TDS

SEPTEMBER 08, 2008 By Shivani Shah, CA THE issue of Tax deduction at source (TDS) on Service tax is indeed a burning issue today. This got even more aggravated with the issuance of a recent Circular by the CBDT bearing Circular no. 4 dated 28/04/2008. In this Circular, the board has clarified that TDS under sections 194-I of the Income Tax Act, 1961 (`Act') would be required to be made on the amount of rent paid/payable without including the service tax. The Circular reads as follows: "Clarification on deduction of tax at source (TDS) on service tax component on rental income u/s. 194-I of the `Act'. Representations/letters have been received in the Board seeking clarification as to whether TDS provisions u/s. 194-I of the `Act' will be applicable on the gross rental amount payable (inclusive of service tax) or net rental amount payable (exclusive of service tax). 2. The matter has been examined by the Board. As per the provisions of 194I, tax is deductible at source on income by way rent paid to any resident. Further rent has been defined in 194I as "rent" means any payment, by whatever name called, under any lease, sublease, 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. 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, 1961 would be required to be made on the amount of rent paid/payable without including the service tax. 4. These instructions may be brought to the notice of all officers working in your region for strict compliance. 5. These instructions should also be brought to the notice of the officers responsible for conducting internal audit and adherence to these should be checked by the auditing parties. F.No.275/73/2007-IT(B)" Thus, the CBDT has clarified that TDS need to be effected only on the net rental amount payable, excluding the service tax charged. The Board has clarified that service tax paid by the tenant doesn't partake the nature of "income" of the landlord and that the landlord only acts as a collecting agency for Government for collection of Service Tax. The CBDT has stated that "therefore it has been decided that tax deduction at source (TDS) under sections 194-I of the Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax." However, it is indeed heartening to note the different stands taken by the Department at different times. In a communication no. CIT (TDS)/RTI/2007-08 dated 03/07/2007 on the very same subject matter, in response to an application filed under the RTI Act, the Commissioner of Income Tax went on to clarify that tax has to be deducted under Section 194I of the `Act' on the sums payable by the deductors' inclusive of any tax, including service tax. In this communication, the learned Commissioner further stated that the provisions of Section 194I of the `Act' operate independently and without interfering with the provisions of the service tax law. The Commissioner's clarification was based on a communication issued by the CBDT to the Chief Commissioner of Income tax dated 21/07/2006. The CBDT, in its letter covered by F.No.275/I/2006-IT(B) addressed to the Chief Commissioner of Income tax, Mumbai dated 21/07/2006 (supra), had clarified that TDS would have to be effected on the sums payable by the deductors inclusive of any tax including service tax, in response to a query from the CCIT, in respect of TDS to be effected under Sections 194C, 194H and 194J of the `Act'. Further more, the CBDT in a Circular bearing No. 715 dated 08/08/1995, the CBDT answered a question no. 30 as follows: "Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses? CBDT's Answer : Sections 194C and 194J refer to `any sum' paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source." In this context, it is important to take note of the ratio of the decision rendered by the Apex court in case of Associated Cement Co. Ltd vs. CIT [2002-TIOL-606-SC-IT] wherein it was held that: "……Indeed, it is neither possible nor permissible for the payer to determine what part of the amount paid by him to the contractor constitutes the income of the latter. It is not also possible to think that Parliament could have intended to cast such impossible burden upon the payer nor could it be attributed with the intention of enacting such an impractical and unworkable provision. Hence, on the express language employed in the sub-section, it is impossible to hold that the amount of two per cent required to be deducted by the payer out of the sum credited to the account of or paid to the contractor has to be confined to his income component out of that sum." One may thus arrive to the conclusion that the Circular no. 715 (supra) issued by the CBDT was largely based on the above decision of the Apex court. The CBDT Circular No. 715 had formed the basis for the methodology related to the TDS law under Sections 194C and 194J of the `Act', over the years. Thus, the law seemed to have been relatively settled. Of course, there have been decisions, which have taken a view that is contrary to that expressed by the Board, especially, in the context of the deduction of tax at source under Section 195 of the `Act', in relation to payments to non-residents. A recent decision rendered by the Delhi ITAT in the case of ACIT v. Modicon Network Pvt Ltd (2008-TIOL-473-ITAT-DEL) confirmed that there was no need to effect TDS on the reimbursements, under Section 195 of the `Act' and held that `reimbursements cannot be considered as having an interest element embedded therein so as to attract Section 195(1)'. However, the overall view had indeed been that TDS would have to be effected on the gross amounts, inclusive of taxes and reimbursements, especially in respect of Sections 194C and 194J of the `Act'. Thus, the recent Circular no 4 (supra) has made the case of rent paid under Section 194I of the `Act' stand on a different footing. Here, the Section 194I of the `Act' talks about `payment of any income by way of rent', which is in contrast with the wording`payment of any sum' as used in Sections 194C and 194J of the `Act'. Similarly, Section 195 of the `Act' specifically talks about amounts chargeable to tax in India. As a general corollary to the above, it was believed by the public at large that the principle enunciated by this Circular is applicable to all the payments made by the assessee and accordingly no TDS is deductible from on the part of service tax whether it is professional's bill or contractor's bill. CBDT may be entirely justified in holding the view that service tax cannot be treated as `income' in the hands of the landlord and consequently, no tax needs to be deducted on the service tax element under Section 194I of the `Act'. In my view, a similar view should also be taken in the case of payments falling under Sections 194C and 194J of the `Act'. If service tax cannot be considered as `income' for a landlord providing taxable services under `Renting of Immovable Property' services, service tax cannot still be considered as `income' for a service tax for any other service provider providing taxable services, as well, not withstanding the difference in the wordings used in Sections 194I and 194C of the `Act'. However, the CBDT has something different in store in this respect. The CBDT issued another clarification vide Circular no. 275/73/2007 IT(B) dated 30/06/2008. In Circular CBDT has clarified that the scope of benefit of Circular no. 4 (supra) cannot be extended to the payment made under section 194J (Fees for professional and technical services) of the `Act'. Thus, TDS is to be deducted on the gross amount inclusive of service tax where the payment is being made u/s 194J of the `Act'.

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