Rajasthan HC rules no withholding on service tax payable on professional/technical fees

 

This tax alert summarizes a recent ruling of the Rajasthan High Court (HC), in the case of Rajasthan Urban Infrastructure Development Project (Taxpayer), on the question of whether tax is required to be withheld on service tax payable on professional/technical fees payable to consultants.

Taking note of the findings of lower authorities that the agreements between the parties provided that service tax was payable by the Taxpayer in addition to professional/technical fees, the HC held that tax was not required to be withheld on the service tax component.

The Central Board of Direct Taxes, in its Circulars, has taken a view that there is a distinction between the scope of withholding on rent which refers to ‘any income payable’ by way of rent and that of withholding on fees for professional/technical services which refers to ‘any sum’ by way of professional/technical services. Based on this distinction, it has taken a view that withholding is not necessary on service tax on rent but the same logic will not apply to service tax on professional/technical services.

However, the present HC ruling provides guidance that, if indirect taxes are payable in addition to professional/technical fees, as per the terms of the contract – an aspect which needs to be factually established, then, withholding is not required on the indirect tax component since the withholding obligation is only in respect of the sum which relates to professional/ technical fees.

The principle will also be useful for other withholding provisions of ITL where similar language has been employed.