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Published views of author that Tax is not deductible at source (TDS) on amount of service tax – Tribunals and Rajasthan High Court also viewed similarly. Correct circular is desired - Cheers for unnecessary litigation due to wrong clarification of CBDT still in force, as pointed out by author earlier. Links and references: Section 73A of the Finance Act, 1994 regarding compulsory deposit of serviced tax collected Various sections relating to TDS particularly those payments which are subjected to levy of service tax like S.194C, 194D, 194E,194G, 194H,,194I, 194J, 195 etc. Article by author: Deduct tax from fees (including service tax) says Board !! Article by another author learned Dr.Sanjiv Agarwal- DEDUCTION OF TDS ON RENT ONLY
Earlier articles by author: In earlier article author has expressed his view that circulars issued by CBDT in respect of TDS on professional and technical fees under section 194J clarifying to deduct tax on element of service tax is wrong and need reconsideration. Author had pointed out that in circular relating to TDS from rent, CBDT has considering nature of service tax as a levy which is just collected by landlord, clarified that tax is to be deducted only from rent and not on amount of service tax charged on rent. However, in case of other TDS provisions clarifications to deduct tax on service tax is wrong and is without considering provisions of service tax according to which service tax collected is to be deposited compulsorily. In any case the amount of service tax which is collected and is admitted liability is not income and is diverted at source by way of overriding title as well as statutory obligations. Charge or payment for service tax cannot be considered as a payment of consideration to contractor, fees to technician or professional, brokerage or commission to broker or agent etc. Therefore author had suggested that a general and wider circular should be issued clarifying that tax need not be deducted on sums like service tax, municipal tax, VAT etc. No such circular has been issued so far. Unfortunately old and wrong instructions issued by CBDT are still in force. Wrong views expressed by CBDT is a source of litigation as apprehended by author in his articles in which author noted as follows: “Cheers for tax professionals- large scope of professional work on likely un-necessary litigation due to CBDT'S clarification on S. 194J which is in disregard of correct legal provisions of S. 194 J of the income-tax Act and s. 73A of the Finance Act, 1994.” The apprehensions of author have become reality, and matter on issue has gone till High Court. Tribunals and High Court have held that deducting tax only on amount of agreed charges, fees , consideration etc. and not on service tax charged separately is as per law. There is no default when tax is not deducted on element of service tax. Statutory diversion of service tax before accrual as income: Before going into the income-tax deduction matter, it would be useful to refer to section 73A of the Finance Act, 1994. It is true that although liability to pay service tax is on service provider , however, we find that not only by way of accounting methods, but also by statutory provisions relating to Service Tax vide Chapter V of Finance Act, 1994 includes section 73A the amount of service tax charged is diverted at source and there is no receipt of income when service tax is received. The section reads as follows: Chapter V of Finance Act, 1994 73A. Service Tax Collected from any person to be deposited with Central Government (1) Any person who is liable to pay service tax under the provisions of this Chapter or the rules made thereunder, and has collected any amount in excess of the service tax assessed or determined and paid on any taxable service under the provisions of this Chapter or the rules made thereunder from the recipient of taxable service in any manner as representing service tax, shall forthwith pay the amount so collected to the credit of the Central Government. (2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government. (3) Where any amount is required to be paid to the credit of the Central Government under sub-section (1) or sub-section (2) and the same has not been so paid, the Central Excise Officer shall serve, on the person liable to pay such amount, a notice requiring him to show cause why the said amount, as specified in the notice, should not be paid by him to the credit of the Central Government. (4) The Central Excise Officer shall, after considering the representation, if any, made by the person on whom the notice is served under sub-section (3), determine the amount due from such person, not being in excess of the amount specified in the notice, and thereupon such person shall pay the amount so determined. (5) The amount paid to the credit of the Central Government under sub-section (1) or sub- section (2) or sub-section (4), shall be adjusted against the service tax payable by the person on finalisation of assessment or any other proceeding for determination of service tax relating to the taxable service referred to in sub-section (1). (6) Where any surplus amount is left after the adjustment under sub-section (5), such amount shall either be credited to the Consumer Welfare Fund referred to in section 12C of the Central Excise Act, 1944 or, as the case may be, refunded to the person who has borne the incidence of such amount, in accordance with the provisions of section 11B of the said Act and such person may make an application under that section in such cases within six months from the date of the public notice to be issued by the Central Excise Officer for the refund of such surplus amount.” From above provisions we find that if a person who has collected as service tax, any amount excessively or which he is not required to charge, is also duty bound as such person shall forthwith pay the amount so collected to the credit of the Central Government. Therefore, service tax collected is diverted in favor of the Central Government and it cannot be regarded as fees. The amount collected as service tax, even if wrongly collected, has to be deposited and it cannot be refunded to the person who has charged and collected the amount as service tax. Therefore, there is diversion at source. Case before Rajasthan High Court: Rajasthan Urban Infrastructure Development Project(in short ‘RUIDP’ or assessee), is a project of Government of Rajasthan for the Infrastructure Development and Civic Amenities in the specified areas/cities in the State of Rajasthan. The project is financially assisted by the Loan from the Asian Development Bank through the Government of India. The project is working under the Urban Development Department of the Government of Rajasthan. The RUIDP appoint the technical and project consultants to whom payments are made for technical and professional services which are liable to TDS. The RUIDP/ assessee deducted Tax at source (TDS) from the payments (account maintained on cash basis) made on account of fees or other charges paid by it and deposit the same and filed returns for the same as per provisions. Consultants charged charges as per agreement and service tax thereon, at the prevailing and applicable rates on the amount of fees or charges which is paid by the assessee/RUIDP. The tax is deducted on amount of fees and other payments of expenses as being part of contract. However, tax was not deduced on amount of service tax in view of the term of contract. The AO held that tax was to be deducted on total amount including service tax. The assessee preferred appeal before CIT(A) who allowed appeal vide para 02.3 of his order dated 31.03.2009. The paragraph from the order is in HINDI language, relevant paragraph translated by author into English language is on the following lines: 02.03 I have considered arguments of both parties and found that as per clarification F. No. 275/73/2007 –IT(B) dated 30.06.2008 issued by honorable CBDT , TDS should be deducted under section 194 J on total payment, including service tax , made for technical and professional services. However, where the contract between parties (service provider and service receiver) provide only for payment of charges or fees for services, and service tax, as applicable is to be charged extra, then in that situation tax is not deductible on service tax charged in addition to agreed fees or charges. If total charges including service tax is fixed, in that situation tax is to be deducted on total amount. During hearing Senior Advocate produced copies of agreements entered into with various parties. On review of agreements, it is found that in each agreement , charges are fixed without including service tax and service tax will be charged extra if payable as per law. Therefore, tax is not deductible on amount of service tax which is charged extra and tax is to be deducted only on agreed charges. Therefore, order of lower authorities on this issue is set aside, and ground of appeal on this issue is allowed. “ The revenue preferred appeal before Tribunal. As per recording in judgment of High court the Tribunal dismissed appeal of revenue. The High Court has noted as follows about order of Tribunal: “The Tribunal has considered the agreement and recorded a finding that as per the term of contract, the amount of service tax was to be paid separately, therefore, the same was not subject to TDS.” Therefore ,the question for consideration of the Court relates to a point as to whether TDS is to be deducted on the amount payable on account of service tax or not? On Appeal Honorable High Court has held as follows (highlights added by author):- “We have considered the provisions of Section 194J of the Income Tax Act, in the light of Circulars dated 28.04.2008 and 30.06.2008. The words, “any sum paid”, used in Section 194J of the Act, relate to fees for professional services, or fees for technical services. As per the terms of agreement, the amount of service tax was to be paid separately and was not included in the fees for professional services or fees for technical services. In these circumstances, we are satisfied that the orders passed by the Appellate Authority as well as the Appellate Tribunal, are in accordance with the provisions of Section 194J of the Income Tax Act. The service tax was to be paid separately or not, is purely a question of fact and as per the agreement entered in the present case, it was to be paid separately and there is a finding of fact in this regard, recorded by the Appellate Authority as well as the Appellate Tribunal also. Even if the Circulars dated 28.04.2008, is held to be not applicable in the present case, we find that the orders passed by both the authorities below, are in accordance with the provisions of Section 194J of the Income Tax Act, looking to the facts and circumstances of the present case.” Conclusion: As discussed by the author in earlier articles, the levies like service tax (ST), municipal tax (MT), sales tax (ST) / VAT etc. are charged and collected from customers / clients /tenants as per law. These levies are collected for onward payment to concerned authorities. The charges will vary from time to time as per relevant law. For example if rate of such tax is increased the charge will go up, if rate is reduced, the charge will be reduced. If a service is exempted from service tax, no service tax will be charged. TAX like ST, MT, VAT etc. are not consideration for work done or service or facility provided etc. These cannot be subjected to TDS. Even in contracts, where total amount payable is agreed inclusive of service tax, the amount of service tax payable by recipient is not his income, so he can separately mention the amount of service tax payable by doing calculations. Amount so charged separately in the bill will not be charge or fees or consideration to contractor or rent paid to landlord. Therefore, the person who pay the bill will not be liable to deduct tax at source under provisions relating to TDS. Correct circular is desired: A correct circular is desired to clarify that tax need to be deducted only on amount paid to payee which is on his own account for fees, charges, consideration, rent etc. as the case may be. Charges like such taxes will not be subject to TDS. Unless such circular is issued there will be large scale of litigation and we professionals will thank to the CBDT for their mistake in the circular which leads to un-necessary litigation. Feedback of readers on TDS on Service Tax Sh. D. K. Kothari, the learned and renowned chartered accountant from Kolkatta, wrote an article dated 21-8-2008. He has expressed his views in detail and requested the board to issue a broader circular. (Also refer to his article dated 11-6-2008 on the same issue). We are thankful to our learned netizens for their valuable suggestions. Refer to previous feed on TDS on service tax in which we have referred the matter in line with the Board's clarification for the sake of knowledge of our netizens. After going through the same, one of our learned netizen, Sh. Sivarman V. Chartered Accountant from Chennai, has sent us some comments. His comments are being reproduced as such herein below: Please read last line of Sec 194J (1) just before the proviso which reads as under: "..deduct an amount equal to 10 per cent of such sum as income tax on income comprised there in: The very same section defines a professional service as under: Explanation. For the purposes of this section, (a) professional services means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44AA or of this section; Where does the service tax come into any of these legal definition or provisions in the Income Tax Act passed by parliament and attested by the President? The TDS is to be on the income component only. The service tax can never be an income component of an assessee [ of course it is an income to the GOVT] Just because some department official sends a clarification thinking "thru his hat" why the entire Community at large should suffer. An organization like you must take up this matter. A department clarification CAN NOT OVER RIDE an Act of Parliament. When the service tax is itself a tax, then where is the question of tax on tax? One should not accept a lame excuse like "tds is only an advance tax" etc." The judgment of High Court with highlights added is as follows: HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. INCOME TAX APPEAL NO.235/2011, D.B. INCOME TAX APPEAL NO.222/2011, D.B. INCOME TAX APPEAL NO.238/2011, D.B. INCOME TAX APPEAL NO.239/2011 Commissioner of Income Tax (TDS) Versus M/s. Rajasthan Urban Infrastructure Date of Pronouncement : 01.07.2013 ORDER Hon’Ble Mr. Justice Narendra Kumar Jain Hon’Ble Dr. Justice Smt. Meena V. Gomber Ms. Parinitoo Jain For the Appellant Heard the learned counsel for appellant. 2. Since common facts and law are involved in these appeals, therefore, they were heard together and are being disposed of by this common order. 3. For convenience, the facts of D.B. Income Tax Appeal No.235/2011 are being taken as leading facts. The Assessing Officer, vide its order dated 30.01.2009, raised a demand of Rs.1,70,881/- along with interest thereon amounting to Rs.44,776/-, on account of TDS on the amount paid as service tax. The matter relates to the Financial Year 2005-06. The assessee preferred an appeal, which was allowed by the Commissioner of Income Tax(Appeals)-III, Jaipur (for short ‘the Appellate Authority’), setting aside the aforesaid demand. Being aggrieved with the same, the Revenue preferred an appeal before the Income Tax Appellate Tribunal, Jaipur Bench ‘A’, Jaipur, but the same was dismissed. Hence, the Revenue has preferred this appeal. 4. Submission of the learned counsel for appellant is that Appellate Authority and Income Tax Appellate Tribunal, both, have committed an illegality in relying upon the Circular dated 28.04.2008, which was in respect of Section 194-I of the Income Tax Act (hereinafter referred to as ‘the Act), whereas dispute in the present case was in respect of TDS, to be deducted under Section 194J of the Act. It was further argued that the Circular dated 28.04.2008 was clarified by a subsequent Circular dated 30.06.2008, which was wrongly held to be inapplicable or contrary to law by the Appellate Authority as well as Appellate Tribunal. She, therefore, submitted that orders passed by the Appellate Authority as well as Appellate Tribunal, are illegal and same are liable to be set aside. 5. We have considered the submissions of the learned counsel for appellant and examined the Circulars dated 28.04.2008 and 30.06.2008 and also the provisions of Sections 194-I and 194J and other provisions of the Income Tax Act. 6. The assessee, Rajasthan Urban Infrastructure Development Project(in short ‘RUIDP’), is a project of Government of Rajasthan for the Infrastructure Development and Civic Amenities in the specified areas/cities in the State of Rajasthan. The project is financially assisted by the Loan from the Asian Development Bank through the Government of India. The project is working under the Urban Development Department of the Government of Rajasthan. The accounts are maintained on cash basis of accounting and also audited by the Chartered Accountant as per the requirement of the Asian Development Bank and also audited by the Department of Accountant General of Rajasthan. The RUIDP appoint the technical and project consultants on open tender basis and the limited companies as well as corporate consulting firms of repute are selected and appointed as per the laid down procedure. The assessee deduct the incometax at source from the payments made by it and deposit the same as per the relevant provisions of the Income Tax Act and the return for the same is filed in due time. It appears that main consultants are charging the service tax at the prevailing rates on the amount of fee payable as per the agreement and the same is paid by the assessee/RUIDP. The tax is deducted on fees and other payments of expenses as being part of contract, however, no TDS has been deduced on service tax in view of the term of contract. 7. The dispute relates to a point as to whether TDS is to be deducted on the amount payable on account of service tax or not? The Tribunal has considered the agreement and recorded a finding that as per the term of contract, the amount of service tax was to be paid separately, therefore, the same was not subject to TDS. The Appellate Authority decided the appeal on the basis of reasoned order dated 31.03.2009 passed in Appeal No.413/Jaipur/ 2008-09 of the same assessee, which is the subject matter of D.B. Income Tax Appeal No.239/2011. The relevant para 02.3 of the above referred order dated 31.03.2009, passed by the Appellate Authority, is reproduced as under:- (order is in HINDI language, relevant paragraph translated by author is as follows: 02.03 I have considered arguments of both parties and found that as per clarification F. No. 275/73/2007 –IT(B) dated 30.06.2008 issued by honorable CBDT , TDS should be deducted under section 194 J on total payment, including service tax , made for technical and professional services. However, where the contract between parties (service provider and service receiver) provide only for payment of charges or fees for services, and service tax, as applicable is to be charged extra, then in that situation tax is not deductible on service tax charged in addition to agreed fees or charges. If total charges including service tax is fixed, in that situation tax is to be deducted on total amount. During hearing Senior Advocate produced copies of agreements entered into with various parties. On review of agreements, it is found that in each agreement , charges are fixed without including service tax and service tax will be charged extra if payable as per law. Therefore, tax is not deductible on amount of service tax which is charged extra and tax is to be deducted only on agreed charges. Therefore, order of lower authorities on this issue is set aside, and ground of appeal on this issue is allowed.
8. The aforesaid finding was discussed and considered, in detail, by the Income Tax Appellate Tribunal and vide order dated 30.10.2009, the Tribunal dismissed the appeal of the Department. The said order is also under challenge in D.B. Income Tax Appeal No.239/2011, preferred on behalf of the Revenue. 9. So far as submission of the learned counsel for appellant, that the Circular dated 28.04.2008 was not applicable as it was in respect of Sections 194-I of the Act relating to rent and not technical fees, therefore, it was wrongly relied upon is concerned, we have considered the provisions of Section 194J of the Income Tax Act, in the light of Circulars dated 28.04.2008 and 30.06.2008. The words, “any sum paid”, used in Section 194J of the Act, relate to fees for professional services, or fees for technical services. As per the terms of agreement, the amount of service tax was to be paid separately and was not included in the fees for professional services or fees for technical services. In these circumstances, we are satisfied that the orders passed by the Appellate Authority as well as the Appellate Tribunal, are in accordance with the provisions of Section 194J of the Income Tax Act. The service tax was to be paid separately or not, is purely a question of fact and as per the agreement entered in the present case, it was to be paid separately and there is a finding of fact in this regard, recorded by the Appellate Authority as well as the Appellate Tribunal also. Even if the Circular dated 28.04.2008, is held to be not applicable in the present case, we find that the orders passed by both the authorities below, are in accordance with the provisions of Section 194J of the Income Tax Act, looking to the facts and circumstances of the present case. 10. In view of above discussion, we find that no substantial questions of law are involved in all these appeals. It is a settled law that Income Tax Appeal before the High Court is maintainable only on the substantial questions of law, which are not involved in the present appeals. 11. In these circumstances, we find no force in any of the appeals and the same are, accordingly, dismissed. 12. Registry is directed to place a copy of this order on record in each connected file. Deduct tax from fees (including service tax) says Board !! http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=143 Cheers for tax professionals- large scope of professional work on likely un-necessary litigation due to CBDT'S clarification on S. 194J which is in disregard of correct legal provisions of S. 194 J of the income-tax Act and s. 73A of the Finance Act, 1994. The circular suffers from a mistake apparent from record and therefore it should be rectified immediately. The latest circular: Vide order-Instruction - (Income Tax) per CIRCULAR F. NO. 275/73/2007IT(B), DATED 30-6-2008 the Board has clarified as follows: Kindly refer to your letter No. Dir. Tax/761, dated 5-5-2008 on the subject mentioned above. Your request has been considered by the Board. The payments made under Section 194-I differ significantly from payment made under Section 194-Jin the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However, in the case of Section 194-J has to be deducted on any sum paid as professional and technical fees. The board had decided to exclude TDS on service tax component on rents payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since Section 194-J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated 28-4-2008 to such payment under Section 194-J. Unconsidered provisions: It is clear beyond doubt that the Board has not at all considered the provisions of Section 73A of the Finance Act, 1994, otherwise Board would not have committed mistake to hold that service tax is a payment of fees to professional or technical person. It is also clear that the Board has not considered fully provisions of S. 194J which only require to deduct tax from payment of fees and not any thing else. When rent does nor include service tax, there is apparently no reason to hold that fees includes service tax. The Board ahs considered that u/s 194J 'any sum paid' is covered. This is wrong due to ignoring the provisions of section 194J and giving undue emphasis on the words 'any sum paid' and ignoring the words 'by way of professional / technical fees'. Wrong reasons to apply different rules: It appears that the board has applied wrong reasons while directing TDS from bills / payments for fees for professional / technical services including service tax. The Board has apparently considered the opening words of relevant sections and ignored the fact the basis of TDS as stated in the section 194 J. The Board have taken view that "However, in the case of Section 194-J tax has to be deducted on any sum paid as professional and technical fees" The board has ignored the heading of S. 194J and specific words used "any sum by way of professional fees or technical fees", as expressly used in S. 194J. Relevant part of which is reproduced below with highlights: Fees for professional or technical services. 194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of— (a) fees for professional services, or (b) fees for technical services, 2[or] Thus, we find that TDS is required from amount of fees for professional or technical services. The amount of service tax may or may not be chargeble depending on several factors like : (a) The nature of service, (b) nature of service provider, (c) nature of service receiver, (d) nature of relationship between service provider and service receiver and (e) nature of payment etc. In the circular u/s 194 I, the Board has specifically noted that the amount of service tax on rent is not income by way of rent and the landlord collects service tax as an agent with an obligation to deposit the same with the government. The same law is applicable in case of a professional or technical persons. They can collect service tax, only if it is payable by them. In case they have collected service tax, even by mistake they are required to deposit the same with the Government. Does CBDT mean that a professional can collect tax and retain it as his income? The different considerations applied by the Board can lead to inference that the Board has considered as if the landlord cannot collect and retain service tax, whereas other service providers can collect and retain service tax as it is their income. This is patently wrong. Diversion of service tax: Provisions relating to Service Tax vide Chapter V of Finance Act, 1994 includes section 73A (2) which provides that (2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government. Thus we find that as per sub-section (2) of S. 73A, if a person who is not required to collect service tax, has collected service tax, then such person shall forthwith pay the amount so collected to the credit of the Central Government. Therefore, service tax is diverted in favor of the Central Government and it cannot be regarded as fees. Earlier article: The readers may refer to earlier article titled " No TDS on government levies like service tax , VAT, Municipal tax , A GENERAL CIRCULAR IN BROADER TERMS IS REQUIRED hosted on this website on 10.06.08 and also some other published articles referred to therein. It is unfortunate that the Board has, instead of issuing a correct circular has issued a wrong circular perhaps with a prejudiced mind holding to deduct income tax on element of service tax ignoring the fact that service tax is not fees for professional services or technical services and in any case it is collected for onward deposit with the Central Government. The Board has also not considered S. 73A of the Finance Act, 1994. The Circular is partly binding: The above circular may be binding on Assessing Officers and even if it is not binding, they will consider it binding and therefore issues SCN, raise demand for shortfall in TDS, interest and penalty. The Circular is not binding on assessee and appellate authorities, therefore, the demands raised by the A.O. are likely to be deleted in appeals. Therefore, the circular will only create un-necessary litigation. Cheers for tax professionals: Though there will be lesser immediate fees collection due to higher TDS, yet tax professionals must feel happy and obliged to the Board and the Assessing Officers for issuance of such wrong circulars, and in consequence issuance of SCN and demands by ITO (TDS) for short fall in payment of TDS, interest thereon, and also penalty. This will lead to substantial litigation from which only tax professionals will gain substantially. Therefore, tax professionals have reason to be happy from the present circular. But the question is Whether personal gains are so important that we should not raise voice against actions which are beneficial to a profession but are wrong and lead to national wastage of intellectual human resources? The author feels that tax professionals are competent enough to find such work that are productive and contribute to the society. Therefore, author feels that the Board must come with a broader circular to hold that no tax be deducted from government levies like service tax, VAT, municipal tax etc. because there is no purpose in collecting higher amount of tax and then refunding the same. http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=102 No TDS on government levies like service tax , VAT, Municipal tax. A GENERAL CIRCULAR IN BROADER TERMS IS REQUIRED. Non-income items/ cases of diversion: Service tax, VAT or similar levies are not consideration for any contractual payment or consideration payable pursuant to any contract. Generally agreements provide that all such levies shall be charged as may be applicable at the relevant time. Therefore, service tax or VAT included in bill or debit note by any supplier and /or service provider cannot be considered as a 'consideration' payable to the supplier and / or service provider. ST/VAT etc. are diverted at source and therefore they are not income of the recipient. CBDT in circular no 4 dated 28.04.08 relating to TDS on rent u/s 194I has held that service tax is not income, it is collected as agent of GOI so income tax need not be deducted from service tax. The same principal apply in relation to other provisions relating to TDS from payments made to contractors, agents, brokers and professionals and technical person. Therefore, there is urgent need for a general circular to clarify that tax need not be deducted from element of service tax in relation to any service. Various service providers are subject to TDS: Service providers may receive income in different capacities. Many of payments to service providers are subject to tax deduction at source under different provisions of the Income-tax Act, 1961 vide chapter XVII. In particular reference to the following provisions are important:
The TDS may fall under some specific provision or otherwise many of services can fall under the category of works contract and payment to contractor and sub contractors. Therefore question as to whether TDS should be on the element of service tax or not is relevant in respect of most of taxable services. Service tax: Service tax is levied only when a service provider is rendering taxable service and he is required to get registered, collect service tax and pay the same to the account of GOI. Thus he collects service tax for and on behalf of the GOI. This aspect has been recognized in a recent circular of the CBDT which is about TDS from rent. The circular (with high lights relevant in context of this article) is reproduced below: CIRCULAR NO 4/2008, Dated: April 28, 2008 portion relevant for this write-up is reproduced below: Clarification on deduction of tax at source (TDS) on service tax component on rental income u/s. 194-I of the Income Tax Act. Representations/letters have been received in the Board seeking clarification as to whether TDS provisions u/s. 194-I of the Income Tax 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 xxx " rent" means xxx 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 would be required to be made on the amount of rent paid/payable without including the service tax. xxxxxxx
In the circular the board has recognized the fact that the service tax is not in nature of income of owner by way of rent. It is only a collection on behalf of the GOI and it is payable to the GOI. Thus concept of diversion at source is recognized. Similar views were expressed by the author in his earlier article. Now the board has stated as follows: The landlord only acts as a collecting agency for Government for collection of Service Tax. Therefore, the owner as a taxable service provider is considered as a collection agent of the GOI. Other service providers: As discussed in the preamble government levies are generally levied as per applicable rate at the relevant time. Thus, person who charge such levies in bill or debit note charges as per the rate payable to the exchequer. Therefore, relationship of collection agent for service tax is applicable in case of other service providers. For example a CS in practice who is liable to pay service tax, can collect service tax only in respect of taxable services rendered by him to his clients. In case of non taxable service he cannot collect service tax. Similar will be the case of any other service providers say a CA, cost accountant, an engineer, an architect, or a builder, a goods transport agency or mandap keeper or any other service provider who is required to pay service tax. Diversion before accrual is in all cases: ST collected is required to be paid to the account of GOI. In case there is some dispute, and service tax is collected on provisional basis, then in case ultimately service tax is payable to GOI then it has to be paid to GOI or if ultimately it is held that service tax is not at all payable then the service tax collected provisionally is to be refunded from the service receiver from whom it was collected. In case the service tax provisionally collected cannot be refunded, then it has to be deposited with GOI and the GOI shall maintain this as a special fund for consumer protection or such other purposes. Thus, it is beyond doubt that the service tax collected, whether finally or provisionally is not income of the service provider. The service tax collected is diverted before it accrues as income of the service provider. Other articles Published in the Chartered Accountant March 2008 issue: For detailed discussions on the subject of TDS the readers can very fruitfully refer to an article written by CA Dev Kumar Kothari and published in the Chartered Accountant of March 2008 at page 1525 titled "For TDS u/s 194J- only fees are covered and not out of pocket expenses and taxes- an analysis of provisions" and another article by CA S.C.Jalan titled Role of Reimbursement of expenses while applying TDS provisions- a study at page 1521 of the March issue of the magazine. The recent circular which has limited application in relation to rent u/s 194 I can be considered a step towards clarifying legal position in relation to other services also. When principally character of collection of service tax in hands of any service provider is similar to that of owner receiving rent and service tax, there cannot be any doubt that service tax chargeable by any service provider cannot be considered as value of service or consideration of service or fees or income in any manner. Therefore, CBDT should issue a circular in a broader term, to clarify that service tax payable to any service provider shall not be subject to service tax. Section 73A of the Finance Act, 1994: This section provide that service tax collected which is required to be collected or even if it is not required to be collected, is if so collected is to be forthwith deposited with the GOI. There are adequate measures made out to recover any amount collected as service tax, even if service tax is not leviable on any service. Therefore, if a sum is collected as service tax, it is diverted at source. However, a collection in protest will be considered separately. In such a case if ultimately it is found that service tax collected is not payable to the GOI and it cannot be refunded to the service receiver from whom service tax was collected then such amount will have to be deposited with GOI and it will be credited to Consumer Welfare Find. Conclusion: Circular required in relation to other services and other government levies: As in case of commercial rent, other services may or may not be leviable with service tax. In case service tax is leviable then only the service provider get registered and collect service tax for onward remittance to the service tax department(GOI). In that case also TDS should not be on service tax but only on professional fees, commission or payment to contractor or sub-contractor etc. Similarly to service tax other levies like municipal tax is also diverted at source, therefore, the Board has in circular no. 718 dated 22.08.1995 F.No. 275/60/94-IT (B) clarified that if municipal tax, ground rent is borne / is reimbursed by tenant then tax need not be deducted from relevant sums. Similarly VAT or other local levies are also not consideration for supply and / or services. Therefore tax should not be deducted from such levies. A clarification will go a long way to avoid litigation. Rational tax deduction: Tax deduction should be on rational basis. There is no use in excessive tax collection and then refund. In view of reduction of rate of tax, in fact it is high time to reduce rate of TDS also. However, in some cases rate of TDS ( e.g professional and technical fees and commission to agents) have been increased. If un-necessary tax is deducted from non-income items, the GOI will have to pay interest on excessive refunds. About the Author: - DEDUCTION OF TDS ON RENT ONLY In respect of payment of rentals against property, there is often a confusion as to whether the land lord can deduct TDS (income tax) on both, rent amount and service tax or only on rent amount net of TDS. Here is an attempt to clarify this issue. Vide sub-rule (4C) in rule (6) of Service Tax Rules,1994 videNotification No.28/2007-ST dated 22.5.2007, it has been provided that where service tax has been paid in excess of the amount required to be paid due to non-deduction of property tax, as exempted under Notification No.24/2007-ST dated22.5.2007, the same may be adjusted within a period of one year of such deposit by the assessee, subject to the conditions stipulated. On whether TDS (income tax) shall be deducted on rental amount or gross amount inclusive of service tax thereon, CBDT has clarified vide Circular No. 4/2008 dated 28.4.2008 that tax deducted at source on rentals paid to landlord shall be on the amount as reduced by service tax paid thereon. For example - if a taxpayer pays Rs. 100 as rent, he is liable to pay service tax @ 12 percent plus education cess, taking a total out go to Rs. 112.36, it has been clarified that service tax would be deducted on Rs. 100 only and not on Rs. 112. (the present rate of service tax is 10 percent ). The Circular states as under - "As per the provisions of 194-I, tax is deductible at source on income by way rent paid to any resident. Further rent has been defined in section 194-I of the Income Tax Act as follows - '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; Service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of Service Tax. Therefore, it has been decided that tax deduction at source (TDS) under sections 194-I of Income Tax Act would be required to be made on the amount of rent paid/payable without including the service tax." This circular is clarificatory in nature as TDS is not a consideration (as rent) or income but is deducted on behalf of deductee for onward remittance to the Government for which the deductee gets a certificate for using against tax liability /refund of such TDS. Accordingly , no tax is required to be deducted at source on the service tax component of rental income or receipts under section194-I of the Income Tax Act, 1961. This indicates that service tax does not partake of the nature of income as the person collecting it would be doing so only as a collecting agent for the Union Government. It also needs to be appreciated that TDS is deductible only in respect of income and not in relation to any tax component comprised in the receipt. In CIT v SE, Upper Sileru [1984 (7) TMI 60 - ANDHRA PRADESH High Court],it was held that as per the scheme of tax deduction at source, tax is to be deducted at source only on that portion of the amount payable which represent any income or profit . In Transmission Corporation of AP Ltd v CIT [1999 (8) TMI 2 - SUPREME Court] apex court held that obligation of the respondent assessee to deduct tax under section 195 is limited only to the appropriate proportion of income chargeable to income tax under the Income Tax Act, 1961. About the Author: - Dr. Sanjiv Agarwal, Sr.Partner, Agarwal Sanjiv & Company Chartered Accountants, 503, Gurukripa Tower, C-43, Mahaveer Marg, C-Scheme, Jaipur-302001 Article by Rakesh Chitkara Conflict of Service Tax and Tax Deducted at Source http://www.taxmanagementindia.com/wnew/print_Article.asp?ID=1731
By: CA DEV KUMAR KOTHARI - September 3, 2013
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