Tax Deducted at Source, best known as TDS in India, is one of the modes of collecting Income Tax from assesses by the Income Tax Department, wherein, the Payer of a sum deducts specified amount of tax before making payment to the payee/deductee and then deposits the amount to the credit of the Government.
As per section 199 of the Income Tax Act, 1961, any deduction made as per the provisions of TDS and paid to the credit of Central Government, shall be treated as payment of tax on behalf of the person, from income of whom the deduction has been made. From the provisions of this section, it is evident that the government has made the payer/deductor a collection agent, who deducts and deposits tax in advance, from the income of payee/deductee.
In India, the concept of TDS has been growing leaps and bounds, as it checks tax evasion. This method of collection of tax, accounts for more than 50 percent of total income tax collection. As per the Provisions of the Income Tax Act, TDS is being deducted under different sections for different kinds of income, for instance, deduction of tax on salary is made u/s 192, for fees for professional and technical services u/s 194J, payment to contractors u/s 194C, Payment of rent u/s 194 I, payment of commission u/s 194 H and few others.
The problem arose, when the Government of India, Imposed Service Tax on various services, the payment for which also attracts TDS provisions. For instance providing a contractors services attracts service tax, and the service provider charges service tax on his invoice and the payer or the service receiver needs to deduct TDS on payments made to the contractor. A confusion erupted that whether TDS should be deducted on total invoice value including the service tax or the invoice value excluding the service tax.
The CBDT, based upon the representations received, vide Circular No. 4/2008, dated 28/04/2008, clarified that TDS on rent is deducted u/s 194I, and as the TDS has to be deducted out of income of the recipient and service tax collection is not the income of the recipient, no TDS is required to be deducted on service tax amount. This circular, brought the much awaited clarification, which was also obvious, keeping the intent of legislature, to collect tax on prospective income of receiver and check tax evasion in mind; Based upon this circular the professional and corporate world stopped deduction of tax at source on the service tax amount;
However, the CBDT, vide Circular No. 275/73/2007-IT (B), dated 30-06-2008, again clarified that the clarification regarding TDS on rent u/s 194 I, will not be applicable to TDS on fees for professional and technical services; as per the provisions of section 194I, TDS has to deducted on ANY INCOME arising out of rent, whereas, as per section 194J, TDS has to be deducted on ANY SUM paid as fees for professional and technical services;
This circular of the Board, triggered a plethora of controversies regarding TDS on Service Tax and this position of the CBDT is still open and requires an amicable solution; The Board, vide its second circular, has done a literal interpretation of the words used in the Act, ignoring the intent of the law. Intent of the law has been to collect tax in advance on supposed income of the recipient, so as to check tax evasion; the service tax amount is not an income of the recipient. As the payer acts as a collection agent of TDS, in the same way the recipient is acting only as a collection agent of Service Tax. The recipient collects service tax from the service receiver and deposits it into the credit of the government, so deduction of Tax on an amount which does not belong to the recipient is not warranted for;
As per section 199 discussed above also, the TDS deducted on income of the recipient is considered as tax paid by the recipient on his income; Service Tax is not an income of the recipient, so if this circular of the board is accepted, the whole intent of the law fails. Furthermore, a circular cannot overrule the provisions of the Act; The intent of the law, that TDS is deducted only on income is also made clear from a simple reading of section 194J, which says, ‘deduct an amount equal to 10 percent of such sum as income tax on income comprised therein’
CBDT’s circulars have a binding effect on the Income Tax Authorities. So the Income Tax Officers and even the first appellant authority, the CIT (A), are expected to follow this circular of the Board and demand deduction of TDS even on the service tax amount, especially in case of TDS on fees for professional and technical service u/s 194 J; However, the CBDT’s circular does not have a binding effect on either the assessee or the ITAT and High Courts and the Supreme Court of India, hence this Circular of the Board can always be challenged and the assessee has a very good chance to prevail.
In case of certain other TDS provisions where service tax provisions are also applicable, like payment of commission and brokerage u/s 194 H, Commission on sale of lottery tickets u/s 194 G, payment of insurance commission u/s 194 D, the word “INCOME”, has been used, hence, in these cases it is safe to deduct TDS only on the commission amount and not on the service tax amount, based upon the first circular. However, in case of fees for professional and technical services u/s 194J and payment to contractor’s u/s 194C, the word “ANY SUM” has been used, triggering the controversy. So if a person intents to avoid controversy an buy peace of mind, TDS u/s 194J & 194C, should be deducted on value inclusive of service tax, based upon the second circular, till the time the board does not further clarifies this issue or a court of law supports the assesses.
Else the validity and applicability of the Board’s circular can always be challenged before the Appellate Tribunals and even higher, as the provisions of the law and intent of the law maker always prevails before a circular which is acting as a demolisher of law rather than being explanatory.
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