NO TDS ON SERVICE TAX COMPONENT

[Dr. Sanjiv Agarwal]

In CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure [2013 (8) TMI 12 - RAJASTHAN HIGH COURT], it was held that in section 194J of Income Tax Act, 1961, 'any sum paid' relates to fees for professional or technical services. Whether Service Tax had to be separately paid or not, is purely a question of fact. If as per agreement, it was to be paid separately, then it is not subject to TDS.

The Central Board of Direct Tax has issued Circular No. 1/2014 dated 13.01.2014  referring to the Rajasthan High Court decision in CIT (TDS) v. Rajasthan Urban Infrastructure (supra) that if as per the terms of the agreement between the payer and the payee, the amount of service-tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service-tax component under Section 194J of the Income Tax Act, 1961. Pursuant thereto, the CBDT has decided in exercise of powers under Section 119 that wherever the terms of the  agreement between the payer and the payee, the service tax component comprised in the amount is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Income Tax Act, 1961 on the amount paid without including such service tax component. This clarification is applicable not only to payment relating Professional Services or Technical Services it is also applicable to payments relating other services i.e. Works contract etc. Even before issue of this order TDS is no applicable to Service Tax portion in the case of Rent (Section 194-I) as per Circular issued by the CBDT. This is explained by an example below:

Example:

Serial No.	Particulars	Rs.
1.	Service Charges	1000
2.	Service Tax	123.60
3.	Total	1123.60

In this case, Service Tax is to be deducted on ₹ 1000 only. 

It may be noted that while making payment of rent alongwith Service Tax, Income Tax at Source (TDS) should not be deducted on Service Tax if shown separately. CBDT had issued a Circular No. 4/ 2008 dated 28.04.2008 to this effect. This has further been reiterated in CBDT Circular No. 1/2014 dated 13.01.2014 clarifying the same treatment i.e., wherever in terms of the agreement / contract between the payer and the payee, the Service Tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII – B of the Income Tax Act, 1961, on the amount paid / payable without including such Service Tax component.

Discussions to this article

[Shahour Khan]

Dear Sir,

The immeiate line after the illustration is "In this case, Service Tax is to be deducted on ₹ 1000 only. "; I was wondering whether it was "In this case, Income Tax (TDS) is to be deducted on ₹ 1000 only. "

Pls clarify.

Thanks

[Dr. Sanjiv Agarwal]

Yes, it will be TDS and not service tax.

Error regretted