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Practical issues in Tax Deduction at Source
Payments to residents (other than salary)

CA. N.C. Hegde
Deloitte Haskins & Sells
22nd March 2013


Contents

• Section 194A – Interest other than interest on securities

• Section 194C – Payments to contractors

• Section 194J – Fees for professional or technical services

• Section 194H – Commission or brokerage

• Section 194I – Rent

• Other issues

• Appendix

2


Section 194A – Interest other
than interest on securities

3


Section 194A
TDS on net off payment?
Issue
• Whether deduction should be done from gross interest payable or net interest
after setting-off mutual balances?
Held
• Statutory liability is imposed at the time of the credit of interest
• It is not possible to cast off the liability or shirk the liability imposed by the statute
• The expression, 'any income by way of interest' in section 194A, indicates that all
'interest income' is included except those which are specifically excluded from the
scope of the section
• The principal of netting the interest has no application under section 194A
• Tax was required to be deducted on gross interest credit to the account

S.K. Sundararamier and Sons (240 ITR 740) (Madras HC)

4


Section 194A
Discounting charges
Issue
• Whether discounting charges are in the nature of ‘interest’ on which tax is
deductible?
Held
• Interest is the sum payable in respect of money borrowed or debt incurred
• Bill discounting is a process in which sale consideration receivable on sale of
goods is discounted, which is not debt incurred or money borrowed
• The Interest Tax Act, 1974 specifically includes discounting charges in the
definition of interest. However interest defined under the Income-tax Act, 1961
(Act) does not include discounting charges
• Wherever the legislature intended the discount of bills of exchange to be included
within the definition of interest, the same was specifically provided for. Hence
omission of these words in the definition under the Act indicates the intention of
the legislator to keep the same out of the ambit of ‘interest’ under the Act
• The same rationale is also laid down in Circular no. 65 issued by the Central
Board of Direct Taxes (CBDT) in relation to section 194A of the Act
• Circular no. 647 dated 22 March 1993 also referred to
Cargill Global Trading (I) (P) Limited (ITA Nos. 331 & 204 of 2011) (SC)
5


Section 194A
Usance interest
Issue
• Whether finance charges / usance interest is in the nature of ‘interest’ on which
tax is deductible?
Held
• The intention of the parties to the contract was clear and the price of the material
to be supplied was reflected in a separate invoice
• In lieu of the credit facility, the buyer was required to pay interest at a stipulated
rate for which a separate invoice was prepared
• There was no nexus between the interest amount and fixation of the price of the
raw materials purchased. The nexus of interest was only with the period from
which the purchase price became due
• Thus, the outstanding price was a ‘debt incurred’ within the meaning of
interest under the Act

Uniflex Cables Ltd. (150 TTJ 290) (Mumbai ITAT)

Circular no. 65 of 1971 – TDS is applicable where there is no immediate
discounting and the bank (as an agent) receives interest at the end of the period
6


Section 194A
Payment on overdue purchase price
Issue
• Whether a compensatory sum payable on overdue purchase price is ‘interest’ on
which tax is deductible?
Held
• A distinction is required between payments not connected with any debt and
those having connection with borrowings
• A payment having no nexus with a deposit, loan or borrowings is out of the ambit
of the definition of interest
• If the immediate source of receipt is trade activity, then the nature of receipt
is not ‘interest payment’ but is payment of compensation. TDS is not
applicable

Parag Mahasukhlal Shah (46 SOT 302) (Ahmedabad ITAT)

7


Section 194A
Interest along with damages / compensation
Issue
• Whether interest for delay in construction projects is ‘interest’ for section 194A?
Held
• In case the houses were ready within the stipulated period the assessee would
not be liable to pay interest
• When construction of a house was delayed, there could be escalation in the cost,
the allottee could be deprived of rental income / right of living in his own house
• Thus, the amount paid by the assessee was not payment of interest but
payment of damages to compensate the allottee for the delay in the
construction of his house and the harassment caused
• The allottees had not given money to the assessee by way of deposit nor had the
assessee borrowed the amount from the allottees
• The amount was paid under a self-financing scheme for construction of the flats
and the interest was paid on account of damages suffered by the claimant for
delay in completion of the flats. TDS is not applicable

H. P. Housing Board (340 ITR 388) (HP HC)
8


Section 194C – Payments to
contractors

9


Section 194C
Deputation of employees
Background and issue
• JV company (JV) made payment towards reimbursement of salaries of
employees deputed by its promoter companies, without deducting tax at source
• Whether the payment can be considered as payment for supply of labour for
carrying out the work and would fall under the provisions of section 194C
Held
• The deputed personnel worked under the control and management of the JV
• The work was being carried out as employees of the JV and not on behalf of the
promoter companies
• Their salary cost was a charge on profits of the JV
• Instead of paying it to the employees directly, the JV reimbursed the amount to
the promoter companies who had paid the amount to the employees

10


Section 194C
Deputation of employees
• Merely because the promoter companies had in an agreement to depute their
employees would not mean that it was a works contract
• Such payment by way of salary would neither constitute FTS nor a works
contract performed by the promoter companies

Bhagyanagar Gas Ltd. (29 taxmann.com 220) (Hyderabad ITAT)

11


Section 194C
Wages paid through Board
Issue
• When wages paid to Mathadi Board for onward payment to labourers is subject
to TDS under section 194C?
• Held
• The mandate of section 194C is that the relationship of the person paying any
sum to the person carrying out any work including the supply of labour should be
in the nature of the principal to contractor
• There was no contractual relationship as a principal and contractor between the
assessee and Mathadi Board, but, in fact, in pursuance of the provisions of the
Act as well as the scheme, the assessee was bound to engage labourers or the
workers through the Mathadi Board
• The payments to Mathadi Board are not subject to TDS under section 194C

Gokuldas Virjibhai & Company (139 ITD 284) (Pune ITAT)

12


Section 194C
Meaning of ‘work’ and ‘service’
Issue
• Whether section 194C is applicable only to payments made for 'any work' and not
the payment made as fee for services rendered?
Held
• If the term 'any work' in section 194C by itself covers any kind of service, the
words in the bracket in sub-section (1) i.e. ‘including supply of labour for carrying
out any work’, will be otiose or superfluous
• But for the specific inclusion of those words in section 194C, obtaining of supply
of labour for carrying out the work would have fallen outside the word 'work‘
• The term ‘any work' is not wide enough to comprise within its scope obtaining of
supply of labour to carry out work (because this is essentially within the sphere of
'services‘). However, 'any work' is wide enough to cover any kind of work which
one can get carried out through another
• It is most inappropriate to equate rendering of a service to carrying out a work

S.R.F. Finance Ltd. (76 Taxman 432) (Delhi HC)
13


Section 194C
Payment for hire of machinery
Issue
• Whether mere providing of machinery on hire without any manpower cannot be
termed as ‘carrying out of any work’ by plant and machinery owners and, thus,
provisions of section 194C cannot be applied?
Held
• There was no contract between the hirer and the owners of the machinery to
carry out any work and only the machinery belonging to the owners was hired for
a fixed period, on payment of hire charges
• Hiring of machinery for the purpose of using it in its business would not amount to
a contract for carrying out any work, as contemplated in section 194C
• The provisions of section 194C are attracted only where any sum is paid for
carrying out any work including supply of labour for carrying out any work
• Circular no. 681 also clarified that the provisions of section 194C would not apply
in relation to payments made for hiring or renting of equipments etc.

Kiran Constructions (30 taxmann.com 235) (Hyderabad ITAT)
14


Section 194C
Different contracts – viewed as a ‘works contract’
• For the purpose of setting up an oil refinery, the assessee entered into three
contracts (for supply of material, for labour-cum-erections and for construction of
refinery) with its sister concern
• Whether these contracts could be termed as 'works contract‘ on which tax was
deductible?
Held
• It is necessary to consider the primary object of the transaction and intention of
the parties in order to determine whether contract is divisible or indivisible
• The assessee had originally entered into a single agreement for construction of
refinery plant and thereafter made amendments and created three separate
contracts for supply (wherein the original agreement was mentioned at various
places)
• Thus, the three agreements were found to be in nature of a single integrated
agreement for construction of refinery plant which could be termed as
'works contract‘. TDS under section 194C is applicable

Essar Oil Ltd (30 taxmann.com 39) (Gujarat HC)
15


Section 194C
Different contracts – not viewed as a composite
transaction
• Assessee entered into entered into three independent contracts with the
contractors, viz., agreement for supply, agreement for civil work, and agreement
for erection work for total / partial turnkey project
• Tax was deducted for civil work and erection work, but not for payments for
supply
• Whether TDS is applicable on payments for supply portion?
Held
• The contract to be entered into would be treated as divisible contract resulting in
three separate contracts (owing to the language in the contract)
• Carrying out any work is a sine quo non to attract section 194C. A contract under
which a contractor agrees to supply material which may be used by him later in
carrying out the work will not render the agreement to supply a contract for
carrying out any work
• The contract for supply of materials is a distinct contract in respect of
which TDS is not applicable
Karnataka Power Transmission Corporation Ltd. (21 taxman.com
16 473) (Karnataka HC)


Section 194C
Warehousing charges
Issue
• Whether tax is deductible on warehousing charges paid to clearing and
forwarding agents under section 194C or section 194I?
Held
• From an analysis of the various lease deeds and agreements entered into by the
assessee with the landlord / lessors and separately the C & F agreements, the
ITAT was able to discern that no element of rent was paid by the assessee to the
C & F agents
• Wherever there was a payments of rent, TDS had been deducted under section
194I
• What was paid to the C & F agents as warehousing charges was the
consideration in terms of the agreement on which tax was deductible under
section 194C

Hindustan Lever Ltd. (29 taxmann.com 313) (Delhi HC)
17


Section 194C
Hire of trucks without contract of carriage of goods
Issue
• Is payment for mere hiring of trucks liable to TDS under section 194C?
Held
• Section 194C would be applicable when there is a payment for carrying out any
work including supply of labour for carrying out any work in pursuance of a
contract
• In the present case, the carriage of goods was not entrusted with the lorry / truck
owners from whom the lorries / trucks were hired by the transport contractor for
further hiring to ‘L’ or even with the transport contractor himself
• The responsibility of carriage of goods remained with ‘L’
• Therefore, there is no contract for carriage of goods between the transport
contractor and the lorry / truck owners from whom the trucks / lorries were hired
and hence, the provisions of section 194C are not applicable

Reez Karakkattil Raghavan (29 taxmann.com 295) (Cochin ITAT)
18


Section 194C
Facilities provided by hotels
Issue
• Whether various facilities offered to guests of the hotel (apart from boarding and
lodging) should be subject to TDS under section 194C?
Held
• The phrase ‘carrying out work’ under section 194C is limited to any work, which
on being carried out, culminates into a product or result (reliance was placed on
the decision of the SC in the case of Associated Cements)
• Circular no. 681 dated 3 March 1994, to the extent it applies to a customer
availing the services of a hotel, should be held contrary to section 194C
• The word ‘work’ has to be understood in a limited sense and would extend only to
the service contracts specifically included in (the then) Explanation III to section
194C
• All service contracts do not automatically fall under the purview of section
194C

East India Hotels Ltd and another (320 ITR 526) (Bombay HC)
19


Section 194C
Payment to transporters
• The assessee got a sub-contract pertaining to construction of peripheral and
approach roads and to transport the construction material to the site, the
assessee had availed services of transporters
• Whether tax was deductible on payments made to the transporters?
Held
• The assessee was solely responsible for execution of the work and no part of
such liability was cast on the transporters
• The services of the transporters had only been availed for carrying the material to
the site
• For application of section 194C, what is necessary is a relationship
between the contractor and sub-contractor (and not merely hiring of an
agency during the course of execution of the work)
• TDS is not applicable in the present case

Prashant H Shah (29 taxmann.com 296) (Gujarat HC)
20


Section 194C
Use of name and copyright
• The assessee was engaged in providing education and training across the
country through education centres run by assessee or by its franchisees
• Whether payment to franchisees attracts TDS under section 194C?
Held
• The substance of the franchisee agreement is that it is a business arrangement
under which both parties hope to benefit (and there are mutual obligations and
rights)
• It is not a simple case of an agreement under which a person is engaged in
carrying out any work for the other
• An arrangement under which both sides have joined together by mutual
arrangement and to share profits of a joint enterprise is not covered by the
definition
• The work is undertaken jointly by them for third parties who pay
consideration which is shared. Parties do not work for each other
• Section 194C is not applicable

Career Launcher India Ltd. (20 taxmann.com 637) (Delhi HC)
21


Section 194C
Reimbursement of expenses
Issue
• Whether reimbursement of customs clearance expenses to a C & F agent
through a separate bill attracts TDS under section 194C?
Held
• If the assessee reimbursed expenses towards freight incurred on its behalf under
an agreement for which separate bills is raised, the provisions of section 194C
are not attracted
• Section 194C is applicable where payments is made to a contractor / sub-
contractor where the contract is either a work contract or a contract for
supply of labour for works contract
• In the present case, the assessee has reimbursed the expenses to its
consignment agent and it was not a direct payment of freight by the assessee to
the transporter

Surendra Commercial & Exim (P) (ITA No. 916) (Kolkata ITAT)
22


Section 194J – Fees for
professional or technical
services

23


Section 194J
Transaction fees paid to stock exchange
Issue
• Whether transaction charges paid to stock exchanges would be Fees for
Technical Services (FTS)?
Held
• The BOLT system of the stock exchange provides all the data that is necessary
for an intending buyer and intending seller of the respective securities
• The fact that the BOLT system has inbuilt automatic safeguards which
automatically alert if the price fluctuation exceeds a particular limit, does not
mean that managerial services are not rendered
• Stock exchanges are required to manage the entire trading activity carried on by
its members and accordingly managerial services are rendered by the stock
exchanges
• Therefore, transaction charges paid to the stock exchange are for rendition
of managerial services and hence, constitutes FTS under section 194J

Kotak Securities Ltd. (340 ITR 333) (Bombay HC)
24


Section 194J
Third Party Administrators (TPAs)
• TPAs provide services such as hospitalization services, cashless access
services, processing and settlement of claims
• TPAs make payment to hospitals for rendering medical services to the policy
holders
• Whether the TPA is required to deduct tax at source under section 194J?
Held
• Though a hospital by itself, being an artificial entity, is not a ‘medical
professional’, it provides medical services by engaging the services of doctors
and qualified medical professionals. These services are rendered in the course of
carrying on the medical profession
• Accordingly, the TPA is required to deduct tax at source under section 194J
• Circular no. 8/2009 dated 24.11.2009 is applicable
• The circular is set aside to the extent it states that a failure to deduct tax on
payments made by TPAs to hospitals will necessarily attract a penalty under
section 271C
Dedicated Health Care Services TPA (324 ITR 345) (Bombay HC)
25


Section 194J
Film broadcasting rights
Issue
• Whether payment made for acquiring rights for satellite broadcasting of film
amounts to 'royalty‘ on which tax is deductible?
Held
• Consideration for transfer of all or any rights in respect of any copyright, including
copyright for films and videotapes, used in connection with television or tapes,
would fall within the definition of 'royalty‘ (except consideration for sale,
distribution and exhibition of cinematographic films)
• Assessee had only received right for satellite broadcasting and had not
purchased the cinematographic films
• Whether the transfer of rights is perpetual or only relates to a part of the rights,
the consideration paid would be ‘royalty’ as long as it relates to transfer of any
right relatable to a copyright of a film or videotape, which is to be used in
connection with television or tapes. TDS under section 194J is applicable

Shri Balaji Communications (30 taxmann.com 100) (Chennai ITAT)
26


Section 194J
Participation fees for seminar
Issue
• Whether payment as participation fees for a conference is subject to TDS under
section 194J or section 194C?
Comments
• The payment for attending a seminar would not be for procuring any technical
services if the information in the seminar is general in nature and not specifically
delivered for the participating company. Accordingly, TDS under section 194J
should not apply
• If the conference is not specifically organized for the payer, there would be no
‘contract for work’ and hence, TDS under section 194C would not be triggered

27


Section 194J
Relationship with stockist
• Assessee appointed a firm as a ‘super stockist’ responsible for getting stock of
the assessee for onward transmission to the market, through the retailer
• Whether the ‘super stockist’ is a manager for the purpose of section 194J?
Held
• The agreement clearly stipulates that the relationship shall be on a ‘Principal to
Principal’ basis and that the super stockist is not and shall, at no point, hold itself
as an agent / employee / legal representative / partner of the assessee
• There is no payment (mush less payment of fee for professional services) which
attracts section 194J
• A bare perusal of section 194J makes it clear that it is necessary that the
assessee or the person concerned liable to deduct and pay TDS must be
responsible for paying to a resident any sum, by way of fees for professional
services, fees for technical services, royalty, etc. In the present case, the
assessee had not paid any sum to the super stockist
• The relationship is on a Principal to Principal basis and TDS is not applicable

28
Piramal Healthcare Ltd (Mumbai ITAT)


Section 194J
Reimbursement of expenses
• Assessee made payments for professional charges and also reimbursed car
maintenance expenses of a consultant (which were charged to the assessee
through separate bills)
• Whether reimbursement of expenses was also part of professional fee paid to
consultant and liable to TDS under section 194J?
Held
• The bills raised for car expenses were towards actual expenses incurred by the
consultant and there was no element of any profit involved therein
• It was a clear case of reimbursement of actual expenses incurred and therefore
not a payment covered by section 194J requiring TDS
• Circular no. 715 dated 8 August 1995 applies in cases where bills are raised
for the gross amount inclusive of professional fees as well as
reimbursement of actual expenses (which was not the case in the present
facts)

Dr. Willmar Schwabe India (P.) Ltd. (3 SOT 71) (Delhi ITAT)
29


Section 194J
Meaning of ‘managerial’ services
• ….merely because some managerial skill is required to render the services,
it would not make the services to be managerial services as envisaged in
Explanation 2 to section 9(1)(vii). Similarly, the requirement of knowledge of local
laws on the part of the service providers to render the services ….would not
change the basic nature of the services which otherwise are commercial
services…”
Yash Raj Films Pvt. Ltd. (28 taxmann.com 247) (Mumbai ITAT)

• “The term 'managerial services' refers to managing certain affairs, a quid pro quo
for which will be described as fees for technical services…The assessee has no
role, much less the provision of any managerial services, in the process of
completion of successful sales, which entitles it to user fee.….When some
purchaser intends to purchase a particular product, he accesses the assessee's
website and on finding a suitable product, clicks 'Buy It Now' button. It concludes
the transaction of sale between the buyer and seller, entitling the assessee to its
fee.…By providing a platform for doing business, the assessee can, by no
standard, be considered as having rendered any managerial services either
to the buyer or to the seller, for which it received fee from the seller.”

eBay International AG (140 ITD 20) (Mumbai ITAT)
30


Section 194J
Acquisition of software
Notification no. 21/2012 dated 13 June 2012 –
• No TDS under section 194J on payments for acquisition of software in some
cases, subject to certain conditions
• Payment by a person (i.e. transferee) for acquisition of software from another
person, being a resident, (i.e. transferor), where
− the software is acquired in a subsequent transfer and the transferor has
transferred the software without any modification
− tax has been deducted under section 194J / 195 on payment for any
previous transfer of such software
− the transferee obtains a declaration from the transferor regarding such TDS
along with the Permanent Account Number of the transferor

Effective from 1 July 2012

31


Section 194H – Commission or
brokerage

32


Section 194H
Credit card commission to banks
Issue
• Whether credit card commission retained by the credit card company / bank from
the sale transaction of merchants is subject to TDS under section 194H?
Held
• Though the definition of ‘commission or brokerage’ used under section 194H is
an inclusive definition, the liability to deduct tax under the said section arises only
when a person acts on behalf of another person
• Sale made through credit card is clearly a transaction of the merchant
establishment. The credit card company / bank only facilitates the electronic
payment, for a charge

33


Section 194H
Credit card commission to banks
• The commission retained by the credit card company is in the nature of normal
bank charges and not in the nature of commission / brokerage for acting on
behalf of the merchant establishment
• Accordingly, there is no requirement of deducting tax at source on the
commission retained by the credit card companies

M/s. Vah Magna Retail Pvt. Ltd. v. Department of Income Tax on 10
April, 2012 (ITA No. 905/Hyd./2011)

No TDS on credit / debit card commission
for transaction between merchant
establishment and acquirer bank
- Notification No 56/2012 [F. NO.
275/53/2012-IT(B)], Dt. 31-12-2012

34


Section 194H
Principal - agent relationship
• Assessee is engaged in providing cellular mobile telephone services
• It sells SIM cards and pre-paid cards at a fixed rate (below market price) to
distributors / franchisees for onward sale to ultimate customers
• Whether the price difference (between the sale price and market price) is a
payment of commission and hence subject to TDS under section 194H?
Held
• As per the agreement, there was essentially a relation of principal and
agent between the assessee and the distributors / franchisees
• In the real sense, the franchisee was acting on behalf of the assessee for selling
SIM cards and pre-paid cards to the customers of the assessee
• The property in the SIM cards and prepaid cards remained with the assessee
even after transfer and delivery to franchisee

35


Section 194H
Principal - agent relationship
• The franchisee had no free choice to sell and everything was being regulated and
guided by the assessee
• The rate at which the franchisee would sell to retailers and that at which is
realized by the assessee from the franchisee was also regulated and fixed by the
assessee
• The franchisee had no role except that of a middleman between the assessee
and the ultimate customers, for which a discount (in real sense commission) was
received
• Therefore, the assessee was liable for deduction of tax at source under
section 194H on the indirect commission paid to its franchisees

Bharti Cellular Ltd. (244 CTR 185) (Calcutta HC)

36


Section 194H
Principal - principal relationship
• Assessee was a cellular telephone service provider offering both pre-paid and
post-paid facilities to subscribers
• It appointed distributors for pre-paid cellular connections and recharge coupons
• At the time of selling its pre-paid cellular connections and recharge coupons to
the distributors, some margin was allowed to the distributors in the form of
discount / commission on the market price
Held
• ‘Commission or brokerage’ as contained in clause (i) of the Explanation to section
194H is not so wide that it would include any payment receivable, directly or
indirectly, for services in course of buying or selling of goods

37


Section 194H
Principal - principal relationship
• The element of agency is required in case of all services or transactions
contemplated by Explanation (i) to section 194H
• Held that transactions between the assessee (a cellular service provider) and the
distributor (for prepaid cellular connections and recharge coupons) were on a
principal to principal basis (i.e. the legal relationship between a seller and
purchaser) and not on principal to agent basis
• Therefore the margins allowed to the distributors on prepaid cards was not
in the nature of commission and hence, section 194H was not applicable

Idea Cellular Ltd (125 ITD 222) (Hyderabad ITAT)

Dairy was not liable to deduct tax on payments made to concessionaires /
agents to whom milk and milk products were sold on a principal to principal
basis – Mother Dairy India Ltd. (249 CTR 559) (Delhi HC)

38


Section 194H
Difference between commercial price and published price
• Airlines had an agreement with agents to sell tickets at a minimum fixed
commercial price which was lower than the published price
• Agents could sell at a higher price subject to a maximum of published price
• As per IATA rules, agents were entitled to commission at 9% on the published
price
• Airlines deducted tax on the payment of this 9% commission. However, Revenue
contended that the difference between commercial price and published price was
also in the nature of commission and liable to TDS
Held
• The agents were entitled to sell tickets at any price between the fixed commercial
price and the published price. As a result the airlines would have no information
regarding the final rates at which tickets were sold

39


Section 194H
Difference between commercial price and published price
• It would be impracticable and unreasonable to expect the airlines to collect
feedback from its numerous agents regarding the prices at which the tickets were
finally sold
• Thus, the difference between the commercial price and the published price
could neither be considered as commission nor brokerage in the hands of
the agents and hence was not liable to TDS

Qatar Airways (332 ITR 253) (Bombay HC)

40


Section 194H
Commission and supplementary commission
• Tax should be deducted at source under section 194H on the amount
available to agents, being the difference between airfare fixed by airlines and
the price at which agents are enabled to sell tickets

Around the World Travels & Tours Pvt. Ltd. (141 Taxman 53)
(Madras HC)

• Supplementary commission retained by travel agents over and above the net fare
made over to airlines is liable to TDS under section 194H as commission
• Air tickets sold by airlines company to travel agents at a concessional rate
held to be a sale transaction on principal to principal basis and does not
amount to commission

Singapore Airlines Ltd. & Other airlines (319 ITR 29) (Delhi HC)

41


Section 194H
Discount given to retail customers, group passengers
and small time agents
• Assessee, an IATA approved agent, was engaged in booking tickets for various
airline companies
• Commission (i.e. in effect, discounts offered) payments made by the assessee
(without TDS) could be grouped into payments to retail customers, to group
passengers like Haj pilgrims and to small time travel agents
• Whether tax is deductible on the said commission ceded?
Held
• Retail / group customers do not provide any service to the assessee and only
get flight tickets at a concession. Accordingly, they cannot be considered as
'agents' and the commission ceded by the assessee is in the nature of 'Discount'
• Small time travel agents act on behalf of and provide service only to their
customers by identifying the best available rates for their flight tickets. Hence,
commission income ceded by the assessee in respect of tickets purchased by
them would also partake the character of 'Discount' only
• No TDS is applicable

42
Al Hind Tours & Travels (P.) Ltd. (29 taxmann.com 294) (Cochin ITAT)


Section 194H
Discount availed by stamp vendors
Issue
• Whether tax is deductible on discount given to stamp vendors?
Held
• Discount given to the Stamp Vendors is for purchasing the stamps in bulk
quantity
• The said discount is in the nature of cash discount
• The transaction is that of a sale and section 194H has no application

Ahmedabad Stamp Vendors Association (348 ITR 378) (SC)

43


Section 194H
Incentive to distributors
• The assessee had given certain discounts to distributors by issuing credit notes
and specifically mentioned the nomenclature 'discount' in these credit notes
• No tax was deducted contending that the relationship between the distributor and
the assessee was that of Principal to Principal
• Whether the amount of discount paid by way of credit note could be regarded as
‘commission’ in absence of Principal–Agent relationship?
Held
• A discount is given from the gross price and it occurs at the instance of sale and
purchase between the manufacturer and the distributor / dealer
• Commission is in the nature of refund or compensation for performing some task
or business by one person on behalf of the other and in case of sale and
purchase of goods, the commission is accrued at the instance of further sales by
the dealer or distributor

44


Section 194H
Incentive to distributors
• The dispute in the present case is not regarding income arising due to difference
between MRP and the price as invoiced to the distributor but relates to the
incentive given by the assessee in addition to the margin on the purchase and
sale of goods
• Therefore, even if the relationship is that of principal to principal so far as the
price and sale of products is concerned, the incentive / benefit given to the
distributor is not accruing from transaction of sale and purchase and therefore,
cannot be regarded as income from purchase and sale of product
• TDS is applicable as section 194H talks about the payment of commission
or brokerage and does not talk about the relationship between the payer
and the payee necessarily be of a principal and agent. It does not require
any formal contract of agency

SKOL Breweries Ltd. (29 taxmann.com 111) (Mumbai ITAT)

45


Section 194I – Rent

46


Section 194I
Payment for infrastructure facility
Issue
• The assessee was engaged in the business of providing computer education
and training. For this purpose, it had entered into various agreements with
franchisees for running the education centers at various metro cities
• For the purpose of convenience, the assessee had categorized the fees shared
as (i) marketing claim and (ii) infrastructure claim
• Whether the infrastructure claim paid by the franchisees to the assessee can be
termed as ‘rent’ under section 194I?
Held
• The relations between the parties were not of a lessor and lessee as was sought
to be contended by the revenue authorities
• The franchisee agreement showed that a limited license was granted by the
assessee to the licencee for use of the trademark and the trade name of the
assessee for the education center

47


Section 194I
Payment for infrastructure facility
• Instead of giving a deposit which it would have done if it was a tenant, the
assessee, in fact, received a security deposit from the licensee
• If the interpretation of the revenue was to be accepted, then in a case where
there is a partnership and one of the partners brings in his capital in the form of
his premises from where the partnership business is carried on, payment made
to such a partner by the firm can be stretched to be included in the definition of
rent under section 194I
• The agreement was in fact a franchisee agreement and it could not be said
that the rent was being paid by the assessee company to the licensee
franchisee

NIIT Ltd. (184 Taxman 472) (Delhi HC)

48


Section 194I
Roaming charges
Issue
• Whether payment towards roaming charges (by one telecom service provider to
another) would be payment for services or payment for use of equipment?
Held
• ‘Rent’ means any payment by whatever name called under any lease, sub-lease
or tenancy or ‘any other agreement’. The emphasis is upon the term ‘use’
• The service provider is merely a facilitator between the subscriber and the other
service provider (for facilitating a roaming call to be made by the subscriber)
• The service provider only collects the roaming charges from its subscriber and
passes it on to the other service provider and cannot be said to have used the
equipment which is involved in the roaming facility

49


Section 194I
Roaming charges
• Rent is something which is paid for earmarked premises, and in the case of
roaming charges, a subscriber does not get any earmarked premises from
service provider. Also, the choice of the service provider (who will provide the
roaming facility) is left to the subscriber
• The payment for roaming charges to be paid by the service provider is not
in the nature of ‘rent’

Vodafone Essar Ltd. (9 taxmann.com 31) (Mumbai ITAT)

50


Section 194I
Payment for use of equipment
Issue
• Whether the payment for use of equipment is ‘rent’ under section 194I or ‘FTS’
under section 194J?
Comments
• If the control and supervision of the equipment is with the owner of the
equipment, the payer is only availing services from the owner of equipment.
Accordingly, the same may not be considered as rent under section 194I
− Poompuhar Shipping Corpn. Ltd. – (53 SOT 451) (Chennai ITAT)

− Chhattisgarh State Electricity Board (50 SOT 33) (Mumbai ITAT)

• Payment for use of equipment cannot be regarded as FTS unless human
element is involved for providing the services
− Bharti Cellular Ltd. – (319 ITR 139) (Delhi HC)

− Dampskibsselskabet of 1912 – (142 TTJ 70) (Mumbai ITAT)

− Merchant Shipping Services Pvt. Ltd – (135 TTJ 589) (Mumbai ITAT)
51


Section 194I
Issue
• Whether the payment for use of equipment is ‘rent’ under section 194I or ‘royalty’
under section 194J?
Comments
• ‘Royalty’ (Explanation to section 194J r.w. Explanation 2 to section 9(1)(vi))
includes amount payable for the use or right to use any industrial, commercial or
scientific equipment (excluding payments referred to in section 44BB)
• ‘Rent’ (Explanation to section 194I) means any payment under any lease, sub-
lease, tenancy or any other agreement or arrangement, amongst others, for the
use of any equipment
• Both these sections (i.e. sections 194I and 194J) apply for payment towards
use of equipment

52


Section 194I
• It is settled law that the provisions which are more beneficial to the assessee
should be followed
‒ Noble Enclave & Towers (P.) Ltd. (50 SOT 5) (Kolkata ITAT)

• Section 194I is specific in respect of payment of rent for use of equipment
as against section 194J which is general in nature covering fees for
professional services, fees for technical services and royalty
• Payment of any sum shall be liable for deduction of tax only under one section
‒ Circular No. 720, dated 30-8-1995

53


Section 194I
Security deposit
Issue
• Whether security deposit for hiring a premises which was to be reduced every six
months by an amount of rent which became payable in accordance with the
agreement is subject to TDS?
Held
• The security deposit was not a fully ‘refundable deposit amount’
• It was in the nature of advance rent and accordingly, TDS under section
194I is applicable

Reebok India Co. (291 ITR 455) (Delhi HC)

Circular no. 715 dated 8 August 1995 - If the deposit is adjustable against future
rent, the deposit is in the nature of advance rent subject to TDS

54


Section 194I
Upfront charges
Issue
• Whether upfront charges can be regarded as ‘rent’?
Held
• Rent has been specifically defined in the Explanation to section 194I
• Definition of 'rent' includes payments of any type under any agreement or
arrangement for use of land
• The definition of 'rent' under Explanation to section 194I will squarely cover
the upfront charges and render such payment liable to TDS

Foxconn India Developer (P.) Ltd. (53 SOT 213) (Chennai ITAT)

55


Section 194I
Reimbursement of rent
• The holding company had taken office premises on rent and it permitted the
assessee to use portion of said premises
• The rent for the whole premises was paid directly by the holding company to the
lessors and tax was deducted under section 194I
• Whether TDS is applicable on reimbursement of rent expenditure by the
assessee to its holding company?
Held
• The lease deed provided for use of the premises by the subsidiary companies
• The actual payments were made by the lessee (holding company) to the lessor
after deducting tax therefrom
• Also, the holding company had not debited the whole rent amount in its books of
account. It had only debited that portion of the rent which pertained to the part of
the premises occupied by it
56


Section 194I
Reimbursement of rent
• Therefore, there was no lessor and lessee relationship between the holding
company and assessee where the provisions of section 194I were attracted
• The assessee had been paying rent to the holding company as reimbursement
for last many years and this position had been accepted by the department so far

Result Services (P.) Ltd. (52 SOT 598) (Delhi ITAT)

Rent reimbursed could be regarded as reimbursement of expenses if –
• The rent agreement provides that the lessee may allow its subsidiaries /
associates to use the premises; and
• The lessee does not book the entire rent expense

• The above decision as well as Circular no. 4/2008 dated 28 April 2008
(relating to service tax component on rent) recognize that TDS is applicable
on ‘income’ of the landlord
• Could the same rationale be extended to sections other than section 194I or
would it fail owing to difference in the language in these sections?
57


Other issues

58


Other issues
Provisions / credits to suspense account
Issue
• Whether TDS is applicable on provisions / credits to suspense account?
Comments
• TDS is applicable at the time of payment or credit, whichever is earlier (including
credit to suspense account)
• Accordingly, TDS would ordinarily be applicable while creating provisions for
expenses as well as crediting amounts to any party’s account including suspense
account
• However, if it is not possible to identify the payee at the time of creating the
provision / credit to suspense account (depending on the facts), a position
could be adopted that no tax was required to be deducted
• It was observed in the case of Industrial Development Bank of India (107 ITD 45)
(Mumbai ITAT) that the TDS mechanism cannot be put into practice until the
identity of the person in whose hands it is includible as income, can be
ascertained
59


Other issues
TDS prior to accrual of income?
Issue
• Applicability of TDS prior to accrual of income in the hands of the recipient?
Comments
• TDS is applicable at the time of payment or credit, whichever is earlier
• However, there could be instances where this event would precede the accrual of
income in the hands of the recipient (e.g. interest on cumulative deposit /
debenture / bond – refer circular no. 643 dated 22 January 1993)
• Issues when the recipient maintains cash system of accounting

60


Other issues
Threshold for applicability of section 44AB
Issue
• The assessee, an individual, is a surgeon running a private nursing home at
Jodhpur
• What would be the applicable threshold for requiring tax audit under section
44AB and the consequent liability to deduct tax?
Held
• There is no bar for a professional to carry on trade or commerce, which could
also be one annexed to the exercise of his profession
• Where, say lawyers are employed as specialists in their respective areas of
practice with a view to broaden the horizons of the professional services being
offered, the firm, though only a law firm as far as the clients are concerned, its
proprietor could be said to be carrying out trade or commerce, inasmuch as his
function is only passive, of an entrepreneur managing the affairs, much in the
same manner as a nonprofessional would
• A business, by its very nature, is characterized by a much higher level of risk, in
comparison to profession, and which would be one of the defining attributes of a
business
Sunil Chandak (ITA No. 344) (Jodhpur ITAT)
61


Appendix

62


Section 194A
Extract
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income

by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the

account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode,

whichever is earlier, deduct income-tax thereon at the rates in force:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or

profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the

financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct

income-tax under this section.

Explanation.—For the purposes of this section, where any income by way of interest as aforesaid is credited to any account,

whether called “Interest payable account” or “Suspense account” or by any other name, in the books of account of the person

liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the

provisions of this section shall apply accordingly.

63


Section 194C
Extract
(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for
carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the
contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time
of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an
amount equal to—
(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a
Hindu undivided family,
of such sum as income-tax on income comprised therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any
other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit
of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the
Explanation, tax shall be deducted at source—
(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of
the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of
Hindu undivided family.

64


Section 194J
Extract
(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, or
(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible
under section 192, to a director of a company; or
(c) royalty, or
(d) any sum referred to in clause (va) of section 28,
shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue
of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as
income-tax on income comprised therein :
………………………….
Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the
business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB
during the financial year immediately preceding the financial year in which such sum by way of fees for professional services
or technical services is credited or paid, shall be liable to deduct income-tax under this section :
Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-
tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal
purposes of such individual or any member of Hindu undivided family.
65


Section 194H
Extract
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of

June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section

194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of

such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax

thereon at the rate of ten per cent :

………………………….



during the financial year immediately preceding the financial year in which such commission or brokerage is credited or paid,

shall be liable to deduct income-tax under this section

66


Section 194I
Extract
(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income

by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in

cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the

rate of—

(a) two per cent for the use of any machinery or plant or equipment; and

(b) ten per cent for the use of any land or building (including factory building) or land appurtenant to a building (including

factory building) or furniture or fittings:

………………………….



during the financial year immediately preceding the financial year in which such income by way of rent is credited or paid,

shall be liable to deduct income-tax under this section.

67


Section 194A
Interest on time deposits by banks using CBS Software
Circular no. 3/2010 dated 2 March 2010 –
• Clarification on the issue of TDS from payment of interest on time deposits by
banks using Core-Branch Banking Solutions (CBS) software
• No tax is required to be deducted where:
− Interest on time deposits is calculated on daily or monthly basis and for macro
monitory purpose only
− No constructive credit is given to the depositor’s / payee’s account
• Tax is required to be deducted on the income (exceeding limits specified under
section 194A) where:
− Interest is accrued at the end of the financial year or at periodic intervals as per
practice of the bank; or
− as per the depositor's / payee's requirement or on maturity or on encashment of
time deposits
whichever event takes place earlier.
68


Section 194A
Other key circulars
Circular no. Gist
643 (dated 22 • Cumulative deposit / debenture / bond – TDS is
January 1993) applicable every time interest is credited in the books of the
payer and is not to be postponed till maturity
715 (dated 8 • Reinvestment term deposit – TDS is applicable at the time
August 1995) of credit of interest to the account of the payee (or credit to
suspense account) or at the time of payment thereof,
whichever is earlier
• Variable deposits are in the nature of time deposits and
TDS is applicable on the interest thereon
647 (dated 22 • Commercial Papers and Certificates of Deposits – The
March 1993) difference between issue price and face value is to be
treated as ‘discount allowed’ (and not as ‘interest paid’). TDS
is not applicable
526 (dated 5 • Interest payments under Land Acquisition Act – TDS is
December 1988) applicable
718 (dated 22 • Interest, if any, carried on deposit provided to landlord –
69August 1995) TDS is applicable on


Section 194C
Key circulars

Circular no. Gist
715 (dated 8 TDS is applicable on payments to / for the following –
August 1995) • Clearing and forwarding agents for carriage of goods
• Carrier of goods (by clearing and forwarding agents)
• Couriers
• Supply of printed material
• Electrician engaged on a contract basis
• Sponsorship for functions held with a view to earn publicity
through display of banners, etc. (as, in essence, it is an
agreement for carrying out a work of advertisement)
• Chartering an aircraft for carriage of passengers or goods
• Reimbursement of expenses (as section 194C refers to ‘any
sum paid’) – whether stating the expense claim
separately in the invoice / separate invoice could
relieve TDS liability thereon?
13 (dated 13 • TDS shall be applicable only where it is a ‘contract for work’
December 2006) and not where it is ‘contract for sale’
70


Section 194J
Key circulars

Circular no. Gist
726 (dated 18 • Fees for professional services from foreign companies /
October 1995) foreign law and accountancy firms (who are non-residents
and do not have any agent / business connection /
permanent establishment in India) to any CA, lawyer,
advocate or solicitor who is resident in India may not be
subject to TDS
715 (dated 8 Following would be liable to TDS under section 194J (and not
August 1995) section 194C)
• Payments to recruitment agencies
• Payments made by a company to a share registrar
• Maintenance contracts involving rendition of technical
services (unless it is routine/normal maintenance contracts
which include supply of spares)
Reimbursement of actual expenses cannot be deducted out of
the bill amount for the purpose of TDS (since section 194J
71 refers to ‘any sum paid’)


Section 194H
Payments to banks
Notification no. 56/2012 dated 31 December 2012 –
• No TDS on following payments to a bank (listed in the Second Schedule to the
Reserve Bank of India Act, 1934), excluding a foreign bank –
− bank guarantee commission
− cash management service charges
− depository charges on maintenance of DEMAT accounts
− charges for warehousing services for commodities
− underwriting service charges
− clearing charges (MICR charges)
− credit card or debit card commission for transaction between the merchant
establishment and acquirer bank

Effective from 1 January 2013

72


Section 194I
Key circulars

Circular no. Gist
715 (dated 8 • Subletting a rented premise (fully or in part) for putting up a
August 1995) hoarding would be liable to TDS under section 194I (and not
section 194C)
• TDS is applicable with respect to business centre agreements
718 (dated 22 • TDS is applicable on warehousing charges
August 1995) • No TDS on municipal taxes, ground rent, etc., borne by the
tenant
1 (dated 10 • TDS under section 194I is not applicable for cooling charges
January 2008) for cold storage (the customer is not given any right to use any
demarcated space/place or the machinery of the cold store
and thus does not become a tenant)
• However, since the arrangement is basically contractual in
nature, TDS under section 194C is applicable
4 (dated 28 • TDS is applicable on the amount of rent paid / payable without
73
April 2008) including service tax thereon


Section 194I
Key circulars
Circular no. 5/2002 dated 30 July 2002
• Clarifications regarding payments for hotel accommodation taken on a
regular basis
• Where an employee or an individual representing a company (like a consultant,
auditor, etc.) makes payment directly to the hotel, the question of TDS would not
normally arise (except where he is covered under section 44AB) since the payer
is an individual (and the company merely reimburses the expenditure)
• Following would be construed as accommodation available on ‘regular basis’ –
− Earmarked rooms let out for a specified rate and specified period
− No rooms are earmarked, but the hotel has a legal obligation to provide such
types of rooms during the currency of the agreement
• TDS would not apply to mere rate contracts i.e. –
− Contract provides specified types of hotel rooms at pre-determined rates during
an agreed period (usually entered into for lower tariff rates)
− There is no obligation on the part of the hotel to provide a room / set of rooms
− Occupancy would be occasional / casual
74


Thank you!

The information contained in this document is intended to provide general information on a particular subject or
subjects and are not exhaustive treatment of such subject(s).

This contents of this document are for general information and the presenter by means of this document is not
rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This
document is not a substitute for such professional advice or services, nor should it be used as a basis for any
decision or action that may affect your finances or your business. Before making any decision or taking any action
that may affect your finances or business, you should consult a qualified professional advisor.
The presenter shall not be responsible for any loss whatsoever sustained by any person who relies on this
document.

© 2013 Deloitte Haskins & Sells

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