Service tax and TDS - Dr Sanjiv Agarwal - Article published in Business Advisor, dated July 10, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume VIII Part 1 July 10, 2014 21 Business Advisor
Service tax and TDS
Dr Sanjiv Agarwal
Service tax is payable on gross amount payable by
service receiver to the service provider. Since TDS is
deducted on behalf of the payee, gross amount for the
purpose of service tax would be the amount inclusive
of or before deduction of income tax deducted at
source (TDS).
On TDS on payments made to service providers, CBDT
vide Letter No F. No. 275/1/2006-IT (B) dated
21.7.2006 addressed to CIT, Mumbai clarified that tax
deduction u/s 194-J of Income Tax Act, 1961 would be required to be made
on the sums payable by the deductors inclusive of any service tax.
In CCE, Jaipur I v. Louis Berger International Inc. (2009) 13 STR 381; (2008)
18 STT 312 (Cestat, New Delhi), it was held that amount of tax deducted at
source (TDS) is not excludible from gross amount for determining tax
liability.
The TDS amount deducted was payable only on behalf of the appellant to
income tax department and there was no justification to exclude TDS
amount from gross amount for the purpose of determining service tax
liability.
In re: Mainetti (India) (P.) Ltd. (2013) 38 STT 347 (Cestat, Chennai), in case of
service provider, TDS is not deductible for purpose of calculating service tax
liability since service tax is to be charged on gross amount received.
No TDS on service tax component
In CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (2013) 31 STR 642
(Rajasthan), 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.
CBDT clarification
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

2. Volume VIII Part 1 July 10, 2014 22 Business Advisor
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 not
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:
In this case, Service Tax is liable to be
deducted on Rs 1,000 only.
It may be noted that while making
payment of rent along with 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.
TDS on rent
So far as TDS on rent is concerned, CBDT has clarified vide Circular No. 4
dated 28.4.2008 that service tax paid by the tenant does not partake of the
nature of income of landlord. The landlord only acts as a collection agency
for the Government for collection of service tax. Therefore, TDS under
section 194-I of the Income Tax Act, 1961 would be required to be made on
the amount of rent paid or payable without including the service tax.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur)
Sl No. Particulars Rs
1. Service charges 1,000
2. Service tax 123.60
Total 1,123.60