Monday 9 February 2015

Uncertainties in TDS provisions - Recent issues


Introduction
1. Tax deduction at source is a responsibility bestowed on the payer with no rewards attached for perfection in compliance. On the other hand, if the compliance is not proper, so many tax provisions become applicable one after another such as disallowance of expenditure under section 40(a)(ia), mandatory levy of interest under section 201(1A) and penalty under section 271C. It becomes, thus, a primary requirement for payers to ensure that the tax is deducted at source so that the expenditure so incurred is allowed and further consequences are blocked at the outset of the transaction. It may so happen that the recipient, i.e., payee may resist deduction of tax at source by the payer and it is a reality that some payers incur the tax deduction as their own expenditure in order to avoid the wrath of the tax department and laws.



The tax deduction provisions have differential rates of deduction and naturally there is a tendency on the part of the taxpayers to deduct tax at a lower rate if possible and similarly tendency with the tax officers to try and bracket the transaction in a higher tax deduction rate provision so that there is some extra revenue collection to the exchequer. Leaving aside the intent behind such action, it would be of interest to see some recent decisions where the taxpayers and tax gatherers have fought out their case on mechanics of tax deduction.
Distinction between Commission and Discount
2. The term 'commission' signifies a payment made to the service provider who helps in a commercial transaction. The service may be for purchase or sale of commodity or facilitating a business activity by linking the end user or consumer or supplier to a trader or manufacturer or service provider. In a nutshell, there must be three parties in a transaction where commission or brokerage becomes payable. The first one selling goods or rendering services and the other one is the buyer of goods or recipient of service. The agent is a link between these two parties who is eligible for commission or brokerage, regardless of the terminology, used the substance and significance being the same.
In SRL Ranbaxy Ltd. v. Addl. CIT [2011] 16 taxmann.com 343 (Delhi - Trib.), the assessee was reputed organization engaged in lab testing services. It rendered services to many collection centres. The functional responsibility of the collection centres was to collect samples from hospitals, nursing homes, clinics and other laboratories and pass on the same to the assessee for doing clinical/lab testing and furnishing of report to them. The report so obtained would be passed on to the customers by the collection centre. The collection centres were independent entities who can collect samples and pass on the same for lab/clinical testing to any other place and there was no trade agreement for exclusivity with the assessee. The bills were raised by the collection centres on their customers at their free will and there were no restrictive covenants in the agreement entered into between the assessee and the collection centres.
The assessee factually raised bills for the various lab testing performed to the collection centres at intervals and allowed some discount to them. The assessee filed return of income declaring 'nil' income after adjustment of brought forward loss of Rs. 8.18 crores. The assessment was completed by the Assessing Officer by determining the income at Rs. 25.32 crores with a massive disallowance of Rs. 16.81 crores for non-deduction of tax at source towards the amount allowed by way of discount to the collection centres. The facts of the case related to the assessment year 2006-07 for which the provisions of section 40(a)(ia) mandating disallowance of expenditure for non-deduction of tax at source were applicable.
The rationale for the disallowance was that the Assessing Officer opined that the relationship between the assessee-company and the collection centre was that of principal and agent and, thus, the provisions of section 194-H were attracted in respect of the discount allowed. The Commissioner (Appeals) limited the disallowance by restricting it to Rs. 11.78 crores instead of Rs. 16.81 crores.
It is a classic case of explaining the concept of principal-agent relationship and the essentials thereto. The matter went to the Tribunal and the facts of the case were analysed thoroughly.
Decisions of the Tribunal
3. The Tribunal took note of the statutory provision and precedents such as Hindustan Coca Cola Beverages (P.) Ltd. v. ITO [2005] 97 ITD 105 (JP), Mother Diary India Ltd. v. ITO [2009] 28 SOT 42 (Delhi), Delhi Milk Scheme v. CIT [2008] 173 Taxman 54 (Delhi) and ABP (P.) Ltd. v. Asstt. CIT [2008] 23 SOT 28 (Kol).
It held that when the relationship between the parties is not on principal and agent basis, provisions of section 194H are not attracted. Refer Ahmedabad Stamp Vendors Association v. Union of India [2002] 257 ITR 202/124 Taxman 628 (Guj.), Kerala Stamp Vendors Association v. Office of the Accountant General [2006] 282 ITR 7/150 Taxman 30 (Ker.) and Asstt. CIT v. Samaj [2001] 77 ITD 358 (Ctk.).
The Tribunal held that the collection centres had entered into an agreement but it was on a non-exclusive basis. These collection centres were eligible to collect samples and they were under no binding obligation to forward the samples only to the assessee. Only where the patient or customer insisted that the laboratory testing was to be done by the assessee, the collection centre had to forward the samples to the assessee. The collection centres had issued invoices and fee for testing and the receipts were issued. The assessee raised periodical invoices on the collection centres. The collection centres had in fact deducted tax at source under section 194-J for the services rendered by the assessee. In essence, the fund flow was from the collection centres to the assessee and not vice versa.
The Tribunal held that the assessee had not paid any amount to the collection centres either directly or indirectly. In such a case the provisions of section 194-H cannot be applied. The obligation to deduct tax at source is on the payer and not on the recipient. The recipient in this case was the assessee and the mechanics of TDS cannot be applied in this case. The assessee had considered the gross receipt as income and no amount was debited to the profit and loss account by way of commission or brokerage. The amount realized after allowing discount was offered to tax.
The Tribunal accordingly, held that the assessee being the recipient of money after deduction of tax at source under section 194J by the payers, i.e., the collection centres cannot fall within the ambit of section 194-H by any stretch of imagination. The Tribunal held that the disallowance made by the Assessing Officer was to be quashed as there was no principal – agent relationship between the assessee and the collection centres and factually there was nothing of the nature to call it as commission or brokerage for warranting tax deduction at source under section 194-H.
The Tribunal gave its essence in the following manner: (i) There was no principal – agent relationship between the assessee and the collection centres and, therefore, the provisions of section 194-H had been wrongly invoked by the Assessing Officer; (ii) The provisions of section 194-H, even otherwise, had not been met, since no payment was made by the assessee to the collection centre; (iii) The payment made to the assessee by the collection centres was at the rates agreed to inter se between them; and (iv) The CIT (Appeals) also erred in confirming the disallowance for the alleged failure of tax deduction at source by the assessee under section 194-H.
Technical Service and Machinery Maintenance
4. In Kandla Port Trust v. Dy. CIT [2011] 16 taxmann.com 273 (Rajkot) the assessee deployed heavy cranes, weigh bridge and, elevator for carrying out its operations. It awarded contracts for repair and maintenance of these machineries. The assessee deducted tax at source under section 194C while making payment to contractors as per maintenance contract. The revenue claimed that the sum so paid was for technical service and, hence, tax deduction must be at the rate prescribed in section 194-J.
The Tribunal interpreted Explanation 2 to section 9(1)(vii) and held that fee for technical services include payment made for services such as (i) managerial; (ii) technical and consultancy services; and (iii) provision of services of technical or other personnel. Fee for technical services does not include (i) construction; (ii) assembly; and (iii) mining or like project.
It was held that the AMC between the assessee and the contractor was that the contractor must carry out all repairs as per detailed description in the agreement. It held that contracts were not in the nature of managerial or technical or consultancy services. The agreements were related to annual maintenance of machinery and not for technical service. The technical service may have been availed by the contractor in the course of discharging its contract to the assessee but the assessee had not made the payment for such contract. Accordingly, it held that payment for annual maintenance of machineries will not fall within section 194J of the Act.
Availing Service vis-a-vis Possession
5. Yet another issue in Kandla Port Trust's case (supra) was that the assessee took on rent various vehicles from a travel agency. The payments were made to the travel agency on kilometer basis. The assessee deducted tax at source under section 194C and whereas the revenue held that the payments were in the nature of rent liable for tax deduction under section 194-I. The Tribunal drew a distinction between a contract payment for rendering of service vis a vis a rent payment by keeping possession of vehicle by the assessee. It held that as per the agreement the assessee was not in possession of vehicles. Only where the possession was given to the assessee, that the character of payment could be taken as rent. The Tribunal made reference to Vodafone Essar Ltd. v. Dy. CIT [2011] 45 SOT 82 (Mum.)(URO) and held that a payment could not be called as rent merely because the assessee was eligible for making the use of facility without himself using the equipment and without taking possession on to himself.
Impact of Book Entry on TDS
6. To what extent an accounting entry would warrant deduction of tax at source was discussed in Nalawade C. Maruti v. Jt. CIT [2011] 15 taxmann.com 218 (Pune). The assessee in this case hired tractors and trolleys and made payment of Rs. 12.17 lakhs. The expenses were debited in the books as 'transport and octroi charges'. Since tax was not deducted under section 194C in respect of such payments, the Assessing Officer disallowed the expenditure claim under section 40(a)(ia). The assessee claimed before the Assessing Officer and CIT (Appeals) that the payments were not by way of transportation charges and were in the nature of hire charges and, hence, tax deduction prescribed in section 194C will not apply.
The Tribunal held that the nature of expenditure will be determinative of the consequences not only for allowance of expenses but also for compliance with tax deduction provisions. Merely because some expenditure has been accorded treatment in a particular manner in the books of account, it will not be the conclusive factor and the substantive character of the transaction is to be looked into for applying the legal provisions. It opined that section 194C will not apply for hiring of vehicles but section 194-I intend for tax deduction on rent will apply but in this case, since the facts related to assessment year 2006-07 and section 194-I covering TDS on hire of movable assets was brought into the statute book only w.e.f. 13-7-2006, the disallowance of deduction was unwarranted.
Conclusion
7. The three case-laws discussed above have all been in favour of the taxpayers. But it does not mean that the revenue has been at fault on each and every occasion. Out of so many tax assessments coming across such decisions in favour of taxpayers is usual but the important point is, how the tax laws are interpreted by the Tribunal in a harmonious manner meeting the realities of business.
(i)  In SRL Ranbaxy Ltd.'s case (supra) the disallowance was whopping sum of Rs. 18.61 crores which would have created at lot of anxiety to the taxpayer; (ii) in Kandla Port Trust case (supra) the interpretation was on whether annual maintenance contract is a works contract or in the nature of technical service which was decided along with distinction between payment for availing service vis a vis possession of movable asset for applicable tax deduction at source provisions; and (iii) In Nalawade C. Maruti's case (supra), the dictum was that the substance of the transactions are to be looked into and not the nomenclature given by the taxpayer in the books of account for applying the TDS provisions.
The controversy in applying TDS provisions in the recent times is getting narrowed or eliminated due to moderation in the rates of tax deduction prescribed. For example, for contract payments to payees other than individual and HUF, the tax deduction is at 2% and similarly for rent of movable assets the same percentage of tax deduction is prescribed. However, prescribing a uniform tax deduction rate across the board would mean the taxpayers and the revenue gatherers have to see the fact of tax deduction and its remittance than going into the technicalities of the payments, the expressions and purpose

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