TDS (Tax Deduction at Source) – Some Practical and Procedural Issues:

This article explains whether or not a specific transaction is liable to TDS. Whether or if a certain transaction with a specific organization/agency is subject to TDS, Whether TDS is applicable on expense reimbursement, How to Identify the Appropriate Section, Whether TDS applies to the GST component on services. Disparity in repercussions for payments paid to residents and non-residents who do not comply with TDS rules TDS deduction is reduced or eliminated. PAN correction in TDS (TDS Returns) statement and TDS on interest income to senior Citizens.

1. Is a specific transaction subject to TDS or not? This question arises when there is a disagreement regarding a specific transaction that fits under “contract for sale” or “contract for work/service.” TDS requirements do not apply to contracts for sale that entail the transfer of property in goods for consideration. Contract for work/service, on the other hand, entails adding some value to the property by performing some craftsmanship or performing an express job or service and is subject to TDS.
2. Is a specific transaction with certain organizations/agencies subject to TDS? Section 196 states that any monies payable to the government, the RBI, or specified corporations are exempt from TDS. The section 196 excerpt is reproduced here for your convenience.”Notwithstanding anything contained in the preceding provisions of this Chapter, no person shall deduct tax from any sums payable to- The Government, or The Reserve Bank of India, or A corporation established by or under a Central Act that is exempt from income-tax on its income under any law for the time being in force, or A Mutual Fund specified under clause (23D) of section 19, where such sum is payable to it by way of interest or dividend in r.” However, the question of whether contributions to businesses whose income is exempt under section 10 are likewise exempt from TDS may arise. To address this issue, we must refer to Circular No. 18/2017, issued May 29, 2017. It has been clarified that no TDS is required when making payments to companies whose income is unconditionally exempt under Section 10 of the Income Tax Act of 1961 and who are statutorily not required to make a return of income under Section 139. TDS is not levied on amounts payable to organizations that meet both of these conditions. To dispel any ambiguities, the relevant notification under which such organisation is exempt from tax under section 10 must be consulted.
3. Whether TDS is applicable on expense reimbursement: In today’s world, businesses use consultants, attorneys, and professional organizations such as ICA (Indian Council of Arbitration). Assesses may also choose to outsource certain regular activities in order to focus on essential company activities. Certain funds are to be reimbursed to them under the terms of the contract. The primary concern here is whether reimbursement of expenses is subject to TDS provisions (under Sections 194C/194J, as applicable). ADVERTISING ADVERTISEMENT ADVERTISEMENT this is addressed in Question No. 30 of CBDT Circular No.715, dated 8.8.1995. The same is replicated below for your convenience.
4. Selection of appropriate Section: We may encounter a circumstance in which we must determine whether a particular transaction is subject to TDS under section 194C or 194J. This uncertainty emerges while dealing with AMC contracts. If the nature of the activity is routine and routine maintenance, it comes under section 194C. Payments are subject to section 194J if it needs technical/professional skill. Consider the following example: X Company awarded Y Company a contract for material procurement. X Company makes a purchase request to Y in accordance with the contract. Y has a staff that does market research and analysis on pricing patterns to arrive at estimates.As a result, Y places advertisements and solicits vendor quotes. The purchase order is placed based on the lowest quotation. Y is paid an agreed-upon percentage of the value of the Purchase Order (PO) for this job.

Three issues arise: Is the payment to Y subject to TDS?

1. u/s 194C since it is contractual payment?
2. u/s 194J since the assignment involves some research and analysis activity which requires professional expertise?
3. u/s 194H since the payment is nothing but commission by way of prefixed %? Here, we have to carefully examine the contractual terms.

5. Whether TDS applies to the GST component on services: The Government of India implemented GST on July 1, 2017, replacing/summarizing different indirect taxes. Service tax is one example of an indirect tax. There were differing opinions on the applicability of TDS to the Service Tax component. CBDT confirmed in Circular 1/2014 dated 13.01.2014 that no TDS is recoverable on service tax component after observing the Rajasthan High Court verdict in the case of CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (Income-tax Appeal No.235, 222, 238 and 239/2011). To use the same analogy, the CBDT stated in Circular 23/2017 dated 19.07.2017 that TDS is not recoverable on the component of GST on services. However, the above principle only applies to

• Agreement or contract in which the GST component on services is mentioned individually and
• payments to local service providers

6. Lower or no TDS deduction: A payee may seek a certificate under Section 197 from the Income Tax authorities authorizing the payer to deduct TDS at a nil or lower rate, depending on the circumstances. Before acting on the basis of the above certificate, one must verify the following aspects:

• Whether the certificate is addressed to the Payer and includes the Payer’s TAN;
• The certificate’s validity, i.e., the beginning and end dates;
• Maximum amount for which the lower/no deduction applies;
• Verify the legitimacy of the certificate on the TDS CPC Portal.

Aside from the foregoing, the certificate number should always be quoted in the TDS Return for payments/credits made during the authorized period to avoid TDS CPC notices.

7. PAN Correction in TDS statement (TDS Returns) pursuant to Finance Act, 2010, Section 200A introduced in Chapter XVII-B for processing of tax deducted at source statements. The CBDT developed a methodology for TDS return processing and issued Notification No. 03/2013 on January 15, 2013. As a result, a Centralized Processing Center (TDSCPC) was established in Ghaziabad to process TDS Returns filed by deductors and calculate the tax payable or the refund owing to them, if any. Section 200 of the Income Tax Act of 1961 allows the deductor to make a correction statement to remedy any errors or to add, delete, or alter the information contained in the TDS Return.However, in some circumstances where the deductor makes a correction in the PAN of the deductees, the TDSCPC sends a short deduction demand if the modification in the PAN is more than two alphabets and/or two numeric characters. To address this issue, see SLP No. 18631 of 2014 Guj HC decision in the case of Purnima advertising agency Pvt Ltd. Vs DCIT (TDS), in which the Hon’ble Guj HC stated categorically that “putting the limitation of permitting corrections of only four characters has no rationale” and disposed of the case in favour of the assessee.