Income -tax deducted at source is consideration received for services or for goods sold hence cannot be deducted from consideration for the purpose of levying any tax like service tax, VAT or Sale Tax.

[C.A. DEV KUMAR KOTHARI]

Income-tax deducted at source (ITDS)

 ITDS is income-tax deducted by payer as income-tax on behalf of the payee. The tax deductor issues ITDS certificate and the payee claim credit of the same from income-tax department. In case of ITDS being more than tax payable by the payee, he can claim refund of the same from the income-tax department.

Thus ITDS is a part and parcel of payment made by payer to the payee. For example:

A.     While making payment to contractor   of say Rs. five lakh the payer deduct tax of say Rs.10000/- and Rs. 4,90,000/- are paid to contractor. In this case suppose entire consideration  amount of Rs. five lakh is liable to VAT, then VAT shall be payable on Rs. five lakh.

B.       While making payment to contractor   of say Rs. five lakh the payer deduct tax of say Rs.10000/- and Rs. 4,90,000/- are paid to contractor. In this case suppose entire consideration  amount of Rs. five lakh is liable to  service tax  then  service tax shall be payable on Rs. five lakh, as this is the amount of value of service.

A.      While making payment to contractor   of say Rs. five lakh the payer deduct tax of say Rs.10000/- and Rs. 4,90,000/- are paid to contractor. In this case suppose  part of  consideration say Rs.250000/- is liable to VAT and another part of Rs.2,50,000 is fro taxable services liable to service tax. In this case VAT shall be payable on Rs.2,50,000/- (and not Rs.2,45,000)  and  service tax shall be payable on Rs. 2,50,000 ( and not on 2,45,000) as this is the amount of value of service rendered is Rs.2,50,000 and not Rs.2,45,000.

The above calculations are very simple and it is mostly in use. This is because it is generally clear in mind that the ITDS is a part payment of consideration.  This can be illustrated by another example of timing difference. Suppose, on 31^st March adjustment of bill is made and ITDS is affected and ITDS certificate of Rs.10,000/- is issued. In this case the account of payee is credited by Rs.5,00,000/- being consideration and it is debited by Rs.10,000 being ITDS and balance carried forward is Rs.4,90,000/- which is paid subsequently. This leave no doubt that ITDS is a part of consideration of Rs.5,00,000/-

In case the payee has agreed to pay income tax also on behalf of the payee, then the amount of income tax payable shall also be part of consideration and it will be included in value of sale, service and income as the case may be.

Suppose in the above case the payer had agreed to pay income-tax also and suppose income tax is assessed /payable is say Rs.25000/- Then the consideration shall be Rs.5,25,000/- which will be liable to VAT and/ or ST depending on element of goods sold and services rendered.

Another example:

Suppose service provider has obtained from his ITO a certificate to the effect that no income-tax be deducted from the payment. In this case the entire consideration shall be payable to the service provider/ supplier without any deduction of income-tax. Therefore, there will be no question of any deduction from the consideration.

VAT and Service Tax payable will be on gross income:

From above illustrations it is clear that the amount of ITDS is a part payment of consideration for goods and or services. Therefore, this amount cannot be deducted from consideration to compute taxable turnover or value of taxable services.   

A recent case before CESTAT:

CCE, Jaipur-I Vs.  Louis Berger International Inc. 2009 -TMI - 32391 - CESTAT in Appeal No. - ST/334 OF 2006  decided on  25.09.2008 the CESTAT has considered similar aspect and held that ITDS is part of service chargeable and cannot be deducted from consideration to ascertain value of service liable to service tax. However, considering that it involved some aspects requiring interpretation of law, the penalty cannot be levied.

In this case the client deducted ITDS while paying management consultancy service charges to the respondent. Respondent paid service tax on net amount. The question arose  whether, service tax was payable on the withheld ITDS amount or not? The Tribunal held that liability to pay income-tax arising out of income from the services rendered is on the respondent/  assessee/ service provider. ITDS amount deducted was payable only on behalf of the assessee to the Income-tax Dept. - so it is not justified to exclude the said amount from the gross amount for the purpose determining the service tax. The Tribunal noted facts, considered law and concluded on the following lines:

(a)    "Management consultancy services" were rendered  and service charges  were received from the Rajasthan Government agencies (clients). Clients while paying service charges to the  service provider /respondent,  deducted ITDS.

(b)   The Tribunal rightly noted that in the normal course, if the ITDS was not resorted to, the entire amount would have been paid to the respondent and treated as service charges and the service tax would have been paid.

(c)     The Service Tax Department raised this issue then  clients came forward and paid the service tax on the portion of amount of service charges retained by them as ITDS.

(d)    subsequently, on the basis of show-cause notice issued, the original authority confirmed the demand of differential service tax along with interest on the ITDS portion of the service charges and adjusted the amount paid by the Rajasthan Government agencies towards the dues. He also imposed penalty under sections 76 and 78 of the Finance Act, 1994.

(e)      While deciding appeal of the service provider the Commissioner (Appeals) set aside the penalty. He also held that the withheld amount of ITDS should be treated as cum-tax amount for the purpose of levy of service tax and accordingly, reduced the service tax demand from Rs. 7,58,323 to Rs. 7,05,441 and the interest from Rs. 2,36,098 to Rs. 2,21,003.

(f)      The service Tax Department preferred appeal against the setting aside of the penalties and reducing the duty amount and interest.

(g)     As per contention raised by the  DR  the entire amount of ITDS withheld, service tax has been directly paid by the client ,since service tax has been separately paid by the recipients of service, on behalf of the appellant, the question of treating the amount of withheld ITDS as cum-duty tax for the purpose of service tax does not arise. Therefore, reduction of service tax demand and consequent reduction in interest on the service tax ordered by the Commissioner (Appeals) was incorrect. He also submits that setting aside the penalty was not justified.

(h)     On behalf of the respondent it was  submitted that the withheld amount of ITDS was toward paying income-tax on behalf of the appellant and the said amount was paid to the Income-tax Department by the client the service tax payable on the entire with held amount has been paid by the client. There was no mala fide intention on their part; it was a case of pure interpretation of law as to whether service tax was payable on the withheld ITDS amount or not. The benefit of section 80 of the Finance Act should be extended. Therefore, the order of the Commissioner (Appeals)  deleting  penalty should be upheld.

Conclusion and order of Tribunal:

On careful considered the submissions of both sides the Tribunal found that the liability to pay income-tax arising out of income from the services rendered is on the service provider. The ITDS amount was payable only on behalf of the service provider, to the Income-tax Department. Therefore, Tribunal did not find any justification to exclude the said amount from the gross amount for the purpose determining the service tax and therefore, Tribunal allow the appeal of the department on this point and held  that the service tax and interest shall be as determined by the original authority by including ITDS amount.

 Regarding  penalty, Tribunal accepted the views expressed by the service provider /respondent that it was a case of pure interpretation of law as to whether service tax was payable on the withheld ITDS amount or not Therefore, in absence of  any reason to interfere with the findings and reasoning of the Commissioner (Appeals) regarding setting aside of  the penalty Tribunal confirmed the order of the Commissioner (Appeals).

A lenient  view has been taken:

It can be said that the Tribunal has taken a  lenient and favorable view on the aspect of penalty. This is because there is hardly any dispute that ITDS is a part of payment made by payer to the payee. There is no case of over riding title. The ITDS is paid for an on account of the payee and the payee gets credit for the same. Therefore, author feels that a lenient view has been taken and suppose the revenue preferred an appeal against this order, to that extent there is risk of the service provider. In this case there appears no material as to whether such view was taken on expert's opinion or that there was mistake in taking such a view by the officers of the service provider. In absence of such plea and evidence for the same, it can only be said that the Tribunal has taken a lenient view and in appeal again it depends on mood of judges, whether to take such lenient view or not. The service provider must therefore, be ready to establish its bonafide on the aspect as to why ITDS was deducted from gross value of service.

Whether services were really taxable:

From the reading of facts of the case it is clear that the service were provided to agencies of the state government of Rajasthan. Therefore it can be said that services were rendered to the state government of Rajasthan. In such circumstances, it should have been critically examined as to whether the services were really taxable or not?

In case services are not found taxable, the service provider can claim refund.