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 Different Methods of Tax Payments

 What is TDS/TCS
 Why TDS
 Your Role
 Nature of Payments
 Summary of Sections
 Duties of Deductor and Consequences of
Default
 TDS – Specific Provisions
 Tax Collected at Source
 Tax Deducted/Collected at Source
 Advance Tax
 Self Assessment Tax
 Tax Collected After Regular Assessment
 Others – Dividend Distribution Tax etc.
 Tax Deducted at Source
 In most of the Countries and Tax Literature
known as Withholding Tax
 Tax deducted by Payer while making certain
payments to other persons (Payee)
 Deductors are required to pay the tax so
deducted to the income tax department
within due dates
 In the assessment, the payee can claim credit
of the tax deducted at source
 Milton Friedman
 Second World War – Introduced in USA
 Time Value of Money
 Salesman – Installment Buyers could be induced
to pay more because they looked not at total
debt but only the monthly payments
 Added Psychological advantage – people may
pay with less resistance because they were
paying with money they had never seen
 Think what will happen if you have to pay entire
tax after the end of F.Y.
 Collect tax from small number of Payers rather
than large number of payees
 Collect Tax from Payers who are within the
jurisdiction rather than Payees who may be
outside the Jurisdiction
 Prevents Tax Evasion – Tax Evasion is
fundamental reason for expanding scope of TDS
- e.g. Contractors
 Brings new Assessees to the Tax Net
 Lower Cost of Collection – Making Other
institutions partners in tax collection
 Maximisation of revenue collection while
Minimising the cost of collection.
 For example, it should be easier to deduct tax
from all employees by one employer than for
the tax administration to collect from each
individual separately.
 Collection of taxes at the source of
generation of income.
 At the time of paying/ crediting of income /
payments.
 Keeping a track of transactions resulting in
generation of income.
 Ensure regular source of revenue to the
government.
 Simple and convenient mode of collection of
tax.
 The deductor shares the responsibility of tax
collection.
WHERE DO I FIT
IN THE SCHEME
OF THINGS OF
TDS CHARGES?

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ASSISTANT COMMISSIONER OF
INCOME TAX (TDS)

– ACIT(TDS)

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A sample TDS charge;
Ranges and officers CCIT/CIT (TDS)
may vary from place
to place

Addl/JCIT(TDS)

ACIT/DCIT(TDS) ITO(TDS)

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Hierarchy
Legend
Capital
Major cities
Delhi-2
Chandigarh-2 Kanpur
Siliguri
Jaipur
Lucknow Guwahati
Ahmedabad
Patna India
Vadodara Bhopal
Kolkata  Mumbai, Delhi and
Mumbai-2 Nagpur Bhubaneshwar
Chandigarh have 2
Hyderabad CsIT(TDS) each
Pune Vijayawada  26 charges in total
Panaji
Bengaluru Chennai

Kochi Coimbatore

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WHAT AM I
SUPPOSED TO
DO IN A TDS
CIRCLE?

13
Broadly deal with:
 TDS mismatch, rectification, grievance
handling etc. on TRACES portal
 Pass orders U/s 201(1)/201(1A)
 Conduct TDS Surveys
 Issuance of certificates U/s 197
 Refer Penalty & Prosecution proposals
U/s 271C & 276B/276BB
 Capacity Building of Stake Holders

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 TDS Reconciliation Analysis and Correction
Enabling System. Click TRACES
 Deductor to register on TRACES portal (TAN)
 It enables viewing of challan status and annual
tax credit statements (Form 26AS)
 It enables downloading of Form 16/16A.
 It enables online correction of TDS statements.
 PAN verification & Validation of certificates
issued u/s 197
 Status of processing of TDS statements by
CPC(TDS).
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 The Centralized Processing Centre
(CPC)-TDS, located at Gaziabad, is
entrusted with the task of processing
the TDS statements filed u/s 200 by the
deductor and deals with other related
issues of TDS.

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 Sections 190 to 206CA in Chapter XVII
 Casts a statutory obligation to deduct tax at
source – no order from tax officer is required
 Section 190 – Legal basis for TDS
 Section 191 – Safeguard for Revenue – If no
provision for TDS or where tax not deducted
– Tax is to be payable by Assessee Direct
- Explanation (w.e.f. 1.6.2003) – if person does
not deduct or pay after deduction, then
deemed to be assessee in default
 Whatare the Payments which
necessitate Tax Deduction at
Source ??
 Salary - 192
 Interest on Securities - 193
 Dividends - 194
 Interest other than Interest on Securities – 194A
 Lotteries and Cross-word Puzzles – 194B
 Horse Race – 194BB
 Contractors and Sub-Contractors – 194C
 Insurance Commission – 194D
 Non-resident Sportsmen and Sports
Associations – 194E
 Deposit under NSS etc. – 194EE
 Repurchase of Units – 194F
 Commission on Sale of Lottery Tickets – 194G
 Commission on Brokerage – 194H
 Rent – 194-I
 Fees for Professional or Technical Services –
194J
 Income in respect of Units – 194K
 Compensation on Acquisition of Capital Asset
– 194L
 Compensation on Acquisition of Immovable
Properties – 194LA
 Payment to Non-resident – Interest and ‘any
other sum chargeable to tax’ - 195
 Units of non-residents – 196A
 Income from Units (Non-residents) – 196B
 Income from GDRs etc. (non-residents) –
196C
 Income of FIIs from Securities – 196D
 Section
 When Introduced
 Nature of Payment
 Person Responsible for Deducting
 Who is the Payee
 Threshold Limit
 Rate of Tax Deduction
Section Brief Des. Payer Payee Rate Threshold

192 Salary Any person All persons Average Total Income

193 Int. on Securities Any person All residents 10%, 20% No threshold

194 Dividend Any Company All persons 10% Rs. 2,500

194A Interest Any Person, All residents 10%, 20% Rs. 5,000,
Ind/HUF: 44AB
Rs. 10,000
194B Lottery/X- Any person All persons 30% Rs. 15,000
word Puzzle
194BB Horse Race Any person All persons 30% Rs. 5,000
Section Brief Des. Payer Payee Rate Threshold

194C Contractors Any Person, All persons 1%: Ind./HUF Rs.30,000 and
Ind/HUF: 44AB 2%: Others Rs.1,00,000
yearly
aggregate

194D Ins. Comm. Any person All residents 10%, 20% Rs. 20,000

194E Sportspersons Any person Non-residents 10% No threshold

194EE NSS Post Office All persons 20% Rs. 2,500

194F Units UTI/Mutual All persons 20% No threshold


Fund
194G Comm. on Any person All residents 10% Rs. 1,000
Lotteries
Section Brief Des. Payer Payee Rate Threshold

194H Commission / Any Person, All residents 10% Rs. 5,000


Brokerage Ind/HUF: 44AB
Rent Any Person, All residents 2%: P&M Rs.2,40,000
194-I 10%: Land &
Ind/HUF: 44AB Bldg.

194J Fees for Prof./Tech. Any Person, All residents 10% Rs. 30,000
Services Ind/HUF: 44AB

194-K Units UTI/Mutual Fund All residents 10% Rs. 2,500

194LA Com. Acq. Any person All residents 10% Rs. 100,000

195 Non-residents Any person Non- I-T Act or DTAA No threshold


residents
 Obtain Tax Deduction Account Number (TAN)
– Section 203A and Rule 114A
 Deduct tax from income/payments made to
the payee as per the provisions of Act and
Rules
 Obtain PAN of the payee to be quoted on
Challan, TDS Certificates, Compliance
Statement and Returns
 Pay the tax deducted to the Government
within stipulated period – now mandatorily
electronically – Section 200 and Rule 30
 Issue certificates to the Payee in Form
No. 16/16A mentioning Unique
Transaction Number (UTN) generated by
system – Section 203 and Rule 31
 Furnish various returns/statements to
the Department – Section 197A and 206
and Rules 29C, 33, 36, 36A, 37 and 37A)
 Deduct when?
 At the time of
 actual cash payment
 issue of cheque/draft
 credit to the account of payee
which ever is earlier
 Note:- Even if the amount is credited to
suspense account or any other account, TDS
to be made
 Tax Deducted is Income Received (s. 198)
 Credit for TDS – Section 198, 203 and Rule 31
 Any deduction made and paid to the Central
Government shall be treated as payment of tax on
behalf of person on whose income deduction was
made
 The payee feels that there will not be any tax
liability, even after receiving the payment
 He can file an application to his Assessing Officer
(AO), giving all details of income
 AO if satisfied that total income justifies non-
deduction or lower deduction , can give a
certificate
 Payer can give the amount after making nil-
deduction or deduction at lower rate, on the basis
of the certificate produced before him
 Certificate is valid for the financial year, unless it is
cancelled by the AO during the year.
 Who is liable to deduct
 Any person responsible for paying any sum to a
resident Contractor
 For carrying out any work (including supply of
labour for carrying out the work)
 In pursuance of a ‘Contract’ between the
Contractor and specified persons
 Contractor is liable to deduct when making
payments to sub-contractors
 Rate of Deduction
 1% where payment is being made or credit given
to an individual/HUF
 2% to others
 No difference between advertising and other
contracts after 1.10.2009
 No difference between contractors and sub-
contractors after 1.10.2009
 No deduction if amount paid is less than Rs.
30,000 in a single Bill
 But if the total payments during the Year
likely to exceed Rs.1,00,000 then tax needs to
be deducted
 No deduction on payments made to
contractor engaged in the business of plying,
hiring or leasing goods carriages – if PAN is
furnished
 A “Contractor” is a person who, in pursuit of an
independent business, undertakes to do specific
jobs of work for other persons, without
submitting himself to their control in respect to
the details of the work (Stroud’s Judicial
Dictionary)
 Encyclopedia Law Dictionary defines contractor
as under: ―Contractor in relation to an
establishment means a person who undertakes
to produce a given result for the establishment,
other than mere supply of goods or articles or
manufacture to such establishment.
 Where the principle objective or work
undertaken by the payee of the price is not the
transfer of a chattel, qua chattel, the contract is
of work and labor (State of Punjab vs. Associated
Hotels – 29 STC 474 (SC)) – The decision quoted
in Board’s Circulars including Circular 86 dated
29.5.72 when the provision was introduced)
 Chattel means any tangible movable property
(furniture or domestic animals or a car etc)
 ‘Any work’ in section 194C means any work
and not only ‘works contract’ – ‘Work’
envisaged in section 194C has a wide import
and covers ‘any work’ which on or the other
of the organizations specified in the sub-
contractor gets carried out through a
contractor under a contract – Associated
Cement Co. Ltd. vs. CIT (1993) 201 ITR 435
(SC)
 CBDT withdrew earlier circulars and issued Circular No.
681 dated 8.3.1994
 Circular states that section 194C would cover all types of
contracts for carrying out any work including transport
contracts, service contracts, advertisement contracts,
broadcasting contracts, telecasting contracts, labor
contracts, material contracts and works contracts
 Service contracts would include services rendered by
lawyers, physicians, surgeons, engineers etc.
 Transport contracts would include transportation of
goods, loading/unloading etc.
 Materials Contracts would mean contracts for supply of
materials where the principal contract is for work and
labor and not a contract for sale of materials
 Stay granted by various High Courts against
operation of circular
 Relating to ‘transport contracts’ ultra vires in
Birla Cement Works – 246 ITR 216 (SC)
 Relating to professionals held ultra vires in
Chamber of Income Tax Consultants – 209 ITR
660 (Bom)
 In All Gujarat Federation of Tax Consultants – 76
Taxman 307 – held that it is not within the
powers of CBDT to interpret judgments and such
interpretation is not binding on assessee and the
A.O.
 Definition of ‘work’ expanded by inserting
Explanation III through Finance Act, 1995
 Advertising
 Broadcasting and telecasting including production of
programmes for such broadcasting and telecasting
 Carriage of goods and passengers by any mode of
transport other than railways
 Catering
 Manufacturing or supplying a product according to the
requirement of a customer by using material purchased
from such customer and not from any other person
 Section 194-J was introduced for TDS on Income of
Professionals
 A series of circulars issued in 1995 to explain the
provisions
 713 dated 2.8.1995
 714 dated 3.8.1995
 715 dated 8.8.1995
 716 dated 9.8.1995
 718 dated 22.8.1995
 720 dated 30.8.1995
 723 dated 19.9.1995
 726 dated 18.10.1995
 Clarification regarding “work” under section 194C.
There is ongoing litigation as to whether TDS is
deductible under section 194C on outsourcing
contracts and whether outsourcing constitutes work
or not. To bring clarity on this issue, it is proposed to
provide that “work” shall not include manufacturing
or supplying a product according to the requirement
or specification of a customer by using raw material
purchased from a person other than such customer as
such a contract is a contract for ‘sale’. This will
however not apply to a contract which does not entail
manufacture or supply of an article or thing (e.g. a
construction contract)
 It is also proposed to include manufacturing or
supplying a product according to the requirement or
specification of a customer by using material
purchased from such customer, within the definition
of ‘work’. It is further proposed to provide that in such
a case TDS shall be deducted on the invoice value
excluding the value of material purchased from such
customer if such value is mentioned separately in the
invoice. Where the material component has not been
separately mentioned in the invoice, TDS shall be
deducted on the whole of the invoice value. It is
further proposed to make the amendments effective
from the 1st day of October, 2009.
TDS on job work
to manufacture
product

Material not
Material supplied
supplied to
to contractor by
contractor by
customer
customer

Invoice with no Invoice showing


No TDS
detail of material value of material

TDS on invoice
TDS on Gross
value other than
Invoice Value
material
1. The payee, i.e., contractor must be resident in India within meaning of
Sec. 6 of the Income Tax Act.
2. Payment should be made by person specified (mentioned above).
3. Payment should be made for carrying out any work including supply of
labour for carrying out any work.
4. The payment should be made pursuant to a contract whether oral or
written between payer and payee.
5. The consideration of a contract in respect of which payment is made
should exceed Rs. 30,000.
6. If aggregate of the amount of such sums credited or paid or likely to be
credited or paid in the financial year exceeds Rs.1,00,000/-, TDS is
required to be deducted
7. Where advance payments are made, tax will have to be deducted if the
total payment is likely to exceed Rs. 30,000. viii. Where it was expected
that the total consideration would not exceed Rs. 30,000 but later on, it
was found that consideration would exceed Rs. 30,000, tax will have to
be deducted in respect of earlier payments also
 The products of Hindustan Lever Ltd. were
manufactured by various concerns as per the
specifications provided by the Company
 No TDS claiming that it is purchasing finished
goods from suppliers on a principal-to-
principal basis
 HLL has purchased ‘finished goods’ as per its
accounts during F.Y. 2005-06
 Survey Conducted
 Detailed agreements between ‘suppliers’ and HLL
 Specifications provided
 Regular instructions by HLL
 Provision for Regular Quality check
 The products cannot be sold in the open market by the
suppliers – condition remain even if the products are
rejected by HLL
 Department argued that HLL recorded purchase of
‘finished goods' but, in fact, had outsourced the
manufacturing of its branded products from third
parties – cosmetics, soaps, detergents etc.
 A contractual arrangement – not a contract of sale.
 Readymade clothes – outsourced to outside
parties
 Prepared as per specifications
 Whether TDS?
 Depends on Agreements between the parties
 The key provision is whether the same products
can be sold in market by the supplier
independently
 Auto sector
 Different parts are made as per specification
 Large number of Small and Medium Enterprises
doing the ‘manufacturing’ on behalf of the Auto
Company e.g. Tata Motors
 Whether tax needs to be deducted u/s 194C
 Pharmaceuticals Products
 The products are made by small number of
entities
 Whether tax needs to be deducted?
 Work shall include
 manufacturing or supplying a product according to
requirement/specification of a customer by using
material purchased from such customer
 does not include manufacturing or supplying a
product according to the requirement or specification
of a customer by using material purchased from a
third party
 TDS on
▪ Invoice value excluding the value of material if such value is
mentioned separately in the invoice
▪ On the whole of invoice value if the value of material is not
separately mentioned
Mr. X, the proprietor of X & Co., gave an annual
maintenance contract (AMC) for maintenance of office
furniture to Mr. Y on a charge of Rs. 2,52,000. As per the
agreed terms, Mr. X has to make a payment of
Rs.2,00,000 in advance and the balance is to be paid at
the time of completion of the AMC. Mr. X intimated Mr.
Y that he will be deducting tax on the amount of
advance. However, Mr. Y argued that there was no need
to deduct tax at the time of payment of advance. Tax
was to be deducted only when the bill of the contract
work would be raised by him. Is the contention of Mr. Y
correct? 52
 Solution:
As per section 194C, tax is to be deducted at the time of
credit of sum to the account of the contractor or at the time
of payment thereof in cash or by issuance of a cheque or
draft or by any other mode, whichever is earlier. Considering
the above provisions, advance of Rs. 2,00,000 will be liable
to TDS and the argument of Mr.Y is not correct.
Note: In the above case the provisions are discussed
considering a specific case of section 194C. The above
mentioned provisions (i.e., deduction of tax at the time of
payment or credit, whichever is earlier) will apply to all the
payments liable to TDS, viz., interest other than interest on
securities (section 194A), commission/brokerage (section53
194H), rent (section 194I), fees for professional/technical
 XY Corporation, a partnership firm of Mr. X
and Mr. Y, gave a catering contract on the
occasion of celebration party on completion
on 25 years of their partnership to Mr. Z. The
total payment to be made for the catering
contract is Rs.5,84,000. Entire payment has to
be made in advance before commencement
of contract. Determine the TDS liability of the
firm. 54
 Solution: As per section 194C tax is to be deducted as
follows: @ 1% when the contract payment is being
made or credit is being given to an individual or an
HUF and @ 2% when the contract payment is being
made or credit is being given to any person other than
an individual or an HUF.
 In this case the contractor is Mr. Z, i.e., an individual.
Hence, TDS would apply @ 1%. Total payment to be
made is Rs. 5,84,000, TDS @ 1% will come to Rs.
5,840.
 Suppose in the above case the contract is given to Z
Pvt. Ltd. instead of Mr. Z, then the amount of TDS
would come to Rs. 11,680, being @ 2% on Rs.
5,84,000. 55
 Mr. Kumar is running a garment factory. His turnover
for the previous year 2016-17 was Rs. 2,52,00,000.
During the year, he gave a contract to construct his
residential bungalow. The contract payment to be
made for construction of the bungalow was Rs.
2,52,000. Mr. Kumar intimated to the contractor that
he will be deducting tax @ 1% from the contract
payment. The contractor argued that the provisions of
section 194C do not apply in case of contract
payments made by an individual/ HUF for his/its
personal purposes. Is the contention of the contractor
correct? 56
 Solution
As per section 194C an individual or HUF will not
be liable to deduct 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 an individual or any member of
HUF. In this case, the contract payments were
made towards construction of personal
residential bungalow of Mr. Kumar and, hence,
there was no requirement of deduction of tax at
source. Thus, the argument of the contractor
was correct. 57
 Mr. Raja is running a garment factory and his turnover
for the previous year 2011-12 was Rs. 2,52,00,000.
During the previous year 2012-13, he gave an annual
maintenance contract to SM Pvt. Ltd. for the
maintenance of the furniture of factory. The annual
contract payments will amount to Rs. 1,84,000. He
informed the director of the company that he will be
deducting tax at source from the contract payments
@ 2%. The director argued that an individual making
contract payment has to deduct tax @ 1% and not @
2%. The rate of 2% applies only if the person making
the payment is other than an individual. Is the
contention of the director correct? 58
 Solution
As per section 194C, in respect of contract
payments to be made to any individual or a
HUF (and not by an individual or HUF) will be
liable to TDS @ 1%. In other words, the rate
of 1% will apply only in a case where the
payee is an individual/HUF. In this case the
payee is a company and TDS will be deducted
@ 2% and not @ 1%. Thus, the contention of
the director is incorrect. 59
 Mr. Kumar, the proprietor of Kumar & Co., gave an
annual maintenance contract for maintenance of
office furniture to Mr. Soham. As per the agreed
terms, the payment to be made to Mr. Soham was as
follows: Rs. 44,000 to be paid in October, 2012. Rs.
30,800 to be paid in February, 2013. Mr. Kumar
intimated to Mr. Soham that at the time of payment
in the month of February, he would be deducting tax
@ 1% from the payment to be made to him. However,
Mr. Soham argued that payment made to him would
not attract TDS, since the total payment would not
exceed Rs. 1,00,000. Is the contention of Mr. Soham
correct?
 Solution
As per section 194C, no TDS will apply if
single payment does not exceed Rs. 30,000
and the aggregate payment made during the
year does not exceed Rs.1,00,000. In this case
both the payments exceed Rs. 30,000 and,
hence, would attract TDS. The argument of
Mr. Soham is not correct. Moreover, Mr.
Kumar will have to deduct tax in October,
2012 also
 KK, a partnership firm of Mr. Kumar and Mr. Kapoor,
gave a work contract to Mr. Shan for manufacturing
the goods as per their specifications. The raw-
materials required for manufacturing the goods were
to be acquired by Mr. Shan on his own account from
the market. The total contract payment was agreed at
Rs. 5,52,000. KK intimated to Mr. Shan to produce his
PAN, since they would be deducting tax @ 1% from
the contract payments. The contractor argued that
there was no need to deduct tax in respect of contract
of manufacturing of goods, since it was a contract of
sale of goods and not a contract for any work or
service. Is the contention of Mr. Shan correct?
 Solution
The definition of work as given in section 194C includes the
activity of manufacturing/ supplying any product according to
the requirement or specification of a customer by using material
purchased from such customer. However, work will not include
the activity of manufacturing/supplying any product according
to the requirement or specification of a customer by using
material purchased from a person, other than such customer.
Thus, the activity of manufacturing/supplying of any product as
per the requirement of other person will be liable to TDS, if such
product is manufactured from the raw-materials provided by the
person giving the contract. If such product is manufactured from
raw materials purchased from a person other than such
customer, then the activity will not be liable to TDS.
 In the above case the goods were to be
manufactured from the raw-materials
acquired by Mr. Shan from person other than
SM Corporation (i.e., person other than the
customer), hence, the activity would not be
liable to TDS. Thus, the argument of the
contractor is correct.
 Provisions of Sec. 194C are applicable only in
relation to ‗works contracts‘ and ‗labour
contracts‘ but do not cover ‗contract for sale or
mere supply of goods‘.
 Neither Income Tax Act nor Income Tax Rules
specifies the difference between the contract for
sale and works contract; so there is no standard
criteria to determine whether a contract is of
contract for sale or a contract for work and
labour.?
 One of the criteria to differentiate between ‘contract for
sale‘ and ‘work contract‘ is to determine the ownership
regarding goods in question. In case of works contract,
even though a part or whole of the materials used belongs
to the contractor, yet the property in the thing produced
will be the performance whereas in the case of contract for
sale the things produced generally are the sole property of
the party who has performed the work before its delivery
and such person and the property therein passes only under
the contract relating thereto to other party for price.
 Mere transfer of property in goods used in the performance
of a contract is not sufficient. To constitute a sale there
must be an agreement expressed or implied relating to sale
of goods and completion of the agreement by passing of
title in the very goods constructed to be sold.
 Who is liable to deduct
 Any person responsible for paying any sum
chargeable under the head ‘Salaries’
 In other words every employer is liable to deduct
tax at source
 Thus, even Individuals/HUF are required to deduct
 When to deduct
 At the time of payment of salary
 When only provision for salary made – no need to
deduct
 Estimated Income and Rate of Deduction
 At the beginning of year, the employer needs to
estimate the salary income for entire year
 Compute the tax on the basis of rates in force
applying the slab of income – average rate of tax
 Divide it by 12 and deduct the amount every month
 Estimated income may be revised periodically on the
basis of new information, or new facts and
circumstances – new installments may be determined
 Salary includes wages, fees, commissions, perquisites,
profits in lieu of, or, in addition to salary, advance of salary,
annuity or pension, gratuity, payments in respect of
encashment of leave etc.
 Includes the annual accretion to the employees account in a
recognized provident fund to the extent it is chargeable to
tax under rule 6 of Part A of the Fourth Schedule of the Act.
 Contributions made by the employer to the account of the
employee in a recognized provident fund in excess of 12 per
cent of the salary of the employee, along with interest
applicable, is included
 Any contribution made, in excess of 10 per cent, by the
Central Government or any other employer to the account
of the employee under the New Pension Scheme is also
included
 Includes Perquisites – section 17(2)
 Value of rent-free accommodation / concessions
 Personal attendants
 Gas, Electricity and Water
 Free or concessional education
 Interest-free or concessional loan
 Use of assets/transfer of assets
 For the purposes of TDS –classified as monetary
and non-monetary perquisites
 Includes Profits in lieu of salary – section 17(3)
 CBDT’s Annual Circular on TDS – gives guidelines for
deduction from salary
 Exemptions to be considered while computing ‘Salary’
liable for TDS
 10(5): Leave Travel Allowance
 10(10): Death cum retirement gratuity
 10(10A): Pension
 10(10AA): Leave encashment
 10(10B): Retrenchment Compensation
 10(10C): Compensation for VRS
 10(10D): Sums received under Life Insurance Policy
 10(11): Payment from Provident Fund
 Exemptions to be considered while computing ‘Salary’
liable for TDS (contd.)
 10(13A): HRA
 10(14): Special Allowance for Performance of Duties as per
Rule 2BB
 10(15)(iv)(i): Interest on deposit scheme for retiring
Government Employees
 10(18): Pension to Gallantry awards winners
 Exemptions specifically provided under section 17 e.g.
medical treatment provided to an employee or any
member of his family, in any hospital maintained by the
employer or reimbursement of medical expenses upto Rs.
15,000
 Deductions under section 16
 Entertainment Allowance – 16(ii)
 Tax on Employment – 16(iii)
 Standard Deduction omitted with effect from
Finance Act, 2005
 Deductions under Chapter-VIA
 Section 80C
 Section 80CCA: National Saving Scheme or deferred annuity
plan
 Section 80CCB: Equity linked saving scheme
 Section 80CCC: Pension Funds
 Section 80CCD: Pension Scheme of Central Government
 Section 80D: Medical Insurance
 Section 80DD: Medical treatment of handicapped
 Section 80E: Repayment of loan for higher education
 Section 80GG: House Rent Paid
 Section 80RRA: Remuneration in Foreign Currency
 Section 80U: Persons suffering from disability
 Deductions under Chapter-VIA
 Section 80G deduction not allowed by DDOs
 However, on due verification 100% deduction may
be allowed in case of certain specific funds only
such as National Defence Fund or The Prime
Ministers National Relief Fund and 50% deduction
on Jawaharlal Memorial Fund etc.
 The Drawing and Disbursing Officers should satisfy
themselves about the actual
deposits/subscriptions/payments made by the employees,
by calling for such particulars/information as they deem
necessary before allowing the aforesaid deductions. In case
the DDO is not satisfied about the genuineness of the
employees claim regarding any
deposit/subscription/payment made by the employee, he
should not allow the same, and the employee would be free
to claim the deduction/rebate on such amount by filing his
return of income and furnishing the necessary proof etc.,
therewith, to the satisfaction of the Assessing Officer.
 A number of Examples are given in the Circular issued by the
CBDT
 Section 192(1A) and 192(1B)
 Employers have been given option to pay the tax on
non-monetary perquisites without deduction of tax at
source
 The employer will have to pay such tax at the time
when such tax was otherwise deductible i.e. at the
time of payment of income chargeable under the
head Salaries to the employee.
 Tax shall be determined at the average rate of
income-tax computed on the basis of rates in force on
the salary income including non-monetary perquisites
 No Grossing up – Section 10(10CC)
 Example: Salary of a male employee (below 65 years) for the
year inclusive of all perquisites is Rs. 4,50,000, out of which,
Rs. 50,000 is on account of non-monetary perquisites and the
employer opts to pay the tax on such perquisites
 Steps :
 Income chargeable under the head Salaries inclusive of all
perquisites: Rs. 4,50,000
 Tax on total salaries (including Cess): Rs. 46,350
 Average rate of tax [(46,350/4,50,000) 100]: 10.3%
 Tax payable on Rs. 50,000 (10.3% of 50,000):Rs. 5,150
Amount required to be deposited each month:
(5,150/12) Rs. 430
 Assessee employed simultaneously under more than
one employer
 Or employed successively under more than one
employer
 Assessee can choose one Employer
 Furnish particulars to the chosen employer about his
salary etc. received from other employers in Form 12B
 Form 12B includes particulars of Perquisites received
 Employer has to aggregate the income, apply the rates
and make the deduction
 Applicable to Employees of Govt. and semi-Govt.
institutions
 If the employees receives arrears of salary or profits
in lieu of salary of earlier years
 192(2A) read with 89(1): If the tax rate is lower for
the earlier years for which payment is made, he may
furnish to the payer, in Form 10E, to claim the relief
 Section 192 (2B)
 At the option of the assessee
 If any income other than Salary Income –
information may be given to the employer
 Rule 26B with a Verification – I ------ declare
 Employer cannot take losses under consideration
other than loss under the head House Property
 Section 192 (2C)
 Employers are required to submit a statement of
Perquisites or Profits in lieu of Salary to the
Employees
 Rule 26A and Form No. 12BA
 Section 192(3): During the Financial Year, TDS
amount can be adjusted
 Section 192(4): Trustees of a recognized Provident
Fund making payments of accumulated balance
where Rule 9(1) of Part A of Fourth Schedule applies
need to deduct
 Section 192(5): Contribution made by an employer
to approved superannuation fund are paid to
employees in circumstances other than section
10(13) – tax needs to be deducted – Rule 6 of Part B
of Fourth Schedule
 If the salary is paid in foreign currency?
 The value in Rupees of such salary shall be
calculated at the prescribed rate of exchange
 Prescribed in Rule 26 - Rate of exchange to be
adopted for converting the foreign currency
payment into Rupee equivalent is the telegraphic
transfer rate adopted by the SBI on the date on
which tax is required to be deducted
 Who is liable to deduct
 Every person other than individual and HUF
 Individuals and HUFs liable for tax audit also required
to deduct tax at source
 Who is the Payee
 Every resident after 1.6.2003
 Prior to 1.6.2003 payee was “any person”
 Rent paid to non-residents governed by section 195
 To be deducted at the time of payment or credit
whichever is earlier
 Tax needs to be deducted on payment of rent
if the payment during the year likely to
exceed Rs. 2,40,000
 Rate of Deduction
 Payments made in respect of rent paid for
use of plants, machinery and equipments –
2%
 Rent paid for Land, building, furniture and
fittings – 10%
 Rent defined (prior to 13.7.2006) as
 “Rent” means any payment, by whatever name
called, under any lease, sub-lease, tenancy or any
other agreement or arrangements for the use of
any land or any building (including factory
building), together with furniture, fittings and the
land appurtenant thereto, whether or not such
building is owned by the payee
 Rent defined after 13.7.2006 as
 “Rent” means any payment, by whatever name called,
under any lease, sub-lease, tenancy or any other
agreement or arrangements for the use of (either
separately or together) any,-
▪ Land; or
▪ building (including factory building); or
▪ land appurtenant to a building including factory building); or
▪ machinery; or
▪ plant; or
▪ equipment; or
▪ furniture; or
▪ fittings,
whether or not all or above are owned by the payee.
 Definition of rent u/s 194-I is different from
annual value u/s 22 where one has to be owner
 For attracting section 194-I, the payee need not
be the owner of land, building, furniture etc.
 The amended section covers leases or even sub-
leases either by the owners or even by the
lessees and is thus extended to cover all items
 Income from sub-tenancy – may be income from
other sources but still attracts 194-I
 Varun & Co. is a proprietorship of Mr. Varun
(turnover during the preceding year was Rs.
1,84,00,000). For the previous year 2012-13, the
firm has to pay Rs. 6,48,000 towards rent of office
building. The accountants of the firm intimated
the landlord that the firm will be deducting tax
from the rent @ 10%. The landlord argued that as
per section 194I there is no requirement to deduct
tax from rent of office building. TDS is applicable
only on rent of factory building. Is the contention
of landlord correct?
 As per section 194I, tax is to be deducted on any
amount paid towards rent. For the purpose of section
194I, rent means any payment, by whatever name
called, under any lease, sublease, tenancy or any
other agreement or arrangement for the use of (either
separately or together) any : Land, Building (including
factory building), Land appurtenant to a building
(including factory building), Machinery, Plant
Equipment, Furniture, Fittings.The above items may
or may not be owned by the payee. Thus, tax is to be
deducted in respect of rent for office building also.
Hence, the argument of the landlord is not correct.
 Varun & Co. is a proprietorship of Mr. Varun (turnover
during the preceding year was Rs. 1,84,00,000). For
the previous year 2012-13, the firm has to pay Rs.
2,52,000 towards rent of the machineries. The
machineries are taken on rent from Mr. Kumar, who,
in turn, has taken the same on rent from Mr. Raja. The
accountant of the firm intimated to Mr. Kumar that
the firm will be deducting tax from the rent @ 2%. Mr.
Kumar argued that as per section 194I there is no
requirement to deduct tax from rent, if the payee is
not the owner of the machineries. TDS is applicable
only if the rented property is owned by the person
from whom the property is rented. Is the contention
of Mr. Kumar correct?
 It is specified in section 194I that the rented
property may or may not be owned by the
person from whom the property is taken on
rent. Hence, in this case the firm has to
deduct tax from the rent to be paid to Mr.
Kumar. The argument of Mr. Kumar is not
correct.
 XY Corporation is a partnership firm. For the
previous year 2012-13, the firm has to pay
Rs.2,52,000 towards rent of its office
building. The accountant of the firm
intimated to the landlord that the firm would
be deducting tax from rent @ 2%. The
landlord argued that as per section 194I, tax is
to be deducted @ 1% if the person to whom
rent is to be paid is an individual. Is the
contention of the landlord correct?
 As per section 194I in respect of rent of land
or building or furniture or fittings tax is to be
deducted @ 10%. Thus, in the above case
accountant as well as the land lord, both were
incorrect. In this case tax will have to be
deducted @ 10%.
 Mr. Raja is running a proprietary business under the
name of Raja& Co. (turnover during the preceding
year was Rs. 184,52,000). For the previous year 2012-
13, he has to pay rent of office building of Rs. 2,52,000
to Mr. Shivam. In addition to rent of Rs. 2,52,000, he
has to pay a non-refundable deposit of Rs. 3,84,000.
He informed Mr. Shivam that he would be deducting
tax @ 10% from rent and deposit. Mr. Shivam argued
that there was no requirement of deducting tax in
respect of non-refundable deposit and TDS would
apply only in respect of refundable deposits. Is the
contention of Mr. Shivam correct?
 The contention of Mr. Shivam is not correct.
In respect of refundable deposits no TDS will
apply. TDS will apply only in respect of non-
refundable deposits. Hence, Mr. Raja is
required to deduct tax @ 10% from rent as
well as from non-refundable deposits.
100
 Who is liable to deduct
 Every person
▪ Includes Individuals/HUFs also
▪ Includes residents and non-residents
 Who is the Payee
 Every resident
 When to make deduction
 The earlier of
▪ Credit of interest payable to the account of the payee, or
▪ Payment in cash or by issue of cheque/draft/any other mode, or
▪ To any other account in the books of accounts of the payer –
deeming provision in Explanation to section 193)

101
 Payments covered
 Interest on Securities
 Defined in Section 2(28B) to mean
▪ Interest on any security of the Central or State Government
▪ Interest on debentures or other securities for money issued
by or on behalf of a local authority or a company or a
statutory corporation
▪ ‘Securities’ are instruments indicating secured liability
 Upto 1.4.89, ‘Interest on Securities’ was a separate
head of income under section 14 (Deleted sections 18
to 21)

102
 Rate of Deduction
 ‘Rates in Force’ – Part II
Payee Rate
(a) Resident person other than a company
(i) Interest on debentures or securities issued by 10%
a local authority or corporation established
under a Central/State/Provincial Act
(ii) Interest on listed debentures 10%
(iii) Interest on other debentures/securities 20%
(b) Domestic Company 20%

 Plus surcharge and education cess as applicable

103
 Exemptions
 Clause (i): National Defence Bonds, 1972
 Clause (ia): National Defence Loan, 1968 and 1972
 Clause (ib): National Development Bonds
 Clause (iia): NSC (IV Issue)
 Clause (iib): Notified debentures issued by PSUs/Co-
operative society etc. – About 200 Notifications issued
till date – most recent ones are NHAI Bonds, IDBI
Flexibonds etc. – ITA Section of CBDT issues
Notifications
 Clause (iii) – Gold Bond, 1977 and 1980 – interest less
than Rs. 10,000 during the year
104
 Exemptions (continued)
 Clause (iiia): Omitted w.e.f 1.6.97
▪ Notified securities of Central/State Government
▪ Number of notifications issued e.g. exempting securities
issued by nationalized banks etc.
 Clause (iv): w.e.f. 1.6.97
▪ Exempts all securities of central and State Governments
▪ Proviso w.e.f. 1.6.2007 – Payment of interest in excess of Rs.
10,000 on 8% (savings) taxable bonds, 2003 not exempt
 Clause (v): Listed debentures issued by a company if
interest does not exceed Rs.5,൦00

105
 Exemptions (continued)
 Clause (vi), (vii), (viii): Interest payable to
LIC/GIC/Other insurer in which it has full benficial
interest
 Clause (ix)
▪ Inserted through Finance Act, 2008 - “To facilitate
development of the corporate bond market”
▪ Interest payable on any security issued by a company,
where the security is in dematerialized form and listed
on a stock exchange
▪ No limit of Rs.5,൦00 as in clause (v)
106
 TDS on Income from Zero Coupon/Deep
Discount Bonds
 Tax treatment explained in Circular N0. 2 of 2002 dated 15.2.02
 TDS clarified in Circular No. 4 of 2004 dated 13.5.04
▪ TDS u/s 193/195 only at the time of redemption of the bonds
▪ Irrespective of the fact that the bondholder declared income
on accrual basis from year to year
▪ If declared on accrual basis, TDS could be lower
▪ In this case, he has to make application u/s 197 giving
evidence of income offered by him or the previous owners in
different years
▪ Individuals can file declaration in 15H
107
 Since assessee could not have identified
identity of payees at point of time when
provision for ‘interest accrued but not due’
was made since the bonds were freely
transferrable, assessee did not have any
liability to deduct tax at source – IDBI vs. ITO
(2006) 10 SOT 497
 Tribunal ruled that if the identity of lenders known
– Explanation to section 193 would be applicable
108
 Who is to deduct tax
 Principal Officer of
▪ An Indian company or
▪ A company which has made arrangements for declaration
and payment of dividend in India
 Income/Payments covered
▪ Dividends
▪ Including 2(22)(a) to (e)
 No TDS if payment is (i) a resident shareholder, (ii)
paid by account payee cheque and (iii) amount less
than Rs. 2,500
 No TDS if payments to LIC/GIC/Other insurers

109
 Rate of Deduction
 Payee: resident other than company – 20%
 Payee: Domestic company: 20%
 No deduction in respect of dividends referred to
in section 115-O
 Explanation to Chapter XII-D: Dividends shall
have the same meaning as in s. 2(22) but shall
not include 2(22)(e)
 Thus, TDS only on ‘deemed dividend’ u/s
2(22)(e)!

110
 Who is to deduct tax
 Any person other then individuals and HUF (not subject to tax audit)
 Payments covered
 Interest other than ‘Interest on Securities’
 Interest defined in section 2(28A) to mean interest payable in any
manner in respect of any moneys borrowed or debt incurred
(including a deposit, claim or other rights or obligation) and includes
any service fee or other charges in respect of the moneys borrowed or
debt incurred or in respect of any credit facility which has not been
utilized
 “Interest on Securities” in Section 193 is a sub-set of “Interest”

111
 Rate of Deduction
 Payee: Resident other than company – 20%
 Payee: Domestic company: 20%
 When to make deduction
 The earlier of
▪ Credit of interest payable to the account of the payee, or
▪ Payment in cash or by issue of cheque/draft/any other mode,
or
▪ To any other account in the books of accounts of the payer –
deeming provision in Explanation to section 194A(1)
▪ Again same as section 193

112
 Exemptions
 Clause 3(i): Time deposits i.e. fixed deposits
▪ Rs.40,000 in case of fixed deposits with banks, co-
operative banks, post office deposits
▪ Rs. 5,000 in other cases
▪ Rs.40,000 or Rs. 5,000 to be computed with respect to
income credited/paid in a branch of the bank etc.
▪ Rs.40,000 or Rs. 5,000 shall be computed with reference
to the income credited or paid by the banking company
or the co-operative society or the public company has
adopted core banking solutions

113
 Exemptions (continued)
 Clause 3(iii): Income paid/credited to
▪ Banking company to which Banking Regulation Act, 1949
applies or co-operative society (what about foreign banks
such as Standard Chartered Bank)
▪ Financial corporation established under Central/State Act
▪ LIC
▪ UTI
▪ Company/co-operative society in the business of insurance
▪ Notified institutions etc. – About 80 institutions have been
notified such as Power Finance Corporation Ltd.

114
 Exemptions (continued)
 Clause 3(iv): Interest paid by a firm to its partner
 Clause 3(v): Interest paid by a co-operative society to
its member or to another co-operative society
 Clause 3(vi): Interest paid in respect of deposits made
to a Notified Scheme – About 10-15 schemes notified
– mostly Post Office Schemes such as NSCs, P.O.
Recurring deposit schemes etc.
 Clause 3(vii): Deposits (other than time deposits) with
a banking company e.g. interest on savings account
115
 Exemptions (continued)
 Clause 3(viia): Deposits with co-operative society
other than time deposits
 Clause 3(viii): Refunds given by Tax Department –
what happens in the case of refunds granted to a
foreign company?
 Clause 3(ix): Interest on compensation awarded by
Motor Accidents claims tribunal
 Clause 3(x): Income payable by Infrastructure
company/fund/PSU in relation to zero coupon bonds
 Section 194A(4): TDS can be
increased/decreased for adjustment purposes
116
 Circular No. 4 of 2002 dated 28.6.2002
 In case of those funds or authorities or bodies whose
income is unconditionally exempt under section 10
and who are not statutorily required to file return of
income under section 139, there would be no
requirement for TDS as their income is anyway
exempt
 In other case – TDS is required
 Thus, if interest paid to educational
institutions/charitable trusts whose income exempt
u/s 10(23C)/11 – TDS must be done – However, it is
possible to make application u/s 197 and get relief
from A.O.
117
 Who is to deduct tax
 Any person responsible for paying winnings from
Lotteries etc.
 Type of Income/Payment
 Winnings from Lotteries or Crossword Puzzles
 Card Game or any other game of any sort
(inserted with effect from 1.6.2001)
 Exemption limit Rs. 1൦,000
 Rate of Deduction – ‘Rates in Force’ – 30%
plus surcharge/education cess in all cases
118
 Contest for Election forecast/World cup
forecast – no TDS as dominant factor in the
contest is skill/knowledge – ITO vs.
Malayalam Manorama 94 ITD 195 (Cochin)
 Purchase of Refrigerators with scratch card –
held to be lottery – 105 ITD 692 (Chd) –
contrary view by some tribunals –
predominant purpose was promotion for sale
of goods – ‘lottery’ is just incidental
 Payment in kind also covered
119
 If partly in kind and partly in cash and the cash
component is sufficient to meet the TDS liability
– the payer must deduct tax before making the
payment
 If payment in kind or partly in cash and partly in
kind and the cash component is not sufficient to
meet the TDS liability – the person responsible
for paying should ensure that before releasing
the winnings tax has been paid in respect of the
winnings

120
 Who is to deduct tax
 Any person being a bookmaker or to whom a
licence for betting has been granted
 Type of Income/Payment
 Winnings from Horse Races
 Exemption limit Rs.10,000
 Applicable to every race separately
 Rate of Deduction – ‘Rates in Force’ – 30%
plus surcharge/education cess in all cases
121
 A person has placed 3 bets @100 each on
different horses in a particular race and has
won an amount of Rs. 16,000 on one of them.
What will be the amount of winnings subject
to TDS?
 The gross winnings less the amount paid for that
bet only i.e. Rs. 100, that is, Rs. 15,900 shall be
subjected to TDS. Thus, the losses on other horses
or on other races cannot be adjusted against the
winnings – Circular 240 dated 17.5.78

122
 Who is to deduct tax
 Every person responsible for paying income
referred to in the section
 Type of Income/Payment
 Income by way of remuneration or reward,
whether by way of commission or otherwise for
soliciting or procuring insurance business
 Including business relating to the continuance,
renewal or revival of policies of insurance

123
 Who is the Payee
 Every resident receiving the above kinds of
income
 Rate of Deduction
 Rates in Force
▪ If payee is domestic company: 20%
▪ If payee is ‘any other person’: 10%
 Exemption Limit
 Rs. 15,000
124
 Who is to deduct tax
 Every person responsible for paying income referred
to in the section
 Type of Income/Payment – Section 115BBA
 Income by way of, or from
▪ Participation in India in any sport or game (other than income
from lotteries, crossword puzzles, races including horse races,
card games etc. – s. 115BB)
▪ Advertisement
▪ Contribution of Articles relating to any game or sport in India
in newspapers, magazines or journals
 Type of payee in these cases are non-resident
sportsmen and athletes who are not citizens of India
125
 Type of Income/Payment – Section 115BBA
 Amount guaranteed to be paid or payable in relation
to any sports or game (other than income from
lotteries, crossword puzzles, races including horse
races, card games etc.) played in India
 Type of payee in these cases are non-resident sports
association or institutions
 Exemptions
 No exemptions are available
 Rate of deduction: 20% - provided in the section
itself.
126
 Who is to deduct tax
 Every person responsible for paying income
referred to in the section
 Type of Income/payment
 Withdrawal of whole or part of the amount
standing to the credit of National Savings Account
in respect of which deduction has been allowed
u/s 80CCA(1) and interest accrued thereon
 Type of Payee
 Any person

127
 Exemptions
 Aggregate amount during the year less than Rs.
2,500
 No deduction on payments to heirs of the
depositor
 Rate of deduction
 10% - provided in the section itself
 Sunset clause in Section 80CCA with effect
from 1.4.1992 – why continuing with the
section?
128
 Who is to deduct tax
 Every person responsible for paying income referred
to in the section
 Type of Income/payment
 Any amount invested by an assessee in units issued
under the Unit Linked Savings Scheme of S. 80-CCB in
respect of which deduction has been allowed to him –
which is being returned to him in whole or in part by
way of repurchase of such units or on termination of
the plan by Trust or Fund

129
 Type of Payee
 Any person who has invested the amount under
above-referred scheme and who has availed of
deduction u/s 80CCB
 Exemptions
 No exemptions available
 Rate of deduction
 20% - provided in the section itself
 Sunset clause in Section 80CCB with effect
from 1.4.92
130
 Who is to deduct tax
 Every person responsible for paying income referred
to in the section
 Type of Income/Payment
 Any income by way of commission, remuneration or
prize of lottery tickets (including bonus payable on
winning lottery tickets)
 Type of Payee
 Any person who is or has been stocking, distributing,
purchasing or selling lottery tickets; receiving above
types of income
131
 Exemptions
 Rs. 15,000
 Rate of Deduction
 5% - provided in the section itself

132
 Who is to deduct tax
 Any person other then individuals and HUF (not
subject to tax audit)
 Type of Income/Payment
 Income by way of commission (not being
insurance commission) or brokerage

133
 Rate of Deduction
 5% - provided in the Section itself
 Exemption
 Rs. 15,000 during the FinancialYear
 Nodeduction on commission payable by
MTNL/BSNL to PCO franchisees – w.e.f. 1.6.2007

134
 Who is to deduct tax
 Any person other then individuals and HUF (not
subject to tax audit)
 Type of Income/Payment
 Any sum by way of
▪ Fees for professional services (defined in Exp. (a))
▪ Fees for technical services
▪ Royalty (w.e.f. 13.7.2006)
▪ Any sum referred to in section 28(va) i.e. non-compete
fees or fees for a negative covenant (w.e.f. 13.7.2006)
135
 Type of Payee
 Any person who is resident in India
 Exemptions
 No deduction if amount paid/credit or likely to be
paid/credited during the F.Y. does not exceed Rs.
30,000 for each of the services mentioned
 No deduction if the individual/HUF paying fees for
professional services/technical services exclusively for
the personal purposes
 Rate of Deduction
 10% - provided in the section itself
136
 Professional services
 Legal
 Medical
 Engineering or Architectural
 Profession of Accountancy
 Technical Consultancy
 Interior Decoration
 Advertising
 Professions notified u/s 44AA
▪ Profession of Authorized Representative (S.O. 17(E) dated 12.1.77)
▪ Profession of Film Artist (S.O. 17(E) dt. 12.1.77) – defined in Rule 6F
▪ Profession of Company Secretary (S.O. 2675 dated 25.9.92)

137
 Fees for Technical Services
 Same meaning as in Explanation 2 to section 9(1)(vii)
 Means consideration (including any lump sum
consideration) for the rendering of any managerial,
technical or consultancy services (including the
provision of services of technical or other personnel)
but does not include consideration for any
construction, mining or like project undertaken by the
recipient or consideration which will be chargeable
under the head ‘Salaries’

138
 Royalty
 Same meaning as in Explanation 2 to section 9(1)(vi)
 Means consideration (including any lump sum
consideration) but excluding any consideration
chargeable under the head ‘Capital Gains’ for
▪ transfer of all or any rights (including the granting of a
license) in respect of a patent, invention, model, design,
secret formula or process or trademark or similar property
▪ the imparting of any information concerning the working of,
or the use of, a patent, invention, model, design, secret
formula or process or trademark or similar property

139
▪ the use of any patent, invention, model, design, secret
formula or process or trademark or similar property
▪ the imparting of any information concerning technical,
industrial, commercial or scientific knowledge, experience or
skill
▪ the use or right to use any industrial, commercial or scientific
equipment other than section 44BB
▪ the transfer of all or any rights (including the granting of a
license) in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in
connection with television or tapes for use in connection with
radio broadcasting but not including consideration for the
sale, distribution or exhibition of cinematographic film
▪ the rendering of any services in connection with the above-
mentioned activities

140
 An Indian Pharma Company has entered into an
agreement with a UK Pharma Company to share
its product and receives Royalty from UK
Company.
 Whether UK Company is required to deduct tax
at source before making payments to Indian
Company?
 A Foreign Company has employed a lawyer to
present its case before High Court. Whether it
needs to deduct tax at source? – Circular 726
dated 18.10.1995 read with Circular 766 dated
24.4.1998
141
 Inserted w.e.f. 1.10.2004
 Who is to deduct tax
 Every person responsible for paying income referred to in
the section
 Type of Income/Payment
 Any sum, being in the nature of compensation or
enhanced compensation or consideration or enhanced
consideration on account of compulsory acquisition, under
any law for the time being in force, of any immovable
property other than agricultural land
 Immovable property means land or any building or part of
a building

142
 Type of Payee
 Every person resident in India
 Exemptions
 No deduction if the compensation is less than Rs. 2,50,000
 Rate of Deduction
 10% - provided in the section itself
 No TDS – on payment made in respect of any award
or agreement which has been exempted from levy of
income-tax under section 96 of the Right to Fair
Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013

143
 Sunset clause w.e.f. 1.4.2003
 10(33)/10(35)

144
 No specific sunset clause
 But not applicable in view of section 10(33)
and 10(35)

145
 Who is to deduct tax
 Any person
 Type of Income/Payment
 In respect of bonds/shares referred to in section
115AC
▪ Income by way of interest or dividends (other than
dividends referred to in section 115-O)
▪ Long Term Capital Gains
 Type of Payee
 Any non-resident person

146
 Rate of tax
 10% - provided in the section itself
 Exemption
 No exemption
 Section 47(viiia) provides that transfer of a capital
asset, being bonds or GDRs referred to in section
115AC is not regarded as transfer provided the
transfer is made outside India from one non-
resident to another non-resident

147
 Who is to deduct tax
 Any person
 Type of Income/Payment
 Income in respect of Securities (other than units
referred to in section 115AB) listed on a recognized
stock exchange in India and not being dividends
referred to in section 115-O
 Type of Payee
 FIIs
 Rate of Deduction – 20% provided in the section
itself
 No deduction on income by way of Capital Gains
148
 A seller at the time of debiting the
amount payable by the buyer to the
account of the buyer or at the time of
receipt of such amount, whichever is
earlier, collect a sum equal to the
prescribed percentage as income-tax
Nature of Goods Percentage/Rate of
Tax

Alcoholic liquor 1%
Timber obtained under forest lease 2.5%
Timber obtained without forest lease 2.5%
Tendu Leaves 5%
Other forest produce, excluding Tendu leaves 2.5%
and Timber

Scrap 1%
Mining being coal or lignite or iron ore 1%
 s.206c (1F) – inserted w.e.f. 1.6.2016
 Motor Vehicle value exceeding ten lakh
rupees
 1% TCS
 ‘Buyer’ means a person who obtains in any
sale, by way of auction, tender or any other
mode, goods of the nature specified in the
Table or the right to receive any such goods
but does not include
 PSU, Central/State Government, Embassy/High
Commission/Legation/Commission/Consulate/Tra
de Representation of a Foreign Govt., Club
 Purchased for personal consumption
 ‘Seller’ means
 Central/State Government
 Local Authority
 Corporation/Authority established under
Central/State/Provincial Act
 Company
 Firm
 Co-operative society
 Individuals/HUF subject to tax audit
 Country Liquor
 Seller – State Govt.
 Buyer – License Holder
 If the contract is for Rs. 1,00,000 then Govt.
has to collect 1,00,000 + 1%, i.e., Rs. 1,01,000
 Seller (State Govt. in this case) would be
required to pay Rs. 1,000 to the Income Tax
Department
 If buyer (e.g. manufacturer of Bidis) gives a
declaration that ‘goods’ are to be utilized for
the purposes of manufacturing, processing or
producing articles or things and not for
trading purposes – no TCS
 Statement in Form 27C
 Statement needs to be sent to the tax
department by Sellers (e.g. State Govt.)
 Applicable with effect from 1st October, 2004
 Every person, who grants a lease or a license or
enters into a contract or otherwise transfers any
right or interest either in whole or in part in any
parking lot or toll plaza or mine or quarry to
another person (other than a PSU) for the use of
such parking lot, toll plaza or mine or quarry for
the purpose of business
 Collect tax at source at the time of receipt of the
amount or debiting the amount payable to the
account of the licensee or lessee, whichever is
earlier
Nature of contract or license or lease etc. Percentage
Parking Lot 2%

Toll Plaza 2%

Mining and Quarrying (excluding mining and quarrying of 2%


mineral oil, which includes petroleum and natural gas)
 Section 197
 Applicable to TDS under sections 192, 193, 194, 194A,
194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA and
195
 In the case of TCS – Application u/s 206C(9)
 If on an application made by recipient of the income
or the ‘sum’, the A.O. is satisfied that the total income
of the recipient justifies deduction at lower rate or no
deduction at all – the A.O. may give such certificate
 The A.O. here is the Officer entrusted with the
responsibility to enforce the TDS Provisions – the TDS
Officer
 Section 197 (contd.)
 Application to be made in Form 13 (Rule 28)
 Rule 28AA – conditions for lower rate of
deduction (other than dividends)
▪ Higher of (a) tax payable on estimated income of current
year and (b) average of average rates of tax paid during
last 3 years
▪ Valid for the specified assessment year – normally
issued for one year
 Rule 29 - conditions for lower rate of deduction (in
the case of dividends)
 Section 197 (contd.)
 Rule 28AA – conditions for lower rate of deduction in
the case of charitable trusts/institutions
▪ returns have been filed for asst. years for which it has become
due
▪ the trusts etc. are approved for the purposes of exemption
from income-tax
▪ the applicant gives a list of deductors from whom amounts
are to be received without TDS every six months alongwith
the names, addresses and the amounts received
 Section 197 (contd.)
 Instruction No. 8/2006 dated 31.10.2006
▪ Instances have been brought to the notice of Board that
A.O.s are issuing certificates for lower deduction
indiscriminately and in violation of rules 28AA and 28AB
▪ No certificate under any circumstance should be issued
in circumstances which are not covered by the said rules
▪ Certificates should be issued with the prior approval of
JCIT/Addl.CIT
 Section 197A
 Lower rate of TDS on the basis of self-declaration
 197A(1): Section 194/194EE – applicable to a
resident individual
 197A(1A): Section 193/194A/194D/DA/194I/194K –
applicable to any person not being a company or
firm
 197A(1D): SEZs
 Form 15G: For others
 Form 15H: For senior citizens
 Section 197A (contd.)
 Finance Act, 2002: Self-declaration can be given only
if the income is less than the maximum amount which
is not chargeable to tax – Section 197(1B)
 Finance Act, 2003: The above condition relaxed for
senior citizens as representations received – Section
197(1C)
 Form 15G/15H to be submitted by payee to the payer.
The payer is required to submit the same to the
CCIT/CIT within seven days from the end of month
 Section 198
 All sums deducted in accordance with the
provisions of Chapter-XVII is deemed to be
income of the deductee-assessee
▪ Except in the case of section 192(1A), that is, TDS on
non-monetary perquisites
 Section 199 – Totally changed through
Finance Act, 2008
 Any tax deducted under Chapter XVII-B and paid
to Central Govt. shall be treated as payment of tax
on behalf of the person from whose income
deduction was made – also u/s 192(1A)
 Similar provision in case of TCS – Section 206C(4)
 Rule 37BA and 37-I inserted in the I-T Rules
through Notification No. 28/2009 dated 16th
March, 2009
 Section 200
 Any sum deducted in accordance with Chapter-
XVII to be paid to credit to the Central
Government within the prescribed time –
prescribed in Rule 30
▪ Rule 30 as it stands after 1st April, 2010 - If deduction by
Govt. authorities – same day, other cases – 7 days from
the end of the month in which deduction is made i.e.
one week.
 Section 200 (contd.)
 Rule 30 (contd.)
▪ The A.O. with prior approval of JCIT/Addl.CIT may
permit quarterly payments in the case of s.192, 194,
194A,194D &194H.
▪ The person responsible for deduction required to
electronically furnish income-tax challan in Form 17 and
electronically remit it to the bank account
▪ For TCS - newly substituted rule 37CA provides similar
requirements
 Section 200 (contd.)
 Rule 31A (w.e.f 1.4.2010)
▪ Quarterly statements – all Quarterly statements to be
delivered together on 15th June after the end of F.Y.
▪ Section 192: Form No. 24Q
▪ Sections 193 to 196D: Form No. 27Q in the case of non-
residents/foreign company, Form No. 26Q in case of residents
▪ Section 206C: Form No. 27EQ
 Section 203
 Every person deducting tax at source is required to issue TDS
certificate within prescribed time – For TCS similar requirements
under section 206C(5)
 Rule 31 (01.4.10)
▪ TDS certificates to be issued within one month from the end of
month in which TDS was made in most of the cases - in the case of
salary, one month from the end of financial year
▪ TDS certificates to be issued in Form No. 16 or 16A – now will
contain Unique Transaction Number
▪ For TCS - newly substituted rule 37D provides similar requirements
 Section 203A
 Tax Deduction and Collection Account Number
 To be quoted
▪ In all challans
▪ In all TDS/TCS certificates
▪ In all Quarterly statements
▪ In all returns
▪ In all documents which may be prescribed in the
interests of revenue
 Section 203AA
 The prescribed I-T Authority (D.G. Systems) or the person
authorized by such authority is required to submit a
statement to the deductee the amount of tax deducted or
paid and the prescribed particulars
 Particulars prescribed in Rule 31AB read with Form 26AS
▪ Name of the deductor
▪ TAN of the deductor
▪ Section under which deduction was made
▪ Date of payment/credit
▪ Amount paid/credit
▪ Tax deducted
▪ TDS deposited
 Also contains details of Tax paid other than TDS/TCS
 Section 204 provides the meaning of “persons
responsible for paying”
 Section 206 provided annual returns of TDS to
be filed in Form No. 24 or 26 – after 1.4.2005 it is
not required
 Section 206A provides for furnishing of quarterly
return in respect of payment of interest to
residents without deduction of tax
 Rule 31AC, 31ACA, Form 26QA, 26QAA – valid for
time deposits less than Rs. 10,000 (if in excess of Rs.
10,000 – Form 26Q)
 Section 201
 Where the person who is required to deduct tax at
source
▪ does not deduct, or
▪ after deduction does not pay
 the whole or any part of the tax which he is required
to deduct/pay
 Without prejudice to any other consequences
 Will be deemed to be as an assessee-in-default
 Similar provision in case of TCS – Section
206C(6A)
 Other provisions where assessee is deemed to
be an assessee-in-default
 Default in advance tax payment – section 218
 Default in payment after notice of demand under
section 156 – section 220(4)
 Where the assessee is deemed to be in default
 in addition to the arrears it is required to pay
 liable for penalty under section 221
 Proviso to section 201(1) and section 206C(6A)
provides that no penalty u/s 221 if there is good
and sufficient reason
 Penalty u/s 221
 Before levying – opportunity of being heard
 No penalty if A.O. is satisfied that default is for good
and sufficient reason
 Penalty can be levied in ‘installments’ e.g. 10% first
time – continuing default say 20% next time
 Total amount of penalty should not exceed the
amount of arrears
 Penalty u/s 221 rarely levied in practice – but an
effective tool to ensure timely payment of
advance tax, TDS and regular demand
 Interest under section 201(1A)
 Simple interest @1% per month from the date on which tax
was deductible to the actual payment of tax + 1.5% for every
month from the date on which tax was deducted to the date on
which it was actually paid (w.e.f. 1.7.2010)
 The tax could be paid either by the deductor or by the deductee
 Since the deductor was liable to deduct tax at source he has to
make good the time value of money by paying interest @1%
and 1.5%
 Compensatory in nature and accordingly cannot be waived or
reduced by Courts on account of ‘reasonable cause’ or even if
default is not intentional –Rathi Gum – 213 ITR 98 (Raj),
Pentagon Engineering – 212 ITR 92 (Bom), Dhanalakshmi
Weaving – 109 Taxman 395 (Ker)
 If the deductee pays the tax directly, then
whether the deductor is liable to deduct tax
at source
 No – since no double payment of tax
 However, needs to pay the interest from the date
on which the tax was deductible to the date of
payment of tax and the date on which it was
deducted to the date of payment of tax
 Section 191
 Where provision has not been made for TDS, or
 Where the tax has not been deducted at source
 Then, the income-tax shall be payable by the
assessee direct
 Explanation – for the removal of doubts
 If the tax has not been deducted or after
deduction not paid and the assessee itself has not
paid the tax directly, then the deductor shall be
treated as an assessee-in-default
 Hindustan Coca Cola Beverages (P) Ltd. Vs CIT [(2007)
293 ITR 226 (SC)]
“10. Be that as it may, the Circular No. 275/201/95-IT(B),
dated 29-1-1997 issued by the Central Board of Direct Taxes,
in our considered opinion, should put an end to the
controversy. The circular declares “no demand visualized
under section 201(1) of the Income-tax Act should be
enforced after the tax deductor has satisfied the officer-in-
charge of TDS, that taxes due have been paid by the
deductee-assessee. However, this will not alter the liability
to charge interest under section 201(1A) of the Act till the
date of payment of taxes by the deductee-assessee or the
liability for penalty under section 271C of the Income-tax
Act.”
 CIT vs. Eli Lily and Co. (India) (P) Ltd. [(2009) 312
ITR 225 (SC)].
“We are directing the AO to examine each case to
ascertain whether the employee-assessee (recipient)
has paid the tax due on the Home Salary/special
allowance(s) received from the foreign company. In case
taxes due on Home Salary/special allowance(s) stands
paid off then the AO shall not proceed under Section
201(1). In cases where the tax has not been paid, the AO
shall proceed under Section 201(1) to recover the
shortfall in the payment of tax.”
 Section 201(2)
 Where the tax has been deducted but not paid
then the amount of tax alongwith the interest
shall be a charge upon all the assets of the
deductor
 Almost similar provision in section 206C(7)
 Fails to deduct tax at source – Penalty u/s 271C
(in case of TCS – penalty u/s 271CA)
 After deduction fails to pay to the account of
Central Government – Prosecution u/s 276B (in
case of TCS – prosecution u/s 276BB)
 Default u/s 115-O/194B – Both penalty and
prosecution
 Amount of penalty – equal to the default
 Penalty to be imposed by Joint Commissioner
 Section 273B – No penalty if ‘reasonable cause’
for failure
 Failure to issue TDS/TCS Certificate – Rs. 100
per day of the default – Section 272A(2)(g)
 Failure to pay the tax to the Central
Government after deducting - Rs. 100 per day
of the default – Section 272A(2)(k)
 Failure to furnish quarterly returns u/s
206A(1) – Rs. 100 per day of the default –
Section 272A(2)(l)
 Failure to furnish a statement of perquisite u/s
192(2C) r/w rule 26A and Forms 12BA and 16 -
Rs. 100 per day of the default – Section
272A(2)(i)
 Failure to deliver Form 15G/15H referred to in
section 197A(2) to the concerned CCIT/CIT- Rs.
100 per day of the default – Section 272A(2)(f)
 Failure to deliver a copy of declaration u/s
206C(1A) – certificate that the goods are to be
utilized for manufacturing and not for trading
are to be forwarded to CCIT/CIT - Rs. 100 per day
of the default – Section 272A(2)(j)
 Penalty to be imposed by Joint
Commissioners in most cases
 No penalty unless the defaulter is given an
opportunity of being heard – Section 272A(4)
 No penalty if there is reasonable cause for the
failure – Section 273B
 Penalties in most of the TDS/TCS default
should not exceed the amount
deductible/collectible
 Penalty for non-application of tax deduction and
collection account number – Rs. 10,000 – Section
272BB(1)
 A person who is required to quote tax deduction
and collection account number fails to do that –
Penalty of Rs. 10,000 – Section 272BB(1A)
 No penalty unless the person is given an
opportunity of being heard – Section 272BB(2)
 No penalty if there is reasonable cause for the
failure – Section 273B
SECTION 133A (2A) of the
INCOME TAX ACT

Subsection 2A introduced w.e.f


1st Oct 2014

190
 CAN DO THE FOLLOWING:
 The I.T Authority may place marks of
identification on the books of account or
other documents inspected by him and take
extracts and copies thereof.
 may also record the statement of any person
which may be useful for any proceeding
under the Act.

191
CAN’T DO THE FOLLOWING:

 The I.T Authority shall not impound and


retain in his custody any books of account or
documents inspected by him
 make an inventory of any cash, stock or other
valuables.

192
193
 Department conducted a survey on the
premises of KINGFISHER AIRLINES
BANGLORE
 It was found that Tax was deducted at
source from the salary to its employees
but
 the company failed to remit the same to
the Government
194
 Assessing Officer passed an order
under section 201(1) and 201(1A)
treating the company as an
‘assessee in default’
 Levied interest and raised the
demand

195
 Assessee went in further appeal
 CIT(A) dismissed the appeal of the
assessee.
 Assessee files further appeal in the ITAT
 ITAT sets aside the case to the AO for
further consideration.

196
 During this time, the Dept. filed complaints
against the petitioners for the offences
punishable under sections 276B and 278B in
the Special Court (Economic Offences),
Bengaluru.
 The Special Court took cognizance of the
offences and registered the cases and issued
summons.

197
 Assessee filed a WRIT before Karnataka High
Court
 High Court dismissed the appeal and held as
under:
The pendency of proceedings under section
201(1) and 201(1A) cannot act as a bar to the
institution and continuance of criminal
prosecution for offences punishable under
section 276B.
198
 Assessee filed a SLP (Special Leave
Petition) before the Supreme Court
which was also dismissed.
 Subsequently, the assessee has fled
the country and is residing in U.K

199
 The Special Court (Economic Offences),
Bengaluru has issued a Non-Bailable Warrant
(NBW) against the assessee.
 On the behest of the Dept., an Extradition
Request has been obtained from the Court.
 The proposal of Extradition request and the
service of NBW is currently with CBDT and
will be forwarded through MINISTRY OF
EXTERNAL AFFAIRS.
200
 CPC (TDS) – Centralized Processing Centre
(TDS) at Gaziabad provides useful
reports/inputs to field officers that may be
used for identifying survey cases
 Trend of TDS payment in contrast to other
deductors in similar business
 Tax Evasion Petitions (TEPs) related to non-
deduction of TDS

201
 Cases reported by the Assessing Officer with
huge disallowance u/s 40(a)(ia) of the Act
 Habitual late filers or non-filers of TDS
Statement
 Analysis of newspaper reports/information
available through Internet
 Analysis of case laws decided in favor of
Revenue

202
203
 Royalty
 Fees for Technical Services
 Interest
 Dividend
 Capital Gains
 Salary paid to non-residents
 Payments to Artists/Sportspersons
 Payments to foreign companies for logistics
 Import of Equipments – Interest paid on credits
 Payments to lawyers and other professionals

204
 Section 195(1): Any person responsible for paying to a
non-resident, not being a company, or to a foreign
company, any interest or any other sum chargeable
under the provisions of this Act (not being income
chargeable under the head Salaries) 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 rates in force

205
 Person responsible for paying to a non-resident, any sum chargeable
to tax under the Act is required to deduct tax at source at the rates in
force
 Does not apply to income under the head ‘Salaries’
 Tax is to be deducted at the time of credit to the account of the
payee or payment, whichever is earlier
 In the case of payments by banks etc. deduction only at the time of
payment in cash / through cheque
 Rates in force means the rate of tax specified in the Finance Act or
the DTAA, whichever is more beneficial.
 TDS Rate for payments to NRIs

Nature of Income Rate of TDS


Investment Income 20%
LTCG referred to in section 115E 10%
STCG (111A) 15%
LTCG (Other than 10(33), 10(36), 10(38)) 20%
Interest 20%
Royalty/FTS after 1.6.2005 10%
Lotteries/Crossword puzzles/Card Games etc. 30%
Horse Races 30%
Any Other Income 30%
 TDS Rate for payments to non-resident persons other than
companies and NRIs
Interestof
Nature Income
Income 20% of TDS
Rate
STCG (111A) 15%
LTCG (Other than 10(33), 10(36), 10(38)) 20%
Royalty/FTS after 1.6.2005
Interest 10%
20%
Lotteries/Crossword puzzles/Card Games etc.
Royalty/FTS after 1.6.2005 30%
10%
Horse Races
Lotteries/Crossword puzzles/Card Games etc. 30%
30%
Any Other
Horse RacesIncome 30%
30%
Any Other Income 30%
 TDS Rate for payments to foreign companies

Interestof
Nature Income
Income 20% of TDS
Rate
STCG (111A) 15%
LTCG (Other than 10(33), 10(36), 10(38)) 20%
Royalty/FTS after 1.6.2005
Interest 10%
20%
Lotteries/Crossword puzzles/Card Games etc.
Royalty/FTS after 1.6.2005 30%
10%
Horse Races
Lotteries/Crossword puzzles/Card Games etc. 30%
30%
Any Other
Horse RacesIncome 30%
30%
Any Other Income 40%

Surcharge @2.5% if income exceeds Rs. 1 crore


 The objective of section 195 is to ensure, as far as possible, that
the tax liability on the income element of the amount paid is
deducted at source itself, so that the Department is not put to the
hassles of recovering it from a non-resident whose connection
with India may be transient or whose assets in India may not be
sufficient to meet the tax liability.
 Administratively difficult to ensure payment of advance tax or
filing of tax return by a non-resident who might not have any
presence in India
 Section 195 is applicable only if income is chargeable to tax - who
decides?
 If the payer considers that whole of the sum would
not be income chargeable to tax in the case of non-
resident, he can make an application to the A.O. to
determine the appropriate proportion of the sum so
chargeable
 AO to determine the portion of payment
chargeable to tax and issue a certificate
accordingly.
 Application to be made by the payee
 Application in prescribed form (Rule 29B and Form
15C & 15D)
 Income chargeable to tax but still certificate for no
deduction has been granted
 Example: Deposits made in the branches of the
foreign banks
 Rule 29B prescribes conditions for issue of
certificate
 Rule 29B
 In the cases of foreign banks
 Applicant is a regular assessee
 Not a defaulter of tax, interest, penalty, fine or any other
sum payable under the Act
 Not subjected to penalty u/s 271 (1) (iii) of the Act
 In the cases of other assessees
 Has been carrying on business for at least five years
 The value of fixed assets in India exceeds Rs. 50 lacs
 Normally certificate is valid for one FinancialYear
 Banking Companies – Form 15C, other persons –
Form 15D, Certificate in Form 15E
 “Any sum chargeable to tax” means “sum” chargeable to tax and it
not only applies to the amount paid which wholly bears an
“income” character but the gross sum, the whole of which may
not be income or profits.
 Provision of Section 195 is for tentative deduction of tax subject to
regular assessment.
 Deduction will not affect rights of the parties.
 Rights of the payee are further safeguarded u/s. 195(2), 195(3) & 197.
 If no application filed u/s. 195(2), 195(3) & 197 tax has to be
deducted on gross amount
 Withholding tax not conclusive but subject to regular assessment
 The tax from payments to a non-resident has to be collected at the time
of remittance since at a later stage it may not be possible to collect the
tax from the non-resident as after receiving the payments, they may not
have a presence in India
 If the payer/payee believes that no tax is payable by the non-resident, in
the statute itself provision has been made for making an application to
the Assessing Officer. On account of this statutory provision, it is
apparent that the payer cannot take a unilateral decision that the tax is
not payable by the non-resident.
 The Assessing Officer has been given statutory discretion to determine
the rate of tax and it is apparent that this judicial discretion cannot be
extended to the payer or its chartered accountant making the provisions
of sections 195(2)/195(3)/197 otiose.

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 If no tax is deducted, the ‘revenue’ may not become aware that tax is
payable by the non-resident and thus these provisions also serves the
purpose of avoiding tax evasion.
 The provisions of section 195 are for tentative deduction and the payee
can furnish a return of income. Detailed scrutiny is made at the time of
regular assessment and if it is held at the time of regular assessment that
no tax or lower tax is payable by the non-resident, refund can always be
granted.
 The tax deducted at source by the payer will be given credit at the time
of regular assessment of the payee. The return of income may be filed by
the payee or by the payer as representative assessee/agent of the payee.

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 Foreign Company engaged in Construction Activity
 Receives Rs. 100,000 from Indian Company
 Likely Profit Rs. 10,000
 What would be rate of withholding?
 Any Other Income?
 40% on Gross Basis?
 The Assessing Officer has been given wide discretion to determine the
income chargeable to tax at withholding stage
 The A.O. has discretion to determine the appropriate portion of sum
chargeable and not the rate of tax
 Compare section 195 to TDS Provisions for payments to residents
 194C, 194-H, 194-I, 194J etc. where rate of withholding is fixed
 Section 195 gives discretion to the A.O.
 Domestic Contractors – withholding rate is 2% corresponding to
6.67% presumptive rate (2% divided by 30%)
 Foreign Contractor – The A.O. determines the income likely to be
chargeable to tax
 Upto 1997 no remittance was allowed by authorized
dealers unless a NOC is obtained by the persons
responsible for making payments to non-residents
 Circular 759 dated 18.11.97 – Remittance allowed on the
basis of Certificate by a Chartered Accountant (CA
Certificate)
 Circular revised and restated in Circular No. 10 of 2002
dated 9.10.2002
 Supplemented by RBI through instructions issued to
Authorized Dealers

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 Chartered Accountant certifies that income payable to
non-residents is chargeable to tax at a particular rate or
not chargeable to tax
 CA is supposed to examine the provisions of the Act and
the treaties to arrive at the rate of tax
 An undertaking is also given by the payer
“In case it is found that the tax actually payable on account of
remittance made, has either not been paid or has not been paid in full,
I/We undertake to pay the said amount of tax, along with the interest
found due, in accordance with the Income-tax Act”

 The authorized dealers are required to send the CA Certificate


as well as the undertaking to the A.O. (TDS Officer of
InternationalTaxation)
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 The TDS Officer of International Taxation examines the CA
Certificates and Undertaking and initiate proceeding u/s 201
in appropriate cases
 The remittance on the basis of CA Certificate is on assessee’s
own risk of consequences which follow from no deduction or
low deduction (Mahindra Ltd. vs. Addl. DIT, reported in 106
ITD 521)
 Not abandonment of institution of A.O. in favor of
professionals
 It is better for the assessees to obtain a certificate u/s 195(2)
from A.O. in case of doubts

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 Large number of CA Certificates
 Enabling provision for computerization of these CA
Certificates – section 195(6)
 Rule 37BB read with Circular 4 of 2009 (dt. 29.6.2009)
 The details of remittance to be filed electronically to NSDL in Form
No. 15CA – A printout needs to be taken
 C.A. Certificate to be given in Form No. 15CB
 Both Form 15CA and 15CB to be submitted to the authorized
dealer/RBI who will allow the remittance
 Income Tax Department to select some cases for further scrutiny on
the basis of risk analysis

222
223
 Plain reading of section 195(1) – payer is a person which
will include non-residents
 Taxes needs to be deducted by non-residents also if the
income is chargeable to tax in India
 P. No. 13 of 1995 (1997) 228 ITR 487 (AAR)
 AAR No. 250 of 1995 (White Consolidated Industries In Re)
 CIT vs. Vijay Ship Breaking (261 ITR 113)
 STAR Ltd. (99 ITD 91)
 Babcock Power (81 ITD 29)
 Whether contextual interpretation?
 How the non-resident would know that he is required to
deduct tax at source? Impossible Burden on him?

224
 Purchase of an immovable property by a resident from a
non-resident
 Before making payment – tax has to be deducted
 Rate 20% on gross basis
 Application to A.O. u/s 195
 A.O. will determine the cost of acquisition and then
determine the capital gains chargeable to tax – will also
give roll over benefits u/s 54, 54F, 54EC
 A.O. will finally determine the rate of withholding

225
 Decision under section 195 (2) should not be treated
as a conclusion in the determination of income in
the case of a foreign company
 CIT vs. TELCO [2000] 245 ITR 823 (Bom.)
 CIT vs. Elbee Services P. Ltd. [2001] 247 ITR 109 (Bom.)
 Dodsal Pvt. Ltd. Vs. CIT [2003] 260 ITR 507 (Bom.)
 DCIT vs. Arthur Andersen ITA No. 9125/Mum/1995 dated
29-07-2003 (ITAT, Mumbai)
 Appeal against an order u/s 195(2) can be filed only
after payment of tax since as per section 248 appeal
can be filed 30 days after payment of tax – thus if
the tax determined u/s 195(2) not paid – no appeal

226
 Where under an agreement, tax is to be borne by the payer,
then for the purposes of deduction of tax income shall be
increased to such an extent that after deduction of tax at the
specified rates, the amount would become equal to the net
amount payable under the agreement
 Example:
 Amount Payable Rs. 1,00,000
 Rate of TDS: 20%- TDS to be borne by the payer
 Whether tax deductible would be Rs. 20,000 or Rs. 25,000

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 Payee makes an application
 The A.O. issues a certificate for deduction of tax at
lower rate or for no deduction of tax at source
 Applicable to residents as well as non-residents
 Rule 28AA/28AB prescribes the conditions
 AO to issue certificate indicating the rate or rates of tax, which
is higher of the following:
 Average rate determined on the basis of advance tax
 Average of the average rates of tax paid by the assessee in the
last three years
 The certificate is issued to the specified payer

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195(2) 197
Payer makes the application Payee makes the application
A.O. determines the appropriate A.O. determines the rate of tax which can
proportion of sum chargeable to be NIL or greater than NIL
tax
No rules – discretion of A.O. Rule in I-T Rules
Appealable under section 248 – Not Appealable – Only recourse is section
After 1.6.2007 appealable only if 264 followed by Writ
the tax is to be borne by the
payer as per the agreement
(grossing up situation)

229
195(2) 195(3)
Payer makes the application Payee makes the application
A.O. determines the appropriate The amount may be taxable but the
proportion of sum chargeable to tax A.O. may still issue ‘NIL’ certificate if
conditions are satisfied
Final rate can be NIL or greater than NIL Only NIL Certificate can be given
No rules – discretion of A.O. Rule 29B
No such condition prescribed in Act – Certificate remains in force till it is
A.O. has to specify the period cancelled by the A.O.
Appealable under section 248 – After Not Appealable – Only recourse is
1.6.2007 appealable only if the tax is to section 264 followed by Writ
be borne by the payer as per the
agreement (grossing up situation)

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