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Thursday, 5 September 2013

TDS ON SERVICE TAX PORTION OF BILL AMOUNT


TDS ON SERVICE TAX PORTION OF BILL AMOUNT

            The Rajasthan High Court in the case of Rajasthan Urban Infrastructure Development Project has held that withholding of tax is not required under section 194J of the Income Tax Act, 1961 on payment of service tax levied on fees for technical/professional services to consultants.

            The High Court upheld the views of the Tribunal and observed that as per the terms of agreement, the amount of service tax was to be paid separately and was not included in the fees for technical / professional services. Therefore, the amount of service tax was not subject to withholding tax provisions.

Facts of the case
  • The taxpayer was a project of Government of Rajasthan for the Infrastructure Development and Civic Amenities in the specified areas/cities in the State of Rajasthan. In relation to this project, the taxpayer appointed the technical and project consultants along with the limited companies and corporate consulting firms.
  • The taxpayer deducted the income-tax at source from the payments made by it and deposited the same as per the relevant provisions of the Act and the return for the same was filed in due time.
  • The main consultants of the taxpayer were charging the service tax at the prevailing rates on the amount of fee payable as per the agreement and the same is paid by the taxpayer. The tax was deducted on fees and other payments of expenses as being part of contract however no tax was deducted on service tax in view of the term of contract.
  • The Assessing Officer (AO) raised a demand along with interest thereon on account of default in withholding tax provisions on the amount paid as service tax.
  • The Commissioner of Income Tax (Appeals) [CIT(A)] set aside the AO’s demand.
  • The Jaipur Bench of the Income Tax Appellate Tribunal (the Tribunal) dismissed the tax departments appeal against the CIT(A) order.

Issue before the High Court
  • Whether tax has be deducted on payment of service tax on the fees for technical/professional services?
Tax department’s contentions
  • The CIT(A) and Tribunal have committed an illegality in relying upon the Circular No. 4/2008 which was in respect of Section 194-I of the Act whereas dispute in the present case was in respect of TDS under Section 194J of the Act.
  • The Circular No. 4/2998 was clarified by a subsequent Circular dated 30 June 2008, which was wrongly held to be inapplicable or contrary to law by the CIT(A) as well as the Tribunal.

High Court’s ruling
  • The Tribunal has considered the agreement and recorded a finding that as the terms of contract, the amount of service tax was to be paid separately therefore, the same was not subject to withholding tax provisions.
  • Upon a consideration of provisions of Section 194J of the Act, and in light of the Circulars dated 28 April 2008 and 30 June 2008, the words “any sum paid”, used in Section 194J of the Act, relate to fees for professional services/technical services. As per the terms of agreement, the amount of service tax was to be paid separately and was not included in the fees for professional services/technical services. The High Court thus concurred to the order of the lower authority which was in accordance with provision of Section 194J of the I.T. Act.
  • The service tax was to be paid separately or not, is purely a question of fact and as per the agreement entered in the present case, it was to be paid separately and there was a finding of fact in this regard, recorded by the CIT(A) and the Tribunal.
  • Even if the Circular 4/2008 is held to be not applicable in the present case, based on the facts and circumstances of the present case, the orders passed by CIT(A) and the Tribunal are in accordance with the provisions of Section 194J of the Act.

Observations
            The tax department relied on the circular where it is provided that the tax is not required to be withheld on service tax component on rent. However, the same does not apply to service tax component on payment of fees for professional/technical services. The Circular provides a distinction between the language of both the withholding tax provisions.

            However, the High Court in this ruling has held that whether the service tax was to be paid separately or not is purely a question of fact and as per the agreement entered in the present case it was to be paid separately. Hence, the amount of service tax was not included in the fees for professional/technical services and therefore not subject to withholding tax provisions.

            Although, the present ruling is given in relation to payments on which tax is deductible under Section 194J of the Act, the High Court ruling can be of consequence to taxpayers in relation to certain other sums paid on which tax is deductible under relevant withholding tax provisions of the Act. It is important to note that the recipient in such cases only acts as a collecting agency on behalf of Government for collection of service tax.