Issues in Practice of TDS/TCS Law
P.M.Veeramani FCA
1
Chapter XVII
Collection & Recovery of Taxes
A. Chapter XVII contains machinery provisions in the aid of the substantive
provisions of sections 4, 5, 28, 145 laying down the charge of income tax.
B. 4(1) Income Tax shall be charged in respect of the total income of the previous
year.
4(2) In respect of Income chargeable u/s 4(1), income tax shall be deducted at
source.
C. Credit for tax deducted u/s 199
TDS shall be treated as payment of tax on behalf of the person from whose
income the deduction was made/owner of security/depositor/property/unit
holder/shareholder.
D. Credit shall be given to him for the Assessment Year for which such income is
assessable
2
E.
Section 191 - Where no provision for TDS or where TDS has not been
deducted, then obligation to pay directly by the assessee.
Section 205 - Where TDS applicable and deducted then assessee can not be
called upon to pay tax himself.
3
Chapter XVII B – Transactions attracting TDS
1. Sec. 192 - Salary
2. Sec.193 -
Interest on securities
3. Sec.194 - Dividend
4. Sec.194 A - Interest other than interest on securities
5.
Sec.194 B horse races
Winnings from lottery or cross word puzzles; (6) 194 BB – Winning from
7. Sec.194 C -
Payment to Contractors
8. Sec.194 D
Insurance Commission
9. Sec.194 E -
Payment to non-resident sportsmen or sports association
10. Sec.194 EE under 80CCB
12. Sec.194 G -
Payment of deposits / interest under NSS -87; (11) 194F - Mutual funds
Commission on sale of lottery tickets
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Chapter XVII B – Transactions attracting TDS
13. Sec. 194 H - Commission or Brokerage
14. Sec.194 I -
Rent
15. Sec.194 IA - Transfer of immovable property ( new from 1.6.2013)
16. Sec.194 J 17. Sec.194 K 18. Sec.194 LA
Payment for professional or technical services
Payment in respect of Units
Compensation on acquisition of capital asset
19. Sec.194 LB -
Payment to non-resident from Infrastructure debt fund
20. Sec.194 LC -
Payment of interest by Indian company to non-resident
21. Sec.194 LD -
Payment to FII or QFI as interest on bonds or securities
22. Sec. 195 -
Payment of other sums to non-resident
23 – 26 Sec.196 A, B, C, D - Specified payments to non-residents
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TDS – Provisions in Brief
Section 192 - Salary
(a) Any person responsible for paying SALARIES is required to deduct tax at
source on the amount payable to employees. Tax is required to be
deducted at the time of actual payment of salary.
(b) Where an employee is in employment of more than one employer, tax will
be deducted at source by the employer, which the employee chooses or the
present employer. (192(2))
(c) The employee may furnish to the employer details of income chargeable to
tax under other heads of income (not being loss except loss under the head
Income from House Property). In such a case employer shall deduct tax
due on total income. However, total amount of tax deducted should not be
less than the amount of tax deductible from salary except where the loss
under the head Income from House Property has been taken into
account.(192(2B))
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TDS – Provisions in Brief
Section 192 - Salary
(a) TDS on amount payable at the average rate of income tax for financial
year on the estimated income for that year (sec.192 (1))
(b) Increase / reduce the TDS for adjusting excess/ short deduction or failure
to deduct during the financial year (192(3))
(c)
Where salary is payable in Foreign Currency , TDS shall be made on the
rupee equivalent calculated at the prescribed rate (192(6))
(d)
TDS on perquisite provided by way of non monetary payment, employer
may , at his option, pay the tax without recovering from the employee (192
(1A))
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Section 194A – Interest other than “Interest on Securities”
(a) Any person (except on individual or a HUF) responsible for paying interest
other than interest on securities to a resident is required to deduct tax at
source (194A (1)). Tax is required to be deducted either at the time of credit
of such income to the payees account or at the time of payment, whichever
is earlier.
(b) An Individual or a HUF whose total sales, gross receipts or turnover from
business or profession exceeds Rs. 100 lakhs or Rs.25 lakhs respectively,
during the financial year immediately preceding the financial year in which
such interest is credited or paid shall be liable to deduct tax at source
(proviso to 194A(1))
(d) No tax is required to be deducted where the aggregate amount of interest
does not exceed Rs.5,000/-. In case of term deposits with banks or
Cooperative Society and Housing Finance Companies, no tax is required to
be deducted upto an aggregate interest of Rs.10,000/-. No tax is required to
be deducted in case of interest paid/credited to any banking
company/financial corporation, LIC, UTI, etc.(194A(3))
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Section 194A – Interest other than “Interest on Securities”

Points for consideration:

Interest vs

Interest definition Sec.2(28A) - for monies borrowed or debt incurred

Discounting charges of bills – not interest - ACIT vs Cargill Global Trading India
Private Ltd - 9 ITR Trib 558 - ITAT Delhi

Discounting Charges:
Interest for Delayed payment

Interest for delay in completion of construction of flats - Is Compensatory in nature
and hence not interest - CIT vs H.P.Housing Board 304 ITR 388 HP

Interest for delay in payment of purchase price – Is compensatory in nature and
hence not interest – ITO vs Parag Mahasukhlal Shah 46 SOT 302 ITAT Ahmedabad
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Section 194B – Winning from Lottery or Crossword Puzzles
(a) Any person responsible for paying income by way of winning from
Lottery/crossword puzzle or card game or any other game is required to
deduct tax at source.
(b) No tax is deductible if the amount of payment is Rs.10,000/- or less.
Section 194C – Payment to Contractor/Sub-contractors
(a)
Any person (other than individual and HUF) paying any sum to any
resident contractors for carrying out any work (including supply of labour for
carrying out any work) in pursuance of a contract between the resident
contractor and specified person is required to deduct tax at source. The
same rule is applicable in case payment is made by a resident contractor to
a resident sub-contractor for carrying out the whole or any part of the work
undertaken by the contractor or for supplying whether wholly or partly any
labour, which the contractor has undertaken to supply.
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Section 194C – Payment to Contractor/Sub-contractors (contd….)
(b) However, an individual or a HUF whose total sales or gross receipts or
turnover from business exceeds Rs.100 lakhs or whose gross receipts from
profession exceeds Rs. 25 lakhs during the financial year immediately
preceding the financial year which such sum is credited or paid to the account
of sub-contractor shall be liable to deduct tax at source.
(c) Tax is required to be deducted either the time of credit of the sum paid to the
account of the payee or at the time of payment in cash or by cheque or by any
other mode, whichever is earlier.
(d) Tax is required to be deducted at source under this section where the amount
credited or paid to the contractor or a sub-contractor exceeds Rs.30,000 in a
single payment or Rs.75,000 in aggregate during the financial year.
(e) No individual or HUF shall be liable to deduct tax in case such sum is credited
or paid exclusively for personal purposes of such individual or any member of
HUF.
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Section 194C – Payment to Contractor/Sub-contractors (contd….)
(f) In the case of payments made to contractors carrying on business of plying,
hiring or leasing goods carriage, no TDS is required u/s 194C if PAN is
furnished by such contractor
(g) Work shall not include manufacturing or supplying a product according to
the requirement or specification of a customer by using material purchased
from a person, other than the customer
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Section 194C – Contract for work vs Contract for sale
Supply of packing material for which raw material was not supplied by the assessee was
a contract of sale and outside the purview of 194C. Packing material carrying printed
work can only be regarded as incidental to the sale. CIT vs Deputy Chief Accounts
Officer, MARKFED – 304 ITR 17 P&H
Agreements with manufacturers for manufacture of footwear, apparel accessories and
sports goods for the assessee according to the specifications, designs and drawings
provided by the assessee is a contract of sale and section 194 C not applicable to such
cases. CIT vs Reebok India 306 ITR 124 P&H
Manufacture of product using raw material, technical know how of supplier and brand
name is a contract for work and TDS is attracted . CIT vs Nova Nordisk Pharma India
Ltd 341 ITR 451 Kar
Mere hiring of trucks with out the services of personnel is not a contract for work and not
hit by section 194 C - Mythri Transport Corpn vs ACIT 28 DTR Trib Vizag 129;
Services rendered by hotels to its customers by making available certain facilities /
amenities is not a contract for work and section 194 C is not applicable The East India
Hotels Ltd vs CBDT 320 ITR 526 Mumbai
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 194 C vs 194 I :Assessee an advertising agent acquiring right of displaying
advertisement at hoarding site and making payment to hoarding site owners—
There was no lease, sub-lease, tenancy etc.—Sec. 194-I is not applicable as the
payment cannot be termed as rent—Assessee was justified in deducting tax at
source at 1 per cent under s. 194C. ITO vs Roshan Publicity Private Ltd 4
SOT 105 Mumbai ITAT
 Sharing of income :
Payment to distributors of film by exhibitors as share
under standard film renting contract is not covered under the definition of ‘any
work’ as envisaged under s. 194C, hence not amenable to tax deduction at
source under that section—Same was also not rent for use of machinery or
land or building within the meaning of 194-I hence not eligible to tax
deduction at source under that section also ITO vs Shringar Cinemas Pvt
Ltd 20 SOT 480 Mumbai ITAT
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Section 194H – Commission or Brokerage
a) Any person other than an individual or HUF who is responsible for
paying to a resident, any income by way of commission (other than
insurance commission referred to in section 194D), or brokerage, is required
to deduct tax.
(b) No deduction is required to be made where the amount of such income or
the aggregate of the amounts of such income credited/paid during the
financial year does not exceed Rs.5,000/-.
Explanation to Section 194H
For the purpose of this section, “commission or brokerage” includes any
payment received or receivable, directly or indirectly, by a person acting on
behalf of another person for services rendered (not being professional service)
or for any services in the course of buying or selling of goods or in relation to
any transaction relating to any asset, valuable article or thing, not being
securities
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Section 194H – Commission or Brokerage
Sub brokerage : The definition of commission or brokerage in explanation (i) to section
194 H does not include transactions in securities. Sub brokerage was paid in relation to
units of mutual funds and was connected with services rendered in the course of buying
and selling of units of mutual funds. These were not covered by TDS provisions. DCIT
vs S.J.Investment Agencies Private Ltd 21 ITR Trib 258 ITAT Mumbai
(Not
applicable for transactions in commodity exchange)
Commission paid to the credit card companies cannot be considered as falling within
the purview of S.194H. In the case of commission retained by the credit card companies ,
it cannot be said that the bank acts on behalf of the merchant establishment or that even
the merchant establishment conducts the transaction for the bank. The commission
retained by the credit card company is therefore in the nature of normal bank charges and
not in the nature of commission/brokerage for acting on behalf of the merchant
establishment. Payments to banks on account of utilization of credit card facilities would
be in the nature of bank charge and not in the nature of commission within the meaning of
sec.194H of the Act. Tata Tele Services Ltd vs DCIT 140 ITD 451 Bangalore
Trade discount : Discount allowed to customer does not constitute commission and
hence not liable for deduction of tax under 194 H - S.D.Pharmacy (P) Ltd vs DCIT 31
SOT 386 Cochin
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Section 194 I – Rent
(a) Any person other than an individual or HUF responsible for paying any
income by way of rent to a resident is required to deduct tax.
(b) ‘Rent’ means any payment by whatever nature called, under any lease, sublease, tenancy or any other agreement or arrangement for the use of
(either separately or together) any:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
land, or
building (including factory building), or
land appurtenant to a building (including a factory building), or
machinery, or
plant, or
equipment, or
furniture, or
fittings
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194 I Rent ……contd
c) An individual or a Hindu Undivided Family whose total sales or gross
receipts or turnover from business exceeds Rs.100 lacs or whose gross
receipts from profession exceeds Rs.25 lacs during the financial year
immediately preceding the financial year in which such sum is credited or
paid shall be liable to deduct tax at source.
d) No deduction shall be made where the amount of such income or the
aggregate of amounts of such income credited/paid during the financial year
does not exceed Rs.1,80,000/-.
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194 I Rent ……contd
 Rental income from co-owned property. No TDS if share of each co-owner was
less than Rs.1,20,000 . CIT vs Manager, SBI 13 DTR 294 Rajasthan
 Security deposit given to landlord adjustable against rent liable for TDS under
194 I . CIT vs Reebok India 291 ITR 455 Delhi;
 Rent paid to co-owners ; Rate of TDS to be that of individual . CIT vs Laly
Motors 311 ITR 29 P & H
 Sharing of premises by Holding and Subsidiary company. Subsidiary not
deducting TDS for payment to Holding company; but holding company doing
so on payments to Landlord. No violation ACIT vs Result Services Private
Ltd 52 SOT 598 Del
 Where the assessee film producer incurred payments to utilise the land and
building exclusively for film shooting, expenditure falls within the definition of
rent to attract provisions of s.194-I V.R.Entertainers (P) Ltd vs ITO 47 SOT
221
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Section 194 IA - Transfer of immovable property
(a) Any person responsible (includes individual and HUF ) for paying any
resident transferor as consideration for transfer of immovable property
(other than agricultural land)
(b) Tax to be deducted @1%, where consideration exceeds Rs.50 lakhs
(c ) Consideration not defined
(d)
No requirement of TAN: payment to be made electronically
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Section 194 J – Fees for Professional or Technical Services
a) Any person other than individual or HUF responsible for paying to a
resident fee for professional services or fee for technical services or royalty is
required to deduct tax on the income comprised therein.
b) An individual or a Hindu Undivided Family whose total sales or gross receipts
or turnover from business exceeds Rs.100 lacs or whose gross receipts from
profession exceeds Rs.25 lacs during the financial year immediately
preceding the financial year in which such sum is credited or paid shall be
liable to deduct tax at source.
c) “Professional services” means services rendered by a person in the course of
carrying on legal, medical, engineering or architectural profession or the
profession of accountancy or technical consultancy or interior decoration or
advertising or such other profession as is notified by the Board for the
purpose of section 44AA or of this section.
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Section 194 J – Fees for Professional or Technical Services
d) Profession notified by CBDT : Film Artist, Authorised Representative,
Company Secretary , Information Technology – Rule 6 F
e) “Fees for technical services” shall have the same meaning as in Explanation 2
to clause (vii) of sub-section (1) of section 9 –
For the purpose of this clause “Fees for technical services” means: any
consideration (including any lumpsum consideration) for the rendering of any
managerial, technical or consultancy services (including the provisions of
services of technical or other personnel), but does not include consideration
for any construction, assembly, mining or like product undertaken by the
recipient or consideration which would be income of the recipient chargeable
under the head ‘salaries’.
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e)
Royalty shall have the same meaning as in Explanation 2 to clause (vi) of
sub-section (1) of Section 9
f)
The tax is required to be deducted at the time of credit of such income to
the account of the payee or at the time of payment in cash or by issue of
cheques or drafts or by any other mode whichever is earlier. No tax is
required to be deducted in case amount of such sum or aggregate of
amount of such sums credited or paid during the financial year under each
category does not exceed Rs.30,000/-.
g) With effect from 1st June, 2003 no individual or HUF shall be liable to
deduct tax on fees for professional services in case such sum is credited or
paid exclusively for personal purposes of such individual or any member of
HUF.
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h)
Section 194J(1)(ba) – (with effect from 1.7.2012) TDS made applicable
on remuneration or fees or commission other than those on which tax is
deductible under the head Income from Salaries paid to a director of a
company.
However, the limit of Rs. 30,000 is not applicable to payments made to
directors.
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Disallowance of depreciation : Assessee purchased software, capitalized it to the
computers as software came along with hardware and claimed depreciation. On the
ground that purchase of software is essentially purchase of copyright which attracts
TDS , AO disallowed depreciation claimed. Mere purchase of software, a copy righted
article, for utilization of computers cannot be considered as purchase of copyright and
royalty. Assessee did not acquire any rights for making copies, selling or acquiring
which generally could be considered to be falling within “royalty”. Explanation 2 to
section 9(1)(vi) cannot be applied to purchase of a copy righted software which does
not involve any commercial exploitation. Sonic Bio Chem Extractions Pvt Ltd vs ITO
23 ITR Trib 447 ITAT Mumbai
Royalty : Assessee in the business of purchase and sale of satellite broadcasting rights
for movies and programs claimed amount paid for purchase of rights as expenditure.
AO disallowed the same since no TDS was made and payment amounted to royalty.
Since assessee did not purchase cinematographic films as such rather it had only
received right for satellite broadcasting, hence, the amount paid for acquiring said
right would fall within the definition of royalty in view of explanation 2 to section
9(1)(vi) and TDS was attracted . ACIT vs Sree Balaji Communications 140 ITD 687
Chennai
25
 Modelling : Payments were made for services of modeling which were
unconnected with the production of cinematographic films. While modeling was
aimed at display of merchandise, the acting was defined to portray a role
authored by a story writer with different purposes and objects and certainly not to
displace merchandise to boost the sale of manufacturer or trader of product or
services. Therefore, payments made by assessee to Ms.Kartina Kaif
did not
attract the provisions of section 194J. Kodak India Pvt Ltd vs DCIT 22 ITR Trib
721 Mumbai
 Fee for Technical services : When any technology or machinery is developed
by human and put to operation automatically wherein it operates without much of
human interface or intervention, then usage of such technology cannot per se be
held as rendering of technical service as contemplated in Explanation 2 to section
9(1)(vii). Siemens Ltd vs ACIT 142 ITD 1 Mumbai
26
Rate at which TDS to be made
 Rates specified in the Act
:
 Sec.194 C - 1% where payee in individual ; 2% in other cases
 Sec.194 H - 10%
 Sec.194 I - 10% relating to land / building/furniture ; 2% in other cases
 Sec.194 J - 10%
 No surcharge or cess
 Rates in Force:
 This refers to the rates of TDS mentioned in Part II of First Schedule of every Finance
Act : TDS for Section 194A, 194B; No surcharge or cess
 Where payee does not have PAN:
 Highest of Rate specified ; Rate in Force or 20%; No surcharge or cess
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Amount on which TDS is to be made
 CBDT Circular dated 4/2008 dated 28-04-2008:
TDS on rent to be effected only on the net amount without considering the service
tax as service tax paid by the landlord is not income of the landlord.
• F.NO275/1/2006-IT(B) Dt 21.7.06 : ………..tax deduction u/s 194J would be required
to be made on the sums payable by the deductor inclusive of any tax including
service tax ”- May apply to payments under 194C, 194H and also for reimbursement
of expenses
28
Section 197 – Obtaining a Certificate of Lower Rate
a) Applicable for tax-deductible u/s 192, 193, 194, 194A, 194C, 194D, 194G,
194H, 194-I, 194J, 194K, 194LA or 195.
b) The recipient can apply in Form No.13 to the Assessing Officer to get a
certificate authorizing the payer to deduct tax at lower or deduct no tax as
may be appropriate.
c) The certificate of lower rate shall be issued on plain paper directly to the
person responsible for paying income, under an advice to the applicant.
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Consequences of default
• The expenditure shall be disallowed u/s 40a(i) or 40a(ia) while computing
Income from Business or Profession, if :a) Tax deductible is not deducted, or
b) Tax deducted has not been remitted to the credit of the Government
• The tax deducted as per provisions of Chapter XVII B shall be paid to the
credit of the Government within 7 days from the end of the month in which
such deduction is made. In the case of payments for the month of March,
within 30 days from the end of the month.
• In the case of TCS, the tax shall be paid within 7 days from the end of the
month in which such deduction is made.
• However, the expenditure so disallowed u/s 40a(i) or 40a(ia) in a previous
year shall be allowed in the year in which such tax is paid to the credit of the
government.
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Consequences of default
• In addition to disallowance of expenditure, interest and penalty may be levied for
non compliance of provisions of Chapter XVII B
• Interest is chargeable
–
At the rate of 1% for every month or part of the month from date on which tax is deductible to
the date upto which tax is deducted
–
At the rate of 1.5% for every month or part of the month from the date on which tax was
deducted to the date on which tax is actually paid
• Penalty is leviable u/s 271C on the amount of tax failed to deduct or pay.
• Penalty u/s 271 H for failure to TDS returns ranging between 10,000 – 100,000
• The assessee in default shall also be punishable u/s 276B (for non compliance of
TDS provisions) and 276BB (for non compliance of TCS provisions) with rigorous
imprisonment for a term not less than 3 months but which may extend upto 7
years and with fine.
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Tax Collection at Source (TCS) – Sec. 206C
 Applicable to sellers of : Alcoholic liquor for human consumption – 1%
 Tendu leaves – 5%
 Timber obtained under a forest lease – 2.5%
 Timber obtained by any mode other than forest lease- 2.5%
 Any other forest produce other than timber and tendu leaves – 2.5%
 Scrap – 1%
 Minerals being coal or lignite or iron ore – 1%
 Parking lot / toll plaza / mining and quarrying - 2%
 Bullion in cash in excess of Rs. 2,00,000 – 1%
 Jewellery in cash in excess of Rs. 5,00,000 – 1%
 Rates of TCS as prescribed in Section 206C
32
Tax Collection at Source (TCS) – Sec. 206C
 All items except sales of bullion and jewellery exempt if the purchase is for
own consumption
 Jewellery includes ornaments made of gold, silver, platinum or any other
precious metal; alloy containing one or more of such precious metals;
whether or not worked or sewn into any wearing apparel
 Scrap - waste and scrap from manufacture or mechanical working of
materials which is not usable as such because of breakage, cutting up, wear
and other reasons
33
Tax Collection at Source (TCS) – Sec. 206C
 Waste and Scrap to be read together : In the Expln. (b) to s. 206C, word "waste
and scrap" are one item and thereafter, the words used are "from the manufacture
or mechanical working of material" which would mean that the waste and scrap
being one item should arise from the manufacture or mechanical working of
material; since assessee is engaged in manufacturing of fluorine and other
refrigerant gases the scrap items sold viz. drums, plastic drums, plastic bags, used
oil wooden scrap, scrap electrical cables, empty bromine crates etc. cannot be
used for manufacturing or mechanical working of material of fluorine and other
refrigerant gases and hence such items would not form part of the definition of the
scrap and consequently, assessee was not required to deduct tax under s. 206C(6).
Navine Flourine International Ltd vs ACIT 45 SOT 86 ITAT Ahd
 Dealer of scrap not liable : An importer and dealer in recycled ferrous and nonferrous metals, mainly brass and copper, sold the said recycled metals to
manufacturers as well as to certain other traders. Assessee sold scrap but the scrap
sold was neither generated from the manufacture or mechanical working of
materials nor was the scrap sold not usable as such. Nathulal P Lavti vs ITO 65
DTR 133 ITAT Rajkot
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