TDS - Understanding through case studies

TDS - Understanding through case studies SHYAM NORI Senior Manager, Tax Advisory Services 19 th April 2012, ICAI Hyderabad

CONTENTS Session I -Case studies covering TDS on Salaries Interest on Securities Dividend Interest other than interest on securities Payment to Contractors Commission or brokerage Rent Professional or technical Services Page 2

Employer Employee relation CASE STUDIES TDS ON SALARY Ram, a freelance software consultant residing at Hyderabad is hired by software company Sco located in Mumbai to work on a Canadian client project, for a fixed fee payable on monthly basis. The project can be executed by Ram working from his home at Hyderabad. The scope of the work and project timelines are as decided by client and Sco. The project in charge from client side and as well as from Sco review and discuss the progress of work with Ram through mails and video conferencing. The agreement between Sco and Ram prohibits Ram from taking up any private assignments and has to work full time for Sco. Your are asked by Sco to advise on whether TDS is to be deducted u/s 192 or 194J Would it make a difference if Ram, is paid on hourly basis Would it make a difference if Ram, makes frequent visits to Mumbai. Would it make a difference if Ram works from the location of Sco, in Mumbai Reference: Ram Prashad v. CIT 86 ITR 122 (SC) Apollo Hospitals International Ltd 9 taxmann.com 95 (AHD-ITAT) Yashodaya Super Specialty Hospitals [2011] 44 SOT 87 (HYD ITAT) Page 3

CASE STUDIES TDS ON SALARY Estimating salary income The assessee made a bona fide estimate of the income of the employees and excludes certain items from the purview of deduction. Can the assessee be held as assess-indefault and demand be raised for shortfall along with interest under Section 201(1A). Would your answer be different if the employee had paid full tax. Reference: Hindustan Coca Cola Beverage Pvt Ltd v. CIT 163 Taxmann 355 (SC) Delhi Public School [2011] 15 taxmann.com 107 (Delhi-Trib) Circular No 275 dated January 29, 1997 Page 4

CASE STUDIES TDS ON SALARY Uneven deduction The assessee had not deducted the tax regularly from the payment of salary at the average rate during each month on estimated income of the employees and finally makes up for the short fall by a lump sum deduction at the end of the financial year. Is the assessee liable for penalty and interest u/s 201. Reference: Madhya Gujarat Vij Co. Ltd [2011] 14 taxmann.com 156 (Ahd-ITAT) Annual circular Page 5

CASE STUDIES TDS ON SALARY Deduction at the time of credit or making payment The assessee employs an Individual at a fixed remuneration. Salary due to this employee is not paid. Is there any obligation on the company to deduct TDS. Reference: Tej Quebecor Printing Ltd [2011] 151 Taxman 210 [Delhi-Trib] Page 6

CASE STUDIES TDS ON SALARY Can TDS be recovered from deductee ABC ltd having deducted tax u/s 192, does not remit the same. Can the assessing officer assessing the income of the employee raise demand and attach employees bank accounts Reference: Section 205 Yashpal Sahni [2007] 293 ITR 539 (Mum) Page 7

CASE STUDIES TDS ON SALARY Tax on tax The assessee is issued stock options of the holding company under a stock option plan. An amount equivalent to the tax on the perquisite value when these stock options are exercised is transferred by the Holding company to the subsidiary and no tax is deducted from the employee salary. Should the subsidiary company consider such payment by holding company as income in the hands of the employee and deduct tax on tax. The amount of tax on the perquisite value is calculated on the income chargeable under salaries remaining after adjusting loss from house property. Is this the correct procedure. Can the assessee claim refund for the excess when he files return of total income which includes his loss from house property. Reference: Sec 10(10CC) Section 192(1A) & (1B) Page 8

CASE STUDIES TDS ON SALARY Hypo tax The assessee a foreign national working in USA is deputed to India for a particular period with an assurance that for the deputation period the net amount of salary to be received by him net of taxes would be the same as he would have received in USA. For example if the employee was receiving Rs 100 net of tax in USA, he would receive a salary net of taxes of Rs 100 for the deputation period, the differential tax is paid back to the employee. Now the assessee seeks your advise as to whether he can claim deduction in India for the hypo tax. Reference: Dr. Percy Batlivala and Ors. 2010-TIOL-175-HC-DEL-IT Lukas Fole 2009-TIOL-556-ITAT-PUNE Page 9

CASE STUDIES TDS ON SALARY Deputation and Foreign tax credit The assessee is an employee working with ABC India. The employee is deputed to branch in USA to work on a project for three years. The employee leaves on 1 st January 2011. Your are approached by ABC India for advise on The salary on which TDS has to be made for the year 2010-11. Whether u/s 192. relief available u/s 90 can also be considered while determining WHT Would it make a difference if salary paid is not borne by the branch Key points: Section 192 Section 90 Page 10

CASE STUDIES TDS ON SALARY Secondment and TDS The assessee is an employee working with ABC Inc., USA. The employee is seconded to the subsidiary in India. The services are rendered in India. The terms of secondment are as under The employees would function exclusively under the control of the subsidiary They would continue to remain on the payroll of ABC Inc., ABC Inc., has the authority to replace and terminate the employees The salary is paid directly into the foreign bank account of the assessee by ABC Inc., ABC Inc., recharges the Indian subsidiary for the salary cost. Discuss the tax implications of such secondment in the hands of Holding Company ABC Inc., Subsidiary in India. Reference: AT&S India Pvt Ltd 287 ITR 421 (AAR) Verizon Data Services India Pvt ltd (AAR no 865 of 2010, dated 27 May 2011) Eli Lilly & Co India Pvt Ltd 312 ITR 225 Page 11

CASE STUDIES TDS ON SALARY ESOP taxation The assessee, who is a resident of USA, is an employee of ABC Inc., On January 1 st 2008 he is granted stock options conditional that he continues to be in employment until 1 st January 2012 with ABC Inc., or any of its group companies. The option on this condition met will be exercisable from 1 st January 2012 until 1 st January 2014. On 1 st January 2010 the employee moves to India and continues to be in employment with the Subsidiary of ABC Inc in India. The assessee exercises the options on 1 st January 2012. ABC India approaches you for advise on whether Tax has to be deducted u/s 192 on the exercise of these shares If so on what value would your answer be different if the assessee exercises the option during F.Y 2012-13. India USA DTAA, Art 16. Sec 6. Page 12

CASE STUDIES TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES No TDS if unpaid liability incurred is not recognized in books The assessee company took a loan in F.Y 2008-09 and recognized interest liability and deducted tax thereon in F.Y 2008-09 and 2009-10. However in F.Y 2010-11 it neither recognizes such liability in the books nor remits the interest payable for F.Y 2010-11. As a consequence no tax is deducted. However the assessee claims such interest as deduction in its computation of income and files the return of income accordingly. Can the AO hold the company as assessee in default for not withholding tax and as well disallow the interest u/s 40(a)(ia) Sec 194A and Section 40(a)(ia) Pranik Shipping & Services Ltd [2012] 19 taxmann.com 107 (Mum) Page 13

CASE STUDIES TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES TDS on Chit dividends A Chit fund company receives a show cause notice on why no tax is with held on the chit discounts or dividends u/s 194A. You are approached by the company for advise. Daspalla Chits & Invt Ltd & Ors [2010] 131 TTJ 354 (Vishaka) Page 14

CASE STUDIES TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES Compensation A who is the owner of a land enters into a joint development agreement with C. C will construct the property which will be shared between A and C on 40:60 basis. Under the agreement C is to complete the project in 3 years time and for each month of delay has to pay a compensation of Rs 1 lakh to A. You are approached by C to advise on whether such payment for delay would attract TDS u/s 194A. Page 15

CASE STUDIES TDS ON INTEREST OTHER THAN INTEREST ON SECURITIES Non-market rate of interest The assessee takes out a loan for Rs 10 million from an associate company at a preferential rate of 8% per annum. The market rate of interest for similar loan is 11% per annum. The assessee adopting AS 30 accounts for the interest payable using effective interest rate method. The difference is accounted as finance cost. The interest charged to P&L is different from the actual interest paid. On what value should the company deduct TDS Page 16

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Separate Contracts ABC Energy Ltd a power distribution company awards a contract to XYZ Ltd for setting up a net work of transmission lines and sub-stations. Two separate agreements were entered one for supply of material and one for erection and civil works. ABC Ltd deducted TDS u/s 194C on the erection and civil portion. The assessing officer considers the contract as one single and indivisible contract. In the opinion of the AO the erection and installation equipment is as much fundamental part of the contract as the fabrication and supply and the contract is a contract for work and contract for supply. Do you agree with the views of A.O Karnataka Power Transmission Corp Ltd [2011] 10 taxmann.com 237 (Bang-trib) Page 17

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Contract for work vs. Contract for sale The assessee A a pharmaceutical company gets one of its product manufactured by a contract manufacturer B. The raw material required for the manufacture of the product is supplied by C an associate company of the assessee. B is obligated under the contract to sell the entire product manufactured using the raw material supplied by C to A. The price of raw material is paid directly by B to C. A and B enter into another agreement under which A would provide the technical know-how for the manufacture of the product. A and B also enter into a trade mark license agreement under which the product so manufactured is to be labelled under the brand name of the assessee. You are approached by the assessee for advise as to whether the payment to B would attract the provisions of Section 194C Nova Nordisk Pharma India Ltd [2012] 18 taxmann.com 285 (Kar) Page 18

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS DTH Services A typical DTH services would involve a broadcaster, DTH operator, Distributor and the subscriber. The broadcaster grants to the operator a non-exclusive right to subscribe to and to distribute the subscribed channels in an area via the DTH system to the subscribers. For which the DTH operator pays to the broadcaster a license fee based on subscriber levels. The DTH operator would engage distributors for providing set up boxes and collecting subscription money from the subscribers The distributors collect money from the subscribers deduct their share and remit the balance to the DTH operator. They sell recharge coupons to the subscribers and receive commission from the operator. Examine whether any WHT is to be made for the various payments among the parties involved. You may assume that Broadcaster and Operator to be Companies and that distributor and subscriber to be any person. Page 19

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Franchisee agreements The assessee is carrying on the business of conducting coaching classes for admission to various professional courses. It enters into agreements with various persons desirous of running similar business. The agreement allows the franchisees to use the trade name, trade mark and course material of the assessee. The assessee would receive a percentage of net income earned by the franchisee. The assessee charges the franchisee administrative and other expenses, based on the actual cost incurred in respect of a particular franchisee centre. The revenue took a view that the contract with the franchisee is a contract for work and hence provisions of Section 194C is applicable Advise the assessee on the nature of payment. Career Launcher (India) Ltd [2011] 10 taxmann.com 242 (Dekhi trib) Page 20

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Access to Database The assessee a chartered accountants subscribe to various online portals for access to the database that provide latest statutory and legal information. Would this attract TDS u/s 194C As part of the subscription the assessee is given an option to select a plan whereby the updates would be send directly to the mobile of the assessee. This may be included as a part of fixed plan or a separate annual charge may be levied. Would your answer be different if the assessee subscribes to the mobile updates. Examine the transaction from the perspective of Section 194J Armour Consultants Pvt Ltd [2011] 16 taxmann.com 6 (Chennai trib) Changes made to definition of royalty Royalty included in Section 194J w.e.f 13-07-2006 Page 21

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS AMC vs. Technical services The assessee awards the contract for repair and maintenance of its heavy machinery and deducts tax at source under section 194C while making payment to the contractor. The assessing officer in the course of assessment disallows the expenses as in his opinion TDS should have been made under 194J and not 194C. Is the action of the assessing officer justifiable. Kandla port trust [2011] 16taxmann.com 273 (Rajkot trib) Page 22

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Pick up and drop facility The assessee company a software company in Hyderabad enters into contract with various transport companies for pick up and drop facility of its employees through cabs. The company is under the belief that the payment to the transport contractors would be a payment within 194I and not 194C. Hence it deducts tax in those cases where the aggregate value exceeds Rs 180,000. In arriving at such a decision the company has also considered the recent APVAT notification that directs classifying such dedicated transport contracts as lease. The assessing officer issues a SCN as to why the assessee cannot be held as assessee in default as tax is not withheld under Section 194C. You are approached by the company for advise Bharat Electronics Ltd [2012] 20 taxmann.com (Delhi trib) Page 23

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Organising conferences The assessee a management consultant and engages in conceptualizing and organizing conferences and seminars. The assessee receives sponsorships from various sponsors who use the conferences to promote their product. The assessee normally incurs charges in respect of printing, auditorium hire charges and advertisement charges and on such charges the assessee has not withheld any tax. The assessing officer in the course of assessment proceedings notices that no TDS is made on such charges and further the sponsors deduct tax u/s 194C which considering the receipts would make him liable to deduct tax on the above payments. Accordingly the assessing officer proposes to disallow the expenses. The assessee approaches you for advise Dr. Raju L. Bhatia [2012] 18 taxmann.com 36 (Mum trib) Page 24

CASE STUDIES TDS ON PAYMENT TO CONTRACTORS / SUB-CONTRACTORS Reimbursement of expenses The assessee company reimburses the cost incurred by the contractor for hiring a third party as well as the cost incurred by the contractor towards travelling and accommodation. Should TDS be deducted on the reimbursables Associated Cement Co Ltd [1993] 67 Taxmann 346 (SC) Circular no 715, dated August 8, 1995. Page 25

CASE STUDIES TDS ON BROKERAGE AND COMMISSION Bank Guarantees The assessee company furnishes bank guarantee to various parties in the course of its business. In consideration for issue of such bank guarantees, banks charge Bank Guarantee Commission. Examine whether the company has to deduct TDS on payment to the banks. Kotak Securities Ltd [2012] 18 taxmann.com 48 (Mum - Tirb) Page 26

CASE STUDIES TDS ON BROKERAGE AND COMMISSION Sale of SIM cards to distributors The assessee company is engaged in the business of providing cellular mobile telephone services through its distributors / franchisees by selling to them SIM and Pre-paid cards at a fixed rate below the market price for onward sale to its ultimate customers. The assessee company accounts the differential price as discount in its books Examine whether TDS is to be deducted on such discount passed on to distributors / franchisees Vodafone Essar Cellular Ltd [2011] 12 taxmann.com 45 (Chennai - Tirb) Bharati Cellular Ltd [2011] 12 taxmann.com 30 (Cal Trib) Vodafone Essar Cellular Ltd [2010] 194 Taxmann 518 (KER) Page 27

CASE STUDIES TDS ON BROKERAGE AND COMMISSION Free Samples and Early discounts The assessee company is engaged in the business of manufacturing and selling pharmaceuticals. It had appointed certain distributors for the purpose of sale and distribution of its product. The services to be rendered by the distributors is well defined as per the standards set by the assessee. As part of promotional activities the assessee sometimes issues products for free, reimburses the cost incurred for promotional activities and travel and gives early payment discounts Examine whether such free samples, reimbursements and early discounts will constitute Commission, liable for TDS u/s 194H Foster India Pvt Ltd [2009] 29 SOT 32 (Pune - Tirb) Page 28

CASE STUDIES TDS ON RENT Co-owners A building given in rent to a bank is owned by various co-owners and each co-owner was having a definite and ascertainable share in the property. Co-owners executed a registered lease deed in respect of said building in favor of the bank. Since share of each co-owner was definite the bank paid rent to all co-owners by separate cheques. Since rent paid to each co-owner is less than the threshold limit TDS was not made by the Bank. Assessing Officer initiates proceedings u/s 201(1) and 201(1A) against on the bank on the ground that bank was paying rent to an AOP. Cit vs. Senior Manager SBI, [2012] 20 taxmann.com 40 (Allah) Circular No 715, dated 08-08-1995 Page 29

CASE STUDIES TDS ON RENT The term for the use of The assessee a PSU engaged in the distribution of power transmits the power purchased through the transmission system Power grid, of PGCIL. Assessing officer opined that payments are in nature of rent for using the transmission facilities and accordingly provisions of Section 194I would apply. Chattisgarh State Electricity Board, [2012] 18 taxmann.com 150 (Mum-Trib) Page 30

CASE STUDIES TDS ON RENT Roaming charges The assessee engaged in the business of providing mobile telephone services. The assessee didn t deduct TDS on the national roaming costs paid to other cellular operators for allowing to use their network. The Assessing Officer takes a view that such roaming charges would amount to payment for technical services within the meaning of Section 194J or in the alternative would constitutes rent under Section 194I. Vodafone Essar Ltd, [2011] 45 SOT 82 (Mum-Trib) Page 31

CASE STUDIES TDS ON RENT Franchisee Agreement The assessee engaged in the business of providing computer education and training. It entered into agreements with the franchisees for running the education centres at various metro cities. Under the said agreements, the franchisees were providing Software training courses under the license from the assessee. The franchisees were to bring their resources for the purpose of providing computer education to the students. The assessee was required to provide the franchisees the relevant courseware and its expertise for providing computer education. The franchisees were required to provide the infrastructure facilities like classroom facility, equipment, furniture, fixture, administrative set-up, etc. The fees collected from the students was deposited in the account of the assessee-company and then it was shared with the franchisees in accordance with the terms of the license agreement. The assessee-company, for the purpose of its convenience, had categorized the said fees shared as marketing claim and infrastructure claim. The Assessing Officer treated the infrastructure claims paid to the franchisees as rent paid and held that the assessee-company was liable to deduct tax therefrom under section 194-I. Is the action of AO justified. NIIT Ltd, [2009] 184 Taxmann 472 (DEL) Page 32

CASE STUDIES TDS ON RENT Accounting principles vs tax The assessee company leases certain equipment from a vendor. The lease term covers the entire economic life of the equipment. Accordingly the same is classified as a finance lease in its books of accounts in terms of igaap. The accounting of such finance lease gives rise to finance expanse and depreciation for each accounting period The assessee seeks your advise as to whether the payment would be hit by provisions of Section 194I irrespective of its treatment in the books or alternatively TDS is to be deducted under Section 194A on the finance charges alone considering the Substance over form principle. Page 33

CASE STUDIES TDS ON RENT Straight line basis for Operating leases Para 23 of AS 19 Leases, directs that Lease payments under an operating lease should be recognized as an expense in the statement of profit & loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of user s benefit. The straight-line method implies that the cash flows in the form of fixed lease payments over the lease term are aggregated and divided by the lease term to arrive at the monthly income or expense. This results in an equal impact in the income statement in each reporting period irrespective of the fact that cash flows differ. The cumulative difference between amounts recognised in the income statement and the cash flows, is recognised in the balance sheet. On what amount should TDS be made Page 34

CASE STUDIES FEES FOR PROFESSIONAL OR TECHNICAL SERVICES Stock exchange charges The Assessee-company was engaged in business of stock broking. In had paid transaction charges to BSE in respect of transactions carried out through BOLT system of BSE. Assessing Officer held that transaction charges paid by assessee were in nature of 'fees for technical services' covered under section 194J and, therefore, assessee was liable to deduct tax at source at time of making payment to BSE Whether transaction charges paid by assessee-stock broker to BSE in respect of transactions carried out through BOLT system constituted fees for technical services under section 194J read with Explanation 2 to section 9(1)(vii) and, hence, assessee was liable to deduct tax at source before crediting transaction charges to account of stock exchange. Kotak Securities Ltd [2011] 15 taxmann.com 77 (MUM) Page 35

CASE STUDIES FEES FOR PROFESSIONAL OR TECHNICAL SERVICES Technology to be made available The assessee an electric distribution company enters into a transmission service agreement with the electric transmission company. Under the agreement the transmission company discharges the statutory function of onward transmission of electricity for further distribution and carries out SLDC function. (Standard Load Dispatch Centre). It charges the distribution company for these services. Examine whether such charges will attract provisions of Section 194J Jaipur Vidyut Vitran Nigam Limited [2009] 123 TTJ 888 (JP) Technical service only when there is a make available. Page 36

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