TDS ON SERVICE TAX
Vide Circular No. 4/2008, dated 28.04.2008 the Revenue considered the representations received seeking clarification as to whether TDS provisions under Section 194-I of the Income Tax Act would be applicable on the gross rental amount payable (inclusive of service tax) or net rent amount payable (exclusive of service tax). It has been clarified that the service tax paid by the tenant does not partake the nature of ‘income’ of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore the Board decided that tax deduction at source under Section 194-I of the Income Tax would be required to be made on the rent paid/payable without including the service tax.
Clarification was sought to the Board as to whether the scope of the Circular No. 4/2008, dated 28.04.2008 would be extended to the payment under Section 194J. For this vide circular F. No. 275/73/2007IT (B), dated 30.06.2008 the Board clarified that the payments made under Section 194-I differ significantly from payment made under Section 194J in the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However in the case of Section 194J has to be deducted on any sum paid as professional and technical fees. The Board decided to exclude TDS on service tax component on rents payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since Section 194J covers any sum paid, the scope of Circular No. 4/2008, dated 28.04.2008 would not be extended to such payments.
In ‘Commissioner of Income Tax (TDS) V. Rajasthan Urban Infrastructure Development Project (RUIDP)’ - (2013 (8) - RAJASTHAN HIGH COURT) the assessee is a project of Government of Rajasthan for the Infrastructure development and civil amenities in the specified areas/cities in the State of Rajasthan. The project is financially assisted by the loan from the Asian Development Bank through the Government of India. The project is working under the Urban Development Department of the Government of Rajasthan. The accounts are maintained on cash basis of accounting and also audited by the Chartered Accountant as per the requirement of the Asian Development Bank and also audited by the Department of Accountant General of Rajasthan.
The assessee has appointed the technical and project consultants on open tender basis and the limited companies as well as corporate consulting firms of repute are selected and appointed as per the procedure laid down. The assessee deducted the income tax at source from the payments made by it to the said consultants and deposited the same as per the relevant provisions of the Income Tax Act and filed returns in time. The main consultants are charging the service tax at the prevailing rates on the amount of fee payable as per the agreement and the same is paid by the assessee to the consultant. The tax is deducted on fees and other payments of expenses as being part of contract, however, no TDS has been deducted on service tax in view of the term of the contract.
The Assessing Officer raised a demand of Rs. 1,70,881 along with interest of Rs. 44,776 on account of TDS on the amount paid as service tax. The assessee filed an appeal before the Commissioner of Income Tax. The first appellate authority allowed the appeal setting aside the demand of the Assessing Officer. The Revenue preferred appeal before the Tribunal against the order of Commissioner of Income Tax. The Tribunal has considered the agreement and recorded a finding that as per the term of contract the amount of service tax was to be paid separately, therefore, the same was not subject to TDS.
The Revenue filed appeal before the High Court against the order of the Tribunal. The Revenue submitted that the appellate authority and the Tribunal both have committed an illegality in relying upon the Circular dated 28.04.2008, which was in respect of Section 194-I of the Income Tax Act, whereas the dispute in the present case was in respect of TDS to be deducted under Section 194J of the Act. The Revenue further contended that the Circular dated 28.04.2008 was clarified by a subsequent Circular dated 30.06.2008 which was wrongly held to be inapplicable or contrary to law by the appellate authority as well as the Appellate Tribunal.
The High Court, as far as the submission of the Department that the Circular dated 28.04.2008 was not applicable as it was in respect of Section 194-I of the Act relating to rent and not technical fees, therefore, it was wrongly relied upon is concerned, considered the provisions Section 194J in the light of the Circular dated 28.04.2008 and 30.06.2008. The words ‘any sum paid’ used in Section 194J relate to fees for professional services or fees for technical services. As per the terms of agreement, the amount of service tax was to be paid separately and was not included in the fees for professional services or fees for technical services. Under these circumstances the High Court was satisfied with the orders passed by the lower authorities. The High Court rejected the appeal filed by the Revenue.
In view of the judgment of Rajasthan High Court the Board issued a Circular No. 1/2014, dated 13.01.2014 deciding that wherever in terms of the agreement/contract between the payer and the payee the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.