has no territorial nexus with India or is not chargeable in India

GE India Technology Centre P.Ltd. v. CIT and another (327 ITR 456) (Supreme Court)

A payer making a remittance to a non-resident, could make an application to the tax officer, if he

not sure as to what should be the portion so taxable or is not sure as to the amount of TDS

Refund of tax deducted u/s 195 to the deductor – liable to interest u/s 244A?

38

Facts:

• The assessee is a company based in Singapore. It made payments for obtaining a right from G to

broadcast various cricket matches in various countries including India and did not withhold any tax from

the payments made

• The revenue held that the payments made to G are in the nature of “Royalty” and hence liable to tax in

India. The assessee was held to be assessee in default for non deduction of tax at source. The CIT(A)

and the Tribunal held that the payment are not liable to tax

• Pursuance of the Tribunal order, the assessee applied to the AO for NIL withholding tax certificate u/s

195(2). The AO directed the assessee to withhold tax @10.96% in respect of payments made to GCC.

The assessee accordingly deduced the tax at source

• Aggrieved by the order of the AO, the matter carried to CIT(A) and the CIT(A) by following its own order

held that the assessee is not liable to withhold tax at source in respect of payments made to G. The

Tribunal confirmed the order passed by the learned CIT(A)

• While giving effect to the first appeal late order, the assessee was given refund of the taxes withheld

without any interest u/s 244A. Against this order the assessee appealed before the CIT(A) who held that

the assessee is entitled to get interest on refund u/s 244A

Refund of tax deducted u/s 195 to the deductor – liable to interest u/s 244A?

39

Decision 1:

• Firstly the payer is not a resident of India and secondly the liability to pay such Royalty has not been

incurred in connection with and was not borne by the PE of the payer in India. Therefore, there being no

economic link between the payment of Royalty and Indian PE , the royalty does not arise in India having

regard to the provisions of Article 12(7) of the Treaty

• Hence even if it is assumed that the payment for broadcasting cricket constitutes Royalty, such royalty

does not arise in India within the meaning of provisions of Article 12(7) of the Tax Treaty

Decision 2:

• The deduction of tax is not voluntarily on the part of the assessee but as a result of the order passed by

the AO u/s 195. When the deduction was made by the assessee in pursuance of the order of the AO

passed u/s 195 and the refund was made as a result of the order passed by the CIT(A) and falls under

the provisions of section 240

• It is clear from the order of this Tribunal in case of Star Cruise that it had decided this issue after

considering the decision in the case of Godrej Industries L td V/s DCIT and held that the payment made

by the assessee on demand under the provisions of the ITA and the refund also become due to the

assessee under the provisions of the ITA. When it has been held that the refund become due as per the

provisions of ITA, the provisions of section 244A are applicable on the refund made to assessee and

accordingly the assessee is entitled for interest u/s 244A

DDIT (International Taxation) v. MSM Satellite Satell i te (Singapore) P Ltd

Set Satellite (2010-TII-159-ITAT-MUM-INTL)

Payment of daily overseas allowances to foreign

company

40

Facts:

• The taxpayer had entered into a technical assistance agreement with Mazda Motor Corporation

(“Japanese company”) envisaging transfer of rights to assemble and manufacture vehicles in India

• As per the agreement, the Japanese company provided training to the engineers of the taxpayer. The

consideration paid by the taxpayer was by way of daily overseas allowance on account of stay of the

personnel of the Japanese company.

• The taxpayer filed an application under section 195(2). No Objection Certificate was granted permitting

no deduction of tax in respect of the payments made to the Japanese company.

• The AO held that the payment made to the Japanese company was assessable to tax as fees for

technical services and that the taxpayer was liable to deduct tax at source..

Issues:

• Whether the payment of daily overseas allowance by the taxpayer to the Japanese company and the

expenses incurred by the taxpayer on the Japanese engineers during their stay in India were in the

nature of fees for technical services?

Payment of daily overseas allowances to foreign

company

41

Decision:

• The High Court referred to the following observations of the Tribunal:

‒ Imparting of training does not find any mention either in clause (vi) or (vii) of section 9(1) of the ITA

‒ The payments made by the taxpayer to the Japanese company were to meet out-of-pocket expenses

of the engineers sent by the Japanese company for training the workers and technicians of the

taxpayer. Such payments do not partake of the character of royalty or fees for technical services

‒ There was no evidence on record to substantiate the assumption that part of the remittance was

retained by the Japanese company as a surplus which amounted to commercial profits. In the

absence of any evidence on record, it would not be appropriate to assume that the entire money

received from the taxpayer was not dispersed among the Japanese engineers.

• The High Court observed that the certificate granted under section 195(2) of the ITA was never

cancelled under section 195(4) of the ITA, in absence of which the taxpayer was not required to deduct

tax at source and could not be treated as assessee in default.

• If the taxpayer was not required to deduct tax at source and could not be declared assessee in default,

the question whether the payment was in the nature of fees for technical services or in the nature of

reimbursement for the expenses incurred or whether the Tax Treaty overrides the provisions of the ITA,

need not be gone into

Swaraj Mazda (10 taxmann.com 178 ) (Punjab & Haryana HC)

If the assessee is freed from the responsibility to deduct tax on a certain payment, the

nomenclature of that payment is irrelevant

Prior approval of AO not mandatory if a valid CA certificate is obtained

42

Facts:

• On the basis of a CA certificate, the assessee made payment to a US based company without deducting

tax at source and without ascertaining from the A.O u/s 195(2) as to whether tax was required to be

deducted or not

• The assessee submitted that payment for 'off the shelf' software did not have any tax implications since

what was purchased was only a copyrighted article and not copyright in the software; hence he submitted

that no tax was required to be deducted at source

Decision:

• Copyright article is distinct from copyright per se and payment for copyright article, therefore, cannot be

treated as payment of copyright, which could be brought to tax

• Liability to deduct tax is a vicarious liability and it can be invoked only when primary liability survives.

Since the US company itself did not have any tax liability in respect of the payments, the vicarious tax

liability did not survive either

• In any event, in accordance with the procedure stipulated by the CBDT, the assessee had duly obtained

the CA certification regarding applicability of tax withholding and based on the certification, made the

remittance for deduction at source

• When no tax is indeed payable by the recipients of the income, a demand u/s.201(1A) cannot be raised

on the assessee merely because he had not obtained prior approval of the AO u/s 195(2)

ADIT Mumbai vs Tata Communications (2010-TII-157-ITAT-MUM-INTL)

Payment towards equipment hired from overseas entity

43

Facts:

• The assessee was engaged in the business of marine dredging and port construction. It was awarded a

contract at Visakhapatnam Port Trust. For the purpose of executing the contract of dredging the

assessee hired equipment from MA, Netherlands. During the relevant AYs, the assessee made

payments to „MA‟ in respect of usage of the equipment

• The AO was of the view that the equipment hired by the company constituted PE of the Netherland

entity, MA in India.

• The AO held the assessee to be in default within the meaning of section 201 since it had not deducted

tax at source u/s 195

• On appeal, the Commissioner (Appeals), however, set aside the order of the AO

Issues:

• What is the characteristic of the payment made to the overseas entity?

Payment towards equipment hired from overseas entity

44

Decision:

• The Tribunal held that the payment made by the assessee to the Netherlands company was nothing but

hire charges

• Section 195 provides for deduction of tax at source when the payment is made to non-resident which is

chargeable to tax under the ITA. Therefore, if the payment which made to foreign company was

chargeable to tax, the assessee had to deduct tax at source

• For the purpose of taxing to income of the foreign company, the foreign company shall have a PE in

India. Hiring equipment in the territory of India on could not be construed as a PE of a foreign company.

For the purpose of PE of a foreign company, the foreign company should have a permanent place in

order to control its business activity. Merely because the equipment was equipped with place for

residence of its crew and operator and installed with the latest communication facilities, it does not

mean that it was a PE

• In the absence of any PE, the payment made by the assessee to MA was not liable to be taxed in India,

and, therefore, there was no requirement of deduction of tax under section 195

DDIT v. Dharti Dredging & Infrastructural Ltd (9 taxmann.com 327) (Hyd ITAT)

Equipment hired from an overseas entity as such cannot be held to be the PE of the entity.

Sec 197 – Certificate for Lower Deduction

Certificate u/s 197

46

Facts:

• The assessee is a consortium consisting of Larsen and Toubro Ltd (L&T), an Indian entity and Scomi

Engineering, a Malaysian entity

• It has been awarded a contract by MMRDA

• The profit sharing ratio between the two members is 60 (L&T):40 (Scomi) taxable at the rate of 33.99%

and 42.23% respectively

• It filed an application under section 197 requesting revenue to issue a certificate authorizing MMRDA to

deduct tax at the rate of 0.11%

• The Revenue rejected the application by holding that the calculation mechanism under Rule 28AA failed

since past three years‟ profit figures were not available and because the assessee had not filed e-TDS

returns

• The assessee moved the Commissioner of Income-tax (TDS) (“CIT”) for revision u/s 264.

• The CIT(A) rejected the plea on the grounds that when an AO rejects an application u/s 197, he does

not pass an “order” as envisaged u/s 264 and hence a revision of the same is not maintainable

Issue:

• If the profits of the past 3 years are not available , will the mechanism under Rule 28AA fail? Can an

application u/s 197 rejected by the AO never be revised? Does non filing of e-TDS returns result in

rejection of an application u/s 197?

Certificate u/s 197

47

Decision:

• The CIT was in error in holding that the rejection of an application by the AO did not result in an order.

• The AO was in error in coming to the conclusion that the mechanism contemplated under Rule 28AA

would break down in the case of the assessee since financials of the past three years were not

available

• Sub clause (i) of Rule 28AA (1) refers to the average rate of tax as determined by the total tax payable

on estimated income as reduced by advance tax and TDS as a % of the payment referred to in section

197 for which application has been made. Sub clause (ii) refers to the average of the average rates of

tax paid by the assessee in the last 3 years. Hence in the present case sub clause (ii) will not apply and

sub clause (i) will apply

• Failure of assessee to file e-TDS return may result in independent consequence in law including penal

consequences under section 271 but does not justify rejection of an application filed for lower deduction

of tax under sec 197

Larsen & Toubro Ltd. v ACIT (326 ITR 514)

Non availability of financial statements of the past 3 years cannot result in failure of the

mechanism under Rule 28AA. Rejection by the AO of an application u/s 197 is eligible for

revision u/s 264 of the ITA.

Sec 40(a)(i) – Consequences of failure to deduct TDS

Applicability of section 40(a)(i) to payment towards off-the-shelf software

49

Facts:

• Assessee, a dealer of Microsoft products, purchased software from Microsoft and sold the same in the

local market. The AO treated the payment as royalty and on failure to deduct tax from the same,

disallowed the expenses in terms of section 40(a)(i)

• The CIT(A) confirmed the AO's order but the Tribunal deleted the addition

Decision:

• The High Court held that the ITAT dealt with the transaction of the assessee by examining the true nature

of it. The assessee has been purchasing the software from Microsoft and sold it further in Indian market.

By no stretch of imagination it would be termed as "royalty"

• The assessee acted as a dealer of Microsoft and hence Section 40 (a)(i) has no application at all

Dynamic Vertical Software (2011-TII-08-HC-DEL-INTL)

Payment towards off-the-shelf software – a twist in the tale

50

Facts:

• MS Corp entered into agreement with its subsidiary G to grant exclusive license for marketing MS

products.

• G, in turn, entered into a license agreement with M in Singapore under which M (a group enity) was

granted non-exclusive licence to:

reproduce MS software in Singapore and distribute them to retailers or to MS Corp or to

subsidiaries of MS Corp and

license or sublicense the right to reproduce Microsoft software to certain end users for their

internal use, for which M paid consideration to G for each copy.

Decision:

• The Delhi Tribunal in the case of Ms Corp held that income for the right to use (“RTU”) of packaged

software should be regarded as royalty income taxable in India.

• It held that the real transaction of the granting of the licence in respect of copyrights in computer

programmes had been camouflaged by entering into a chain of the agreements between MS Corp and the

group entities. On an in-depth analysis, it was evident that the end users made payments in respect of the

granting of licence of copyright in computer programmes. Hence, the payments made by end-users were

taxable as royalty in the hands of G.

Gracemac Corporation, M/s. Microsoft Corporation, M/s Microsoft Regional Sales Corporation I. T. vs

Asstt. Director of Income-tax ([2011] 8 ITR (Trib) 522)

Applicability of section 40(a)(i) to overseas payments and provision for expenses

51

Facts:

• The assessee is a public limited company. It is engaged in the business of software development.

During the year, the assessee claimed the following deductions:

‒ Bandwidth charges paid to foreign companies for data communication.

‒ Subscription charges to foreign companies

‒ Provision for warranty for post sales customer support

• The AO disallowed the above on the grounds that they were covered u/s 40(a)(i) and the assessee was

liable to deduct tax on the same.

• The CIT(A) upheld the action of the AO.

Issues:

• The contention of the assessee before the AO. Was that the above mentioned payments made tare not

in the nature of royalty, fees for technical services or relate to any item of expenditure covered u/s

40(a)(i)

Applicability of section 40(a)(i) to overseas payments and provision for expenses

52

Decision:

• The payments towards bandwidth charges are not in the nature of managerial, consultancy or technical

services nor is it for the use of or right to use industrial, commercial or scientific equipment. The service

provides only ensure that the sufficient bandwidth is available on an ongoing basis to the ultimate users

to uplink and downlink the signals

• As regards the subscription charges, the Tribunal relied on its own decision in the assessee‟s own case

where it was held that the information was available on subscription to anyone willing to pay .It was

copyrighted information and could not be passed on to anyone else. There was no license granted to

the assessee to use in any manner or quote to anyone else. The access was restricted to specific

individuals named by the assessee. The recipient did not have any PE in India. Further such an access

to data base could not fall within the scope of Article 12(3)(a), as found in the DTAA with USA.

• As regards the provisions for warranties, the Tribunal relied on its own decision in the assessee‟s own

case where it was held that the assessee is required to render post sales customer services in the

nature of claims within the warranty period. Though no precise base is indicated by the assessee, yet it

can be considered to be reasonable having regard to the claim made in the part.

• provision made for the warranty liability was an ascertained liability and that it could not be treated as a

contingent liability.

Infosys Technologies Ltd. v. DCIT (10 taxmann.com 1) (Bang ITAT)

Payments to foreign entities towards bandwidth and subscription charges are not covered under

the purview of section 40(a)(i) of the ITA. Provision for warranties is not a contingent liability

Sec 199 –Tax Credit

Does the method of accounting impact the year of TDS credit?

54

Facts:

• The assessee is a firm and engaged in business of financing and follows cash system of accounting

• It gave a loan to a company on interest. The borrower while crediting the interest deducted TDS and

issued TDS certificate

• The assessee claimed the credit of TDS without offering the corresponding income to tax . The AO

disallowed the claim of the assessee .The CIT (A) allowed the appeal of the assessee

Issue:

• When should be TDS credit be allowed to the tax payer?

Decision:

• As per the provisions of the ITA tax deduction has to match – in time – the earlier of payment or accrual

• „Hence TDS need not march alongside the corresponding income which may be offered to tax by the tax

payer on accrual or receipt as the case may be

• As a result there is a time mismatch between the tax deduction and the accrual of tax liability.

• However, section is very clear. It provides for availability of tax credit in the year for which the

corresponding income is assessable.

ITO Business Ward –II (4) v. M/s Shri Anupallavi Finance & Investments (2011-TIOL-78-ITAT-MAD)

Credit for TDS to the deductee if refund has been granted to

the deductor

55

Facts:

• The assessee – a tax payer of the USA, was in the business of supply of copyrighted software for

telecommunication projects. It received consideration from R for the supply of software

• R made an application to the AO to make remittance without TDS since the payment was for

copyrighted article and not a copyright.

• This request was declined. R deducted tax as per the directions of the AO and deposited it with the

govt. R issued a TDS certificate to the assessee

• R was successful in appeal for NIL TDS and was granted full refund of taxes paid

• The assessee claimed credit for the said tax deducted by R in its return of income. The AO held that

since the tax had been refunded to R, the TDS certificate was not valid and the assessee would not get

credit for the tax.

Issue:

Can the lawful implications of a valid TDS certificate can be declined if R has been refunded the taxes

deposited with the govt?

Credit for TDS to the deductee if refund has been granted to

the deductor

56

Decision:

• The Tribunal held that all the requirements for grant of TDS had been complied with. The fairness of the

procedures was not questioned by the AO

• The refund to the deductor is not prescribed under the law, but appears to be an administrative

exercise. Approval from the assessee was not taken before granting refund to R. This cannot curtail the

rights of the assessee

• Since the taxes have been deducted from the payment made to the assessee and it is also in receipt of

TDS certificate, the credit for TDS cannot be declined on the basis of an administrative action of refund

which is neither envisaged by the provisions of the ITA nor in the control of the assessee.

• Tribunal directed the AO to grant credit to the assessee on the basis of original TDS certificates

produced and in accordance with the provisions of the ITA uninfluenced by any refunds subsequently

granted to R

• The Tribunal observed that the above directions should not be construed to affect the remedies that the

tax department may pursue qua the tax deductor

Lucent Technologies GRL LLC v DCIT (9 taxmann.com 182) (Mumbai ITAT)

Refund made to tax deductor, even if wrongful, has no adverse impact on rights of a person

from whose income taxes are so deducted and to whom tax deduction certificate under section

203 is already issued

When the payer and receiver of an income is the same

person

57

Facts:

• In the return of income file by the assessee - a non- resident bank, the head office had credited the

interest received from the branch as income and offered the same for taxation while the branch had

debited the same in its accounts and claimed as expense

• The A.O noticed that while interest paid by the Indian branch to the head office was not assessed as

income of the foreign Bank on the ground of payment to self, credit was given for the tax deducted at

source by the branch. Accordingly, through a rectification order u/s 154, he held that that the assessee

was not eligible for credit of tax deducted on interest payment made to Head Office

• In appeal, the CIT(A) decided against the AO

• Aggrieved, the Revenue appealed to the Tribunal and submitted that the consolidated return filed for the

head office and branch office was assessed as such and , as no income on account of interest was

taxed, the benefit of TDS also could not be granted in terms of the existing section 199

Issues:

• Payment of interest by the Branch Office to the Head office was nothing but a payment to self. Should

the resultant tax deducted on such payment be considered as payment of tax by the assessee?

When the payer and receiver of an income is the same

person

58

Decision:

• The Tribunal held that the Head Office and Branch Office filed a consolidated return of income and

assessment was done accordingly. Therefore the inter se transactions have to be considered as having

not actually taken place

• The deduction and payment of tax at source by the Branch Office in such circumstances will constitute

payment of tax by the assessee as there is no outside recipient of the interest

• Section 199 provides that the benefit of TDS shall be allowed to the recipient of the income in the year

in which the income on which such tax was deducted, is assessable

• If the department‟s contention was accepted that the assessee should not be allowed the benefit of TDS

against its tax liability it would mean that the tax actually paid by the assessee to the Central

Government would never be adjusted against any tax liability

• Every deduction of tax at source pre-supposed, the existence of two distinct persons and the taxability

of income in the hands of the recipient. If the payer and receiver of an amount was the same person,

naturally the amount of tax deducted and paid by the assessee would partake of the character of tax

paid by the assessee against its tax liability. Thus the AO was not justified in initiating rectification

proceedings on this count

ADIT, Mumbai Vs M/s Antwerp Diamond Bank

If the payer and receiver of an amount is the same person, tax deducted and paid by the payer

would be considered as tax paid as against its tax liability

When the payer and receiver of an income is the same

person

59

Principles of taxation vis-à-vis payments by branch to HO

• The Kolkata High Court was required to adjudicate on the issue of tax deductibility of the interest paid

by the Indian branch of ABN to its HO, under the provisions of the India Netherlands tax treaty.

• The Kolkata High Court indicated that there were principally two issues that needed to be considered in

the appeal:

First, whether the interest paid was to be allowed as a tax deduction in computing the profits of

the Indian branch?; and

Second, whether the Indian branch was required to withhold tax under section 195 of the Act,

while paying the interest to the HO?

• The Kolkata High Court has held that the interest paid by the Indian branch of ABN to its HO was tax

deductible in the hands of the branch while computing the profits of the branch, and the branch was not

required to withhold tax on the interest paid to the HO as the interest was not chargeable to tax in India

under the provisions of the India-Netherlands tax treaty.

ABN AMRO Bank NV (Kolkata High Court) 23 Dec, 2010

Other Developments

Payments to overseas agent

61

Facts:

• Assessee was engaged in the business of entertainment, event management and marketing and

organized performances of renowned foreign artistes in India

• For engagement of international artistes the assessee had entered into an agreement with two

proprietary concerns of C, a UK resident, who acted as an agent to and in coordination with several

worldwide event management companied offered artiste management services across the world

• For various international artistes engaged by the assessee, it paid remuneration for their services

rendered in India and reimbursed expenses in connection with their visit and performances in India such

as travel cost, visa etc

• It also paid commission charges to C for services rendered by it in engaging various artistes

• The assessee deducted tax at source in respect of payments made for remuneration of foreign artistes

but not on expense reimbursement of artistes and commission payment to C

• The AO took the view that all payments were to be looked as a single consideration for payment to

artistes and the bifurcation was to avoid taxes. As a result, AO contended that tax is liable to be

deducted on all payments. However, CIT (A) ruled in favour of the assessee

Issues:

• Whether payment of commission charges to C and reimbursement of expenses of artistes were liable to

tax deducted at source

Payments to overseas agent

62

Decision:

• The Tribunal noted that agreements with C showed that C had authority to enter into an agreement with

the assessee on behalf of the artiste. It stated that the agent acted with acumen and skills to negotiate

with such performers. Based on the nature of deals, time and effort involved C was entitled to

commission was his services and there was nothing on record to prove that commission payable to C

was in fact payment for performance of artistes

• Further, it was held that payment of commission was not covered under article 18 of the DTAA between

India and UK as C had neither taken part in any events performed in India nor engaged in any personal

activities in India

• Also, it was not liable to tax under article 7 of the DTAA between India and UK as C had no permanent

establishment in India

• Tribunal also held that reimbursement of expenses to artistes was also not liable to have tax deducted

at source

ADIT (International Taxation) v. Wizcraft International Entertainment P. Ltd. ( [2011] 8 ITR (Trib) 334)

Payment made to overseas agent of overseas artistes does not take the character of payment

to the artistes but is taxable as business income of the agent

Payment of statutory obligation would not constitute a business expenditure

63

Facts:

• The assessee claimed a deduction in respect of TDS paid on foreign remittance by F, which had merged

in it

• The amount represented the demands raised by the ITO under section 201, in respect of alleged non

deduction of tax at source from remittances made by the assessee to Hansons Pacific (S) Pte Ltd,

Singapore

• The assessee claimed deduction of this amount, which was an additional payment by the assessee in

respect of remittances to Hansons, as expenses in the AY 2004-05. The assessee claimed that “the

aforesaid payment is not a payment of tax liability of the appellant but a payment to avail services from

Hansons which, as per the understanding with Hanson, the appellant was liable to bear”

Decision:

• Law is well settled that a tax withholding liability raised under section 201, in respect of remittances made

abroad, cannot be allowed as a deduction.

• Reliance placed on the decision of the Supreme Court in the case of India Aluminium Co Ltd Vs CIT (79

ITR 514) where it was held that whether a payment made under statutory obligation because assessee

was in default could not constitute expenditure laid out for purposes of its business and hence, same was

not allowable under that section

RMC Readymix India Pvt. Ltd. (2011-TIOL-81-ITAT-MUM)

Interest u/s 234B due to lower deduction as per an order

issued u/s 195

64

Facts:

• Assessee a non-resident company received royalty from its Indian subsidiary and offered the same to

tax. It had also received income from the subsidiary for providing IT infrastructure supply services and IT

support

• On an application u/s 195(2) by the Indian subsidiary the A.O directed that 20% of the same was

chargeable to tax in India. Accordingly, the subsidiary deducted tax @ 20% of the gross receipts

• AO concluded that not only the gross receipts were chargeable to tax in India but also the other

payments including employee salaries and equipment and maintenance charges were taxable in India

as royalty at the rate of 15 %. AO raised a demand for tax as well as interest on the advance tax

payable but not paid. CIT(A) confirmed the order of the AO.

• CIT(A) held that if its plea were to be accepted, the deductee would not be required to pay interest u/s

234B and would also not be liable to pay interest u/s 201(1A) because it has acted in compliance with

the withholding order u/s 195(2), thereby causing loss of revenue to the exchequer

Issue:

• Is the assessee liable to interest u/s 234B for the difference in tax payment due to lower deduction

under a 195 order?

Interest u/s 234B due to lower deduction as per an order

issued u/s 195

65

Decision:

• The assessee has not approached the deductor to deduct the tax at lower rate. It is the deductor who

approached the department claiming that the payments to be made to the assessee are not chargeable

to tax in India and to determine the chargeability.

• where all payments made to non-resident are subject to deduction of tax at source u/s 195, the interest

u/s 234B is not leviable on the non-resident.

M/s Texas Instruments Incorporated v DDIT (International Taxation) (2011-TII-16-ITAT-BANG-INTL)

When tax has been deducted at the rate specified in an order u/s 197, the assessee cant be

held liable to pay interest u/s 234B on account of short deduction as may be held at the time of

assessment

TDS on reimbursements

66

Amounts received towards reimbursement of expenses can, under no circumstances, be regarded as a

revenue Receipt and is not chargeable to income-tax (Reliance was placed on the decisions of the

Kolkata HC in the case of Dunlop Rubber Co. Ltd and that of the Delhi HC in the case of Industrial

Engineering Projects)

CIT v. Siemens AG (310 ITR 320)

In case of Danfoss Industries the AAR held that was held that payments to a foreign company under a

cost sharing arrangement was tax deductible as the same was a consideration for rendering of service

and not a reimbursement.

The AAR also held that an element of profit is not essential ingredients of receipt to be taxable as income

and even assuming that fees charged by an overseas entity from the resident entity is equivalent to the

expenses incurred by the resident entity in providing the services, it would then be a case of quid pro quo

for the service fees and not a case of reimbursement of expenses.

Danfoss Industries Pvt.Ltd (268 ITR 1) and Timken India Limited (273 ITR 67)

67

Where payments to foreign technicians were made outside India for services rendered outside India

and no tax was deducted there from – the said payments cannot be disallowed under section

40(a)(i)

International Creative Foods (9 taxmann.com 191) (Ker)

There is no such requirement in section 199 that credit of TDS is to be allowed only after

confirmation is received from the issuer of the TDS certificates

Ramakant Singh v. CIT (No.2) (8 ITR 505) (Patna ITAT)

Recent Amendments

Recent amendments

69

Instruction on section 200 – Instruction regarding parameters for processing e-TDS returns

[F.No.275/73/2009-IT(B)] dated 8-12-2010

• In the present system of processing e-TDS returns, the returns are processed online and mismatch

report showing defaults is generated.

• Based on these reports, the AO issues show cause notices to the deductors

• Substantial returns are pending where deducteewise default due to short deduction is less than Rs.10/-

• It has been decided that where the default on account of short deduction is less than Rs.100/- for each

deductor the demand is rounded off to zero; and

• After considering the above if the deductorwise demand/default of Rs.100/- or less will be ignored for

further action

• However, the officers have been instructed to ensure that the short deduction should not become

habitual

Instruction No.6/2010 issued by CBDT on 9 August 2010 issued to curb the indiscriminate issuance

of 197 certificates

• Instruction No.8/2006 dated 13-10-2006 laid down that certificate of lower/NIL deduction u/s197 are not

to be issued indiscriminately and prior administrative approval of the concerned Range head shall be

obtained before issue of each certificate

• Instruction 7/2009 read with F.No.275/23/2007-IT(B) laid down monetary limits for prior adminitrative

approval of the CIT-TDS or DIT- International Taxation.

• Such certificates are issued manually

Recent amendments

70

• It is now instructed that certificates u/s 197 shall be generated and issued by the AO mandatorily through

the ITD system only. In case the certificate cannot be generated on the date of issue, the AO shall

upload the data on the system within 7 days of manual issue

• The manual system of issuing certificates had the following issues:

No check as to whether such certificate has been issued by the authorized/competent AO having

jurisdiction

No information available as regards number of certificates issued or the quantum of revenue

involved.

No systematic reference number which could be amenable to verification. It is not possible to

ascertain the veracity of claim, of the deductor about no/low deduction having been made on the

strength of a 197 certificate actually issued by the department

• Issue of certificates u/s 197 vide the ITD system shall have the following benefits:

Complete information of he deductor and deductee will be available with the department

This information will be useful in processing e-TDS returns

The non-deduction defaults detected by the system when processing the TDS returns would

reduce substantially

There will be a control on the number of certificates issued

Amendment under Finance Act, 2011 (insertion of section 194LB)

w.e.f. 1st June 2011, notified infrastructure debt fund will deduct tax at source at the rate of 5% (plus

applicable surcharge & cess) on interest payable to a non-resident at the time

of credit or payment, whichever is earlier..

Recent amendments

71

Amendment to Rule 28AA (Certificate for deduction at lower rates or no deduction of tax from

income other than dividends)

• Now in order to obtain a lower/NIL deduction certificate, is it necessary for the AO to be satisfied that the

existing and estimated tax liability of the applicant justifies the deduction of tax at lower rate or no

deduction of tax.

• The mechanism of arriving at the rate of tax deduction has been eliminated. The AO shall determine the

rate of tax deduction after considering the following:

Tax payable on estimated income of the previous year relevant to the AY;

Tax payable on the assessed or returned income of the last three previous years;

Existing liability under the ITA and Wealth-tax Act,1957;

Advance tax payment for the AY relevant to the previous year till the date of making application.

Tax deducted at source for the AY relevant to the previous year till the date of making application

under sub-rule (1) of rule 28; and

Tax collected at source for the AY relevant to the previous year till the date of making application

under sub-rule (1) of rule 28.

• The certificate shall be issued direct to the person responsible for deducting the tax under advice

to the person who made an application for issue of such certificate

Recent amendments

Amendment to Rule 31A (Quarterly statement of deduction of tax under sub-section (3) of section

200)

• The deductor at the time of preparing statements of tax deducted will be required to furnish the following

additional particulars besides his PAN, TAN, PAN of deductees, particulars of taxes paid to the Central

Government:

amount paid/credited on which tax was not deducted in view of the issue of certificate of no

deduction of tax under section 197 by the AO of the payee;

amount paid or credited on which tax was not deducted on payments made to transporters who

have provided their PAN.

Notification 41/2010 dated 31 May 2010 w.e.f April 1, 2010

1. Due dates for payment of TDS

Amount paid / credited Due date of deposit of TDS

Old Provisions On 31 March 31 May

On any other day 7th of the next month

New Provisions In the month of March 30 April

In other months 7th of the next month

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Recent amendments

2. In the case of a company or a person (other than a company) to whom the provisions of tax audit are

applicable, TDS must be remitted electronically (by way of internet banking facility or debit card) to the

RBI or SBI or any authorized bank accompanied by an electronic income-tax challan

3. Quarterly filed of TDS returns

Statement of deduction of tax under section 192 – Form no. 24Q

Statement of deduction of tax under other sections

‒ In case of the deductee being a non-resident or a foreign company or resident but not ordinarily

resident – Form no. 27Q

‒ In case of all other deductees – Form no. 26Q

4. If the number of deductee‟s / collectee‟s records in a statement for any quarter are twenty or more, the

statements are required to be furnished electronically

Quarter ended Due date Requirements of the forms

30 June 15 July TAN of deductor

PAN of deductor

PAN of all deductees

Particulars of the tax paid to the

Central Government, including

Challan identification number

30 September 15 October

31 December 15 January

31 March 15 May

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Recent amendments

5. Timelines for issue of TDS certificates

Deduction u/s Form No. Requirements of form Time for furnishing

the form

192 16 Valid PAN of the deductee

Valid TAN of the deductor

Challan identification number in case of

payment through bank

Receipt number of the relevant quarterly

TDS statement(s)

Periodicity – Annual

Due date – By 31 May

Any other

provision

16A Same as above Periodicity – Quarterly

Due date – Within 15

days from the due date

for furnishing the

quarterly TDS

statements

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Recent amendments

6. The deductor may use digital signatures to authenticate Form 16

Once digitally signed, the contents of the certificate are not amenable to change

The certificates must have a control number and a log of such certificates must be maintained by

the deductor

7. Form 16 now has two parts:

Part A dealing with basic information regarding the deductor and employee and the summary of

tax deducted of source;

If an assessee is employed by more than one employer during the year, each of the employers are

required to issue Part A of the certificate;

Part B dealing with details of salary and tax deducted / paid.

Part B may be issued by each of the employers or the last employer at the option of the assessee

8. The provision for issue of Form 16AA in cases of salaries not exceeding Rs. 150,000 is not contained

in the amended rules

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Recent amendments

New sub-sections have been added to Section 201 w.e.f 01.04.2010

• 201(3) – No order shall be made under sub-section (1) deeming a person to be an assessee in default

for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the

expiry of:

‒ 2 years from the end of the financial year in which the statement is filed in a case where the statement

referred to in section 200

‒ 4 years from the end of the financial year in which payment is made or credit is given, in any other

case

Provided that such order for a financial year commencing on or before 1 April 2000 may be passed at

any time on or before the 31st day of March , 2011

• 201(4) – The provisions of sub-clause (ii) of sub-section (3) of section.153 and of Explanation to Sec153

shall, so far as may, apply to the time limit prescribed in sub-section(3)

76

Recent amendments

Finance Act 2010 has increased the interest u/s 201(1A) rate w.e.f. 1 July 2010

.

77

Interest on late deduction/deposit of tax Existing New

Interest from the date when tax deductible to actually

deducted

1% 1%

Interest from the date when tax actually deducted to

actually paid

1% 1.5%

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Q&A

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