Practical issues in TDS


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Practical issues in TDS

  1. 1. Practical Issues Prashanth G S , ACA Chartered Accountant Bangalore TAX DEDUCTION AT SOURCE (TDS)
  2. 2. Need for TDS <ul><li>Pay as you earn / accrual of income </li></ul><ul><li>Ensure regular flow of income for the Revenue </li></ul><ul><li>Collect tax in advance </li></ul><ul><li>Minimizes incidence of interest costs for the recipient </li></ul>
  3. 3. Contd… <ul><li>Places responsibility on the persons other than payees </li></ul><ul><li>Easy collection of taxes and avoidance of large scale tax evasion. </li></ul><ul><li>- United Breweries, 211 ITR 256,267- Karnataka </li></ul>
  4. 4. Issues for Discussion
  5. 5. Case Study 1 <ul><li>An assessee employer is liable to deduct tax at source under section 192. </li></ul><ul><li>Deduction of tax of the employees was not unifom during the year; very negligible in the initial months and high amount in the last months. </li></ul><ul><li>AO passed order, levying interest under section 201(1A) on the grounds that tax was not properly deducted. </li></ul><ul><li>Whether the Assessing Officer has rightly levied interest on non-uniformity of tax deducted? </li></ul>
  6. 6. CASE LAWS <ul><ul><li>Vinsons –vs – ITO, 89 ITD 267 (Mum) </li></ul></ul><ul><ul><li>Grasim Industries Ltd. –vs – ITO, 92 TTJ 944 (Jodh) </li></ul></ul><ul><ul><li>Secy. Board of Secondary Education, Rajasthan –vs – ITO, 93 TTJ 256 (Jaipur) </li></ul></ul><ul><ul><li>Annual Board Circular </li></ul></ul>
  7. 7. Case Study 2 <ul><li>The assessee company (employer) deducted tax under section 192 treating leave travel expense as exempt on the basis of declarations filed by the employee. </li></ul><ul><li>  The assessee did not obtain any documentary evidence to treat LTA as exempt. </li></ul><ul><li>AO passed order under section 201(1) treating ‘assessee in default’ having regard to non- verification of travel payments proof. </li></ul><ul><li>Whether the order passed by the A O is good in law ? </li></ul>
  8. 8. CASE LAWS <ul><ul><li>L&T Ltd, 221 CTR 620- Supreme Court </li></ul></ul><ul><ul><li>ITI Ltd, 221 CTR 619 – Supreme Court </li></ul></ul><ul><ul><li>DCIT v. HCL Infosystems Ltd. 282 ITR 263 </li></ul></ul><ul><ul><li>Savani Financials Ltd. –vs – ITO, 1 SOT 111 </li></ul></ul><ul><ul><li>Lintas India Ltd. –vs – Ass. CIT, 5 SOT 310 </li></ul></ul>
  9. 9. Case Study 3 <ul><li>M/s ABC Ltd (employer), as part of the salary structure issued food coupons to the employees, which were to be utilised only at food joints. </li></ul><ul><li>During the assessment proceedings, the AO finds that the employees were misusing the food coupons given by utilizing them for purchase of grocery and other household items. AO passes an order charging the employer for short deduction of tax. </li></ul><ul><li>Is he right? </li></ul>
  10. 10. <ul><li>Employer cannot be held responsible for the misuse of coupons by the employees as long as he had acted in good faith . </li></ul><ul><ul><ul><ul><li>- Reliance Industries Ltd, 308 ITR 82 – Gujarat High Court </li></ul></ul></ul></ul>CASE LAWS
  11. 11. Case Study 4 <ul><li>Mr. A is employed with M/s XYZ and receives salary. </li></ul><ul><li>He also receives salary from a third party. </li></ul><ul><li>Whether M/s XYZ has to deduct tax on the salary received from the third party and whether XYZ is liable to pay interest for short deduction? </li></ul>
  12. 12. <ul><ul><li>Woodward Governor India Pvt Ltd, 295 ITR 1 – Delhi High Court </li></ul></ul>CASE LAWS
  13. 13. Case Study 5 <ul><li>The employer is required to deduct tax u/s 192. He pays Citizen Tax / Social Security Tax on behalf of the employees. </li></ul><ul><li>Whether tax needs to be deducted on the amount paid as Citizen Tax / Social Security Tax? </li></ul>
  14. 14. CASE LAWS <ul><ul><li>NHK Japan Broadcasting Corporation – 291 ITR 331 – Delhi High Court </li></ul></ul>
  15. 15. Case Study 6 <ul><li>Mr. X, an employee contends that he has made arrangements to pay the taxes due on his salary income and hence does not want his employer to deduct tax at source. </li></ul><ul><li>Is he right in claiming so? </li></ul>
  16. 16. CASE LAWS <ul><ul><li>Employers liability is absolute and not affected by any private arrangement by employee to discharge his tax liability </li></ul></ul><ul><ul><li>- John Patterson & Co., 36 ITR 449 – Calcutta High </li></ul></ul><ul><ul><li> Court </li></ul></ul>
  17. 17. Case Study 7 <ul><li>M/s ABC Limited (employer) has paid salary to a non-resident in March 2009 without deduction of tax at source u/s 192 </li></ul><ul><li>He makes good the shortfall in May 2009. </li></ul><ul><li>He contends that he can claim the deduction of salary paid in the year in which he remits the tax deducted. </li></ul><ul><li>Is he right in claiming so? </li></ul>
  18. 18. CASE LAWS <ul><ul><li>No. Disallowance U/s 40 (a)(iii) is permanent </li></ul></ul><ul><ul><li>ANZ Grindlays 82 TTJ 995– Delhi Tribunal </li></ul></ul>
  19. 19. Case Study 8 <ul><li>G Ltd. is a construction company engaged in the business of construction. </li></ul><ul><li>At the initiation of the job work, the client provides G Ltd. some interest bearing ‘mobilization and plant advance’, which is to be repaid by the end of the contract along with interest. </li></ul><ul><li>  Against this, the client recovers the principal plus interest amount and thus G Ltd. does not actually pay any interest. </li></ul>
  20. 20. Contd……. Case Study 8 <ul><li>G Ltd. submits the running account bills on monthly basis depending on the completion of contract. </li></ul><ul><li>  Since no direct payment of interest made, no TDS deducted. </li></ul><ul><li>  Is the contention of the assessee correct? </li></ul><ul><li>  Whether tax is required to be deducted at source under section 194A – ‘Interest other than interest on securities’? </li></ul>
  21. 21. <ul><ul><li>Kanchanganga Sea Foods Ltd. –vs – CIT 265 ITR 644 </li></ul></ul><ul><ul><li>Raymond Limited –vs – DCIT 86 ITD 791 </li></ul></ul>CASE LAWS
  22. 22. Case Study 9 <ul><li>The assessee employer is a Nodal Agency which is 100% owned by the State Government. </li></ul><ul><li>The assessee funds various infrastructure projects in the State. For that purpose, it disburses amounts to various City and Town Corporations. They in turn pay interest to the assessee, which the assessee credits to a separate fund in the Balance Sheet. </li></ul>
  23. 23. Contd……. Case Study 9 <ul><li>By virtue of the Government order, the interest accrued/received by the assessee is held not to be the income of the assessee. </li></ul><ul><li>The assessee contends that no tax u/s 194A needs to be deducted by the parties who are paying interest. </li></ul><ul><li>Is the contention of the assessee correct? </li></ul>
  24. 24. <ul><ul><li>KUIDFC Ltd., 284 ITR 582 – Karnataka High Court </li></ul></ul><ul><ul><li>Notification No. SO/3489 </li></ul></ul>CASE LAWS
  25. 25. Case Study 10 <ul><li> The assessee had purchased goods on credit. The credit period was three months. In case, the amount is not settled within three months, the assessee is liable to pay interest to the vendor. </li></ul><ul><li>The assessee pays interest to his bank, which in turn pays to the vendor. </li></ul><ul><li>Are the provisions of section 194A applicable? </li></ul>
  26. 26. <ul><ul><li>Circular No. 48, Dated 7.11.1970 </li></ul></ul>CIRCULAR
  27. 27. Case Study 11 <ul><li>Assessee engaged in the business of imports and/or exports, engages services of Clearing & Forwarding agents. </li></ul><ul><li>Payments to such C&F agents comprise of the following: </li></ul><ul><li>Reimbursement of freight paid to shipping companies or airlines. </li></ul><ul><li>Reimbursement of freight on local transportation </li></ul><ul><li>Reimbursement of import or export clearing expenses like payments to Port Trust, Airport Authorities of India, miscellaneous charges, etc. </li></ul>
  28. 28. Contd……. Case Study 11 <ul><li>Reimbursement of import or export clearing expenses like payments to Port Trust, Airport Authorities of India, miscellaneous charges, etc. </li></ul><ul><li>Reimbursement of bonded warehousing charges. </li></ul><ul><li>Reimbursement of Customs duties and Octroi. </li></ul><ul><li>Reimbursement for Crane and Machinery charges to Port Trust etc. </li></ul><ul><li>Agency service charges </li></ul>
  29. 29. Contd……. Case Study 11 <ul><li>  Whether any tax is liable to be deducted on any of the above payments to C&F agents? </li></ul><ul><li>If the agent has already deducted TDS on freight payments to the Indian Shipping Co., then whether the importer/exporter also needs to deduct tax on the payments made to the agents and if so then on what amount? </li></ul><ul><li>When C&F agent deduct tax and pays it to the exchequer, the payments would be on his own TDS account or his clients’ account number? </li></ul>
  30. 30. <ul><li>CIT –vs – Industrial Engineering Projects Pvt. Ltd., 202 ITR 1014 (Del.) </li></ul><ul><li>CIT –vs – Dunlop Rubber Co. Ltd, 142 ITR 493 (Cal.) </li></ul><ul><li>Associated Cement Co. Ltd. (SC) 201 ITR 435 </li></ul>CASE LAWS
  31. 31. Case Study 12 <ul><li>The assessee is a pharmaceutical company, engaged in the business of manufacturing and selling pharma related products. </li></ul><ul><li>It procures packing material like plastics wrappers, containers, cardboard boxes etc., from the vendors (manufacturers) as per assessee’s desired specifications viz. brand name, name & address, designs, trademarks etc. </li></ul>
  32. 32. Contd……. Case Study 12 <ul><li>Similarly, payments are also made to printing and stationery vendors who supply printed letterheads, business cards, sales and other printed literature where the printing is done as per the assessee’s specifications. </li></ul><ul><li>Vendor’s charge excise duty and sales tax on such items. </li></ul><ul><li>  Whether tax is required to be deducted under section 194C for payments made as printing charges? </li></ul>
  33. 33. <ul><li>BDA Ltd., 281 ITR 99 – Mumbai High Court </li></ul><ul><li>Wadilal Diary, 81 ITD 238 – Pune Tribunal </li></ul><ul><li>Reebok India Ltd., 100 TTJ 976 – Delhi Tribunal </li></ul>CASE LAWS
  34. 34. Case Study 13 <ul><li> X Ltd. is in the business of running a call centre. </li></ul><ul><li>Contract is entered with transport contractor for transporting the employees of X. </li></ul><ul><li>X Ltd. uses the bus or van and such other means of transport for this purpose. </li></ul><ul><li>The payments made by X Ltd to transport contractor are fixed hire charges. </li></ul><ul><li>Tax is deducted by X u/s 194C. </li></ul><ul><li>AO is of the view that payments are in the nature of ‘rent’ u/s 194I as defined by Tax Law Amendment 2006 </li></ul><ul><li>Is the stand taken by the AO correct? </li></ul>
  35. 35. <ul><li>Explanation III to Section 194C </li></ul>Reference
  36. 36. Case Study 14 <ul><li>PQR Ltd., the assessee, is engaged in the business of providing airline services. </li></ul><ul><li>  Co. frequently requires hotel rooms for accommodation of its pilots and crewmembers. </li></ul><ul><li>  Co. books rooms and makes payments for hire of rooms. </li></ul>
  37. 37. Contd……. Case Study 14 <ul><li>  PQR Ltd. has entered into ‘rate-contracts’ with some and with others the nature of contracts is such that hotels are under an obligation to provide accommodation to PQR Ltd.. </li></ul><ul><li>Tax is deducted u/s 194C. </li></ul><ul><li>  Is PQR Ltd. required to deduct tax u/s 194I or whether the Co. is justified in deducting u/s 194C? </li></ul>
  38. 38. <ul><li>Krishna Oberoi and other v. UOI [2002] 257 ITR 105(AP) </li></ul><ul><li>Circular No. 5/2002 dated 30-7-2002, 194I does not apply to rate contracts </li></ul>CASE LAWS
  39. 39. Case Study 15 <ul><li> G Ltd. is a manufacturer. </li></ul><ul><li>Company has made payments to an Indian entity towards the Internet connectivity, Vo-Data card charges and Domain registration charges. </li></ul><ul><li>No Tax is deducted on such payments made. </li></ul><ul><li>Company has a view that the payments made are not in terms with ‘payment for technical services’ as covered u/s 194J. </li></ul>
  40. 40. Contd……. Case Study 15 <ul><li>However, CCIT treats the payments made as ‘fees received for providing technical services’ and deduct tax at source. </li></ul><ul><li>Is G Ltd. correct in its stand that the payments made to providers of internet connectivity, facility of Vo-Data card or domain registration charges are out of the purview of ‘fees for technical services’? </li></ul><ul><li>Whether tax should be deducted on such payments? </li></ul>
  41. 41. <ul><li>Skycell Communications Ltd. (251 ITR 53) [Madras] </li></ul>CASE LAWS
  42. 42. Case Study 16 <ul><li>The invoice raised on the assessee was inclusive of professional charges and service tax thereon and reimbursement of actual expenses. </li></ul><ul><li>No tax deducted on the reimbursement of expenses. </li></ul><ul><li>Under ‘any sum paid’ as referred to in Section 194J, reimbursement of actual expenses cannot be deducted out of the bill amount for the purpose of tax deduction. </li></ul><ul><li>- [Circular No. 715 dated 8-8-1995]. </li></ul>
  43. 43. Contd……. Case Study 16 <ul><li>AO relied on CBDT circular and levied interest u/s 201(1A). </li></ul><ul><li>Whether tax will be deductible on gross value of bill or on net? </li></ul><ul><li>Will the answer be different if separate bills are raised for both? </li></ul>
  44. 44. <ul><li>ITO –vs – Dr. William Scwabe India (p) Ltd., 3 SOT 71. </li></ul>CASE LAWS
  45. 45. Case Study 17 <ul><li> A Ltd., the assessee, entered into a lease agreement with B Ltd. For taking premises on lease with a separate agreement on hire of furniture. </li></ul><ul><li>A Ltd., fails to deduct tax at source u/s 194-I on the lease payments made to the payee. </li></ul><ul><li>However B Ltd. While filing his return of income declared the said receipt of income and paid tax thereon. </li></ul>
  46. 46. Contd……. Case Study 17 <ul><li>Assessing officer issued notice u/s 201 (1) & 201(1A) levying interest for non-deduction of tax. </li></ul><ul><li>Whether the AO can issue such a notice on A Ltd.? </li></ul><ul><li>If yes, is he liable to pay tax? </li></ul><ul><li>If not, is he liable to pay interest? </li></ul><ul><li>If yes, what is the period for which interest is payable? </li></ul>
  47. 47. <ul><li>CIT –vs – Adidas India Marketing Pvt. Ltd., 288 ITR 379 </li></ul><ul><li>CIT –vs – Rishikesh Apartments Co-op Housing Soc. Ltd. 253 ITR 310, 316 (Guj.) </li></ul>CASE LAWS
  48. 48. <ul><li> B Ltd. is engaged in the business of providing cellular mobile telephone services through its distributors. </li></ul><ul><li>It sold SIM and other pre-paid cards at a fixed rate [below market price] to such distributors for ultimate sale to customers. </li></ul><ul><li>As agreed, all rights, title, ownership and property rights in such cards would all time vest with B Ltd. </li></ul>Case study -18
  49. 49. <ul><li>Assessee claimed such price difference as discount allowed and not as commission defined in Expl. u/s 194H. </li></ul><ul><li>AO treated it as default and levied interest u/s 201(1) and 201(1A). </li></ul><ul><li>Is the AO’s claim justified in treating it as commission? </li></ul><ul><li>Whether provisions of section 194H gets attracted? </li></ul>Contd……. Case Study 18
  50. 50. <ul><li>ACIT –vs – Bharthi Cellular Ltd. 105 ITD 129 (Cal.) </li></ul><ul><li>( Stay granted by Calcutta High Court) </li></ul><ul><li>Hindustan Coca-Cola Beverages (P.) Ltd. –vs – ITO [2005] 97 ITD 105 (Jaipur.) </li></ul>CASE LAWS
  51. 51. Other Issues <ul><li>Section 40(a) (ia) </li></ul><ul><li>Provision for Expenses </li></ul><ul><li>Reimbursement of Expenses </li></ul><ul><li>Section 201(1) – penal in nature? </li></ul>
  52. 52. Section 40(a) - Amounts not deductible <ul><li>Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head &quot;Profits and gains of business or profession&quot;,- </li></ul><ul><li>any interest, commission or brokerage, rent, royalty, fees for profes­sional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid,- </li></ul><ul><li>(A) in a case where the tax was deductible and was so deducted during the last month of the previous year, on or before the due date specified in sub-section (1) of section 139; or </li></ul><ul><li>(B) in any other case, on or before the last day of the previous year: </li></ul>Section 40(a)(ia)
  53. 53. <ul><li>Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted- </li></ul><ul><li>(A) during the last month of the previous year but paid after the said due date; or </li></ul><ul><li>(B) during any other month of the previous year but paid after the end of the said previous year, </li></ul><ul><li>such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid. </li></ul>
  54. 54. Section 201(1) - Consequences of failure to deduct or pay <ul><li>Where any person, including the principal officer of a company,— </li></ul><ul><li>who is required to deduct any sum in accordance with the provisions of this Act; </li></ul><ul><li>or </li></ul><ul><li>referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax : </li></ul><ul><li>…………………… </li></ul>
  55. 55. Section 220 - When tax payable and when assessee deemed in default <ul><li>220(1) - Any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice : </li></ul><ul><li>……………… .. 220(2) - If the amount specified in any notice of demand under section 156 is not paid within the period limited under sub-section (1), the assessee shall be liable to pay simple interest at one per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid : …………………….. </li></ul>
  56. 56. <ul><li>220(4) If the amount is not paid within the time limited under sub-section (1) or extended under sub-section (3), as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed to be in default. </li></ul><ul><li> ……………………… .. </li></ul><ul><li>- Mittal Steels – 240 ITR 707 – Karnataka High Court </li></ul>
  57. 57. Section 221(1) - Penalty payable when tax in default. <ul><li>When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears : </li></ul><ul><li>…………………… .. </li></ul>
  58. 58. Sec 140A(3) <ul><li>If any assessee fails to pay the whole or any part of such tax or interest or both in accordance with the provisions of sub-section (1), he shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of the tax or interest or both remaining unpaid, and all the provisions of this Act shall apply accordingly </li></ul>
  59. 59. <ul><li>Provision for Expenses – 37 ITR 1 – Calcutta Company Limited </li></ul><ul><li> </li></ul><ul><li>Reimbursement of Expenses – ITA No.466/2004 – KUIDFC Ltd., - Karnataka High Court </li></ul><ul><li>Crystallization of Liability – Trigger Point ? </li></ul>
  60. 60. p r a s h a n t h @ s d u c a.c o m Thank You