Deduct tax from fees (including service tax) says Board !!

[DEV KUMAR KOTHARI]

Cheers for tax professionals- large scope of professional work on likely un-necessary litigation due to CBDT'S clarification on S. 194J which is in disregard of correct legal provisions of S. 194 J of the income-tax Act and s. 73A of the Finance Act, 1994.

The circular suffers from a mistake apparent from record and therefore it should be rectified immediately.

The latest circular:

Vide order-Instruction - (Income Tax) per CIRCULAR F. NO. 275/73/2007IT(B), DATED 30-6-2008 the Board has clarified as follows:

Kindly refer to your letter No. Dir. Tax/761, dated 5-5-2008 on the subject mentioned above. Your request has been considered by the Board. The payments made under Section 194-I differ significantly from payment made under Section 194-Jin the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However, in the case of Section 194-J has to be deducted on any sum paid as professional and technical fees. The board had decided to exclude TDS on service tax component on rents payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since Section 194-J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated 28-4-2008 to such payment under Section 194-J.

Unconsidered provisions:

It is clear beyond doubt that the Board has not at all considered the provisions of Section 73A of the Finance Act, 1994, otherwise Board would not have committed mistake to hold that service tax is a payment of fees to professional or technical person.

It is also clear that the Board has not considered fully provisions of S. 194J which only require to deduct tax from payment of fees and not any thing else. When rent does nor include service tax, there is apparently no reason to hold that fees includes service tax.

The Board ahs considered that u/s 194J 'any sum paid' is covered. This is wrong due to ignoring the provisions of section 194J and giving undue emphasis on the  words 'any sum paid' and ignoring the words 'by way of professional / technical fees'.

Wrong reasons to apply different rules:

It appears that the board has applied wrong reasons while directing TDS from bills / payments for fees for professional / technical services including service tax. The Board has apparently considered the opening words of relevant sections and ignored the fact the basis of TDS as stated in the section 194 J. The Board have taken  view that

"However, in the case of Section 194-J tax has to be deducted on any sum paid as professional and technical fees"

The board has ignored the heading of S. 194J  and specific  words used  "any sum by way of professional fees or technical fees", as expressly used in S. 194J. Relevant part of which is reproduced below with highlights:

Fees for professional or technical services.

194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a) fees for professional services, or

(b) fees for technical services, ²[or]

Thus, we find that TDS is required from  amount of fees for professional or technical services. The amount of service tax may or may not be chargeble depending on  several factors like :

(a) The nature of service,

(b) nature of service provider,

(c) nature of service receiver,

(d) nature of relationship between service provider and service receiver  and

(e) nature of payment etc.

In the circular u/s 194 I, the Board has specifically noted that the amount of service tax on rent is not income by way of rent and the landlord collects service tax as an agent with an obligation to deposit the same with the government. The same law is applicable in case of a professional or technical persons. They can collect service tax, only if it is payable by them. In case they have collected service tax, even by mistake they are required to deposit the same with the Government.

Does CBDT mean that a professional can collect tax and retain it as his income?

The different considerations applied by the Board can lead to inference that the Board has considered as if the landlord cannot collect and retain service tax, whereas other service providers can collect and retain service tax as it is their income. This is patently wrong.

Diversion of service tax:

Provisions relating to Service Tax vide Chapter V of Finance Act, 1994 includes section 73A (2) which provides that

(2) Where any person who has collected any amount, which is not required to be collected, from any other person, in any manner as representing service tax, such person shall forthwith pay the amount so collected to the credit of the Central Government.

Thus we find that as per sub-section (2) of S. 73A, if a person who is not required to collect service tax, has collected service tax, then such person shall forthwith pay the amount so collected to the credit of the Central Government. Therefore, service tax is diverted in favor of the Central Government and it cannot be regarded as fees.

Earlier article:

The readers may refer to earlier article titled " No TDS on government levies like service tax , VAT, Municipal tax , A GENERAL CIRCULAR IN BROADER TERMS IS REQUIRED hosted on this website on 10.06.08 and also some other published articles referred to therein.

 It is unfortunate that the Board has, instead of issuing a correct circular has issued a wrong circular perhaps with a prejudiced mind holding  to deduct income tax on element of service tax ignoring the fact that service tax is not fees for professional services or technical services and in any case it is collected for onward deposit with the Central Government. The Board has also not considered S. 73A of the Finance Act, 1994.

The Circular is partly binding:

The above circular may be binding on Assessing Officers and even if it is not binding, they will consider it binding and therefore issues SCN, raise demand for shortfall in TDS, interest and penalty. The Circular is not binding on assessee and appellate authorities, therefore, the demands raised by the A.O. are likely to be deleted in appeals. Therefore, the circular will only create un-necessary litigation.

Cheers for tax professionals:

Though there will be lesser immediate fees collection due to higher TDS, yet tax professionals must feel happy and obliged to the Board and the Assessing Officers for issuance of such wrong circulars, and in consequence issuance of SCN and  demands by ITO (TDS) for short fall in payment of TDS, interest thereon, and also penalty. This will lead to substantial litigation from which only tax professionals will gain substantially. Therefore, tax professionals have reason to be happy from the present circular. But the question is Whether personal gains are so important that we should not raise voice against actions which are beneficial to a profession but are wrong and lead to national wastage of intellectual human resources?

The author feels that tax professionals are competent enough to find such work that are productive and contribute to the society. Therefore, author feels that the Board must come with a broader circular to hold that no tax be deducted from government levies like service tax, VAT, municipal tax etc. because there is no purpose in collecting higher amount of tax and then refunding the same.