QUESTIONS AND ANSWERS ON SECTION 194H

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QUESTIONS AND ANSWERS ON SECTION 194H Q.1 Who is responsible to deduct tax u/s 194H? Ans. Any person, (other than individual or a Hindu undivided family) who is responsible for paying, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, deduct income-tax thereon. However, individuals and HUF who were covered under section 44AB(a) and (b) in the preceding previous year i.e. whose gross turnover/receipts of the business/profession in the immediately preceding financial year exceeded business/profession in the immediately preceding financial year exceed Rs. 1,00,00,000 / 25,00,000, as the case may be, are also required to deduct tax at source. Q.2 What is the point of deduction of TDS u/s 194H? Ans. It will be deducted at the time of credit of such income to the account of the payee or to any account, whether called suspense account or by any other name 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. Q.3. At what rate TDS has to be deducted u/s 194H? Ans. The rate of TDS shall be 10%. Notes: 1. No surcharge, education cess or SHEC shall be added to the above rates. Hence, tax will be deducted at source at the basic rate. 2. The rate of TDS will be 20% in all cases, if PAN is not quoted by the deductee on or after 1-4-2010. Q.4. Under what circumstances TDS u/s 194H is not deductible? Ans. (1) No deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to the payee, does not exceed ` 5,000 (` 2,500 upto 30.06.2010) (2) No tax shall be deducted on any commission or brokerage payable by Bharat Sanchar Nigam Ltd. or Mahanagar Telephone Nigam Ltd. to their public call office franchises (Third proviso to section 194H inserted w.e.f. 1-6-2007) 1 P a g e

Q5. What is the meaning of words Commission or brokerage for the purpose of section 194H? Ans. Commission or brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person: (a) (b) for services rendered (not being professional services), or for any services in the course of buying or selling of goods, or (c) in relation to any transaction relating to any asset, valuable article or thing, not being securities. Q.6. Whether having Principal-agent relationship is a sine qua non for invoking provisions of section 194H? Ans. Principal-agent relationship is a sine qua non for invoking provisions of section 1 94H. When bank issues bank guarantee on behalf of assessee, there is no principal-agent relationship between bank and assessee and, therefore, assessee is not required to deduct tax at source under section 194H from payment of bank guarantee commission made to bank. Kotak Securities Ltd. v. Dy. CIT [2012] 18 taxmann.com 48 (Mum.) see also Jagran Prakashan Ltd.v. Dy. CIT (TDS)* [2012] 21 taxmann. com 489 (All.), ACIT v. Pearl Bottling (P.) Ltd. * [2011] 10 taxmann. com47.(visakhapatnam.), Ajmer Zila Dngh Utpadaicsang Ltd. V ITO (2009)30 DTR 418 (JP)(Trib)] Q.7. Whether TDS u/s 194H is deductible on commission paid by Mother dairies to concessionaires? Ans. Commission paid by Mother Dairy to concessionaires who sell milk of assessee from booths owned by assessee not liable to TDS under section 194H as principle-agent relationship is missing. CIT v. Mother Dairy India Ltd. * [2012] 18 taxmann.com 49 (Delhi), Delhi Milk Scheme v. ITO [2006] 8 SOT 344 (Delhi), Government Milk Scheme V ACIT (2006) 98 ITD 306 (Pune). Q.8. Whether Provisions of section 194H applicable on discounts offered by laboratories rendering testing facility to collection centers/ franchisees? Ans. Where assessee laboratory was rendering services of testing samples to collection centres/franchisees, TDS under section 194H not required in respect of discount offered by assessee to said collection centres/ franchisees. SRL Ranbaxy Ltd. v. ACIT[201 1] 16 taxmann.com 343 (Delhi). Q.9. Whether Provisions of section 194H applicable on discounts offered Mobile companies to retailers of rechargeable coupons and starter packs? by 2 P a g e

Ans. Such starter packs/rechargeable coupons were sold by distributors to retailers at rate stipulated by assessee which was less than MRP on Sim cards After selling all Sim cards and pre-paid coupons to retailers, franchisees were to make payment of sale proceeds to assessee after deducting a discount. Since there was principal-agent relationship between assessee and franchisees and, therefore, receipt of discount by franchisee was, in real sense, commission paid to franchisees and same would attract provisions of section 194H. Please refer Bharti Cellular Ltd. v. ACIT,. [2011] 12 taxmann.com 30 (Cal.) see also Vodafone Essar Cellular Ltd. v. ACIT*[2010] 194 Taxman 518 (KER.), however contrary decision given by the Hyderabad tribunal in ACIT v Idea Cellular Ltd. (2009) 29 DTR 237 (Hyd) Q.10. Whether deduction of TDS u/s 194H permissible, in case agreement between payer and payee is on principal to principal basis? Ans. Assessee-company, engaged in business of manufacture and sale of soft drinks, had appointed a C&F-cum-distributor for purpose of distribution and sale of its products vide an agreement Assessing Officer held that payments made by assessee to distributor would constitute commission under section 194H and assessee was liable to deduct tax at source on such payments. Since agreement between assessee and distributor was clearly stipulated to be an agreement on principal-to-principal basis, payments made by assessee to distributor were as incentives and discounts and not commission liable for deduction of tax at source under section 194H. Please refer CIT v. Jai Drinks (P.) Ltd.* 2011] 198 Taxman 271 (Delhi) Q.11. Whether TDS u/s 194H applicable to tickets issued by airlines to its travel agents at a concessional price? Ans. Assessee-airlines issued tickets to its travel agents at a concessional price, transaction between assessee and travel agents was that of principal-toprincipal and difference in price was discount and therefore, such transaction would not fall with ambit of section 1 94H. CIT v. Singapore Airlines Ltd. * [2009] 180 Taxman 128 (Delhi). Q.12. Whether Provisions of section 194H applicable to trade incentive to dealers? Ans. Where assessee, a manufacturer of bicycles, was giving trade incentive to dealers, Tribunal was justified in holding that if dealers were selling goods at price for which they were purchasing from company, such trade incentive would amount to commission for purpose of section 1 94H. Please refer Tube Investments of India Ltd. v. ACIT[2009] 223 CTR 99 (MAD.) 3 P a g e

Q.13 Whether Provisions of section 1 94H applicable on Discount granted to licensed stamp vendors on sale of stamp paper? Ans. Discount granted to licensed stamp vendors on sale of stamp paper, by treasury cannot be termed as `commission or brokerage to attract TDS under section 194H. Please refer Kerela State Stamp Vendors Association v. Office of the Accountant General [2006] 150 Taxman 3 0/282 ITR 7/200 CTR 658 (Ker) Q.14 Whether Provisions of section 194H applicable on payments made by news channel to advertising agencies? Ans. Where assessee, a unit of Prasar Bharati, was paying certain amount at the rate of 15 per cent to the advertising agencies, since there was no relationship of principal and agent between assessee and advertising agency, aforesaid amount deducted by the advertising agency out of gross payment received by agency from advertiser could not be treated to be payment of commission by assessee to agency so as to attract deduction of tax at source under section 1 94H on payment received by agency. Please refer All India Radio Commercial Broadcasting Service / Prasar Bharati Broadcasting Corpn. of India v. ITO [2006] 8 SOT 513 (Delhi) Q.15. Whether consigner is liable to deposit TDS u/s 194H to the credit of Central Government where consignee retained its commission out of sale proceeds of goods? Ans. Where commission or brokerage is retained by the consignee/agent and not remitted to the consignor/principal while remitting the sale consideration. It may be clarified that since the retention of commission by the consignee/agent amounts to constructive payment of the same to him by the consignor/principal, deduction of tax at source is required to be made from the amount of commission. Therefore, the consignor/ principal will have to deposit the tax deductible on the amount of commission income to the credit of the Central Government, within the prescribed time. Please refer Circular: No. 619, dated 4-12-1991. Q.16. Whether provisions of S. 194H shall apply to free issue of goods under trade scheme? Ans. Free issue of goods under trade scheme and free gift on sponsorship and promotions and early payment discount given to distributors do not constitute commission as the distributor works on principal to principal basis and not on principal agent relation. [Foster s India (P) Ltd. v ITO (2009) 29 SOT 32 (Pune)(URO).] 4 P a g e

Q.17. Whether TDS u/s 194H deductible on turnover commission payable by RBI to Agency Banks? Ans. Tax deduction at source under section 194H should not be applicable in respect of Turnover Commission payable by the Reserve Bank of India to the Agency Banks (Banks authorized for conducting Government business) for performing the general banking business of the Central and State Governments on behalf of RBI. Circular: No. 6/2003, dated 3-9-2003. (Extract Book on Practical Aspects of Tax Audit, TDS, HUF & Capital Gains by CA Agarwal Sanjay) 5 P a g e