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1119. Clarifications on various provisions relating to tax deduction at source regarding changes introduced throughFinanceAct,1995

TheFinanceAct,1995,hasenlargedthescopeof incometaxdeductionatsourcebymakingvariousamendments.Inregard to thechangesintroducedthroughtheFinanceAct,1995,anumberofquerieshavebeenreceivedfromthevariousassociationsandprofessionalbodiesonthescopeof taxdeductionatsource.Itwouldbedesirable toclarifythedoubtsby issuingapubliccircular in theformofquestionanswersasunder:

Question1:Whatwouldbethescopeofanadvertisingcontractforthepurposeofsection194CoftheAct?

Answer:ThetermadvertisinghasnotbeendefinedintheAct.DuringthecourseoftheconsiderationoftheFinanceBill,1995,theFinanceMinisterclarifiedontheFlooroftheHousethattheamendedprovisionsoftaxdeductionatsourcewouldapplywhenaclientmakespaymenttoanadvertisingagencyandnotwhenadvertisingagencymakespaymenttothemedia,whichincludesbothprintandelectronicmedia.Thededuction is required tobemadeat the rateof1percent. Itwas furtherclarified thatwhenanadvertisingagencymakespayments to theirmodels,artists,photographers,etc.,thetaxshallbedeductedattherateof5percentasapplicabletofeesforprofessionalandtechnicalservicesundersection194JoftheAct.

Question2:Whethertheadvertisingagencywoulddeducttaxatsourceoutofpaymentsmadetothemedia?

Answer:No.ThepositionhasbeenclarifiedintheanswertoquestionNo.1above.

Question3:Atwhatrateis tax tobededucted if theadvertisingagenciesgiveaconsolidatedbill includingcharges forartworkandotherrelatedjobsaswellaspaymentsmadebythemtomedia?

Answer:Thedeductionwillhavetobemadeundersection194Cattherateof1percent.Theadvertisingagenciesshallhavetodeducttaxatsourceattherateof5percentundersection194Jwhilemakingpaymentstoartists,actors,models,etc.Ifpaymentsaremadeforproductionofprogrammesforthepurposeofbroadcastingandtelecasting,thesepaymentswillbesubjectedtoTDS@2percent.Eveniftheproductionofsuchprogrammesisforthepurposeofpreparingadvertisementmaterial,notforimmediateadvertising,thepaymentwillbesubjecttoTDSattherateof2percent.

Question4 :Where the tax is required to be deducted at source on paymentsmade directly to the printmedia/Doordarshan for release ofadvertisements?

Answer:Thepaymentsmadedirectlytoprintandelectronicmediawouldbecoveredundersection194Castheseareinthenatureofpaymentsforpurposesofadvertising.Deductionwillhave tobemadeat therateof1percent. Itmay,however,beclarified that thepaymentsmadedirectlytoDoordarshanmaynotbesubjectedtoTDSasDoordarshan,beingaGovernmentagency,isnotliabletoincometax.

Question5:Whetheracontractforputtingupahoardingwouldbecoveredundersection194Cor194IoftheAct?

Answer:Thecontractforputtingupahoardingisinthenatureofadvertisingcontractandprovisionsofsection194Cwouldbeapplicable.Itmay,however,beclarifiedthatifapersonhastakenaparticularspaceonrentandthereaftersubletsthesamefullyorinpartforputtingupahoarding,hewouldbeliabletoTDSundersection194Iandnotundersection194CoftheAct.

Question6:Whetherpaymentunderacontractforcarriageofgoodsorpassengersbyanymodeoftransportwouldincludepaymentmadetoatravelagentforpurchaseofaticketorpaymentmadetoaclearingandforwardingagentforcarriageofgoods?

Answer:Thepaymentsmadetoatravelagentoranairlineforpurchaseofaticketfortravelwouldnotbesubjectedtotaxdeductionatsourceastheprivityofthecontractisbetweentheindividualpassengerandtheairline/travelagent,notwithstandingthefactthatthepaymentismadebyanentitymentionedinsection194C(1).Theprovisionofsection194Cshall,however,applywhenaplaneorabusoranyothermodeoftransportischarteredbyoneoftheentitiesmentionedinsection194CoftheAct.Asregardspaymentsmadetoclearingandforwardingagentforcarriageofgoods,thesameshallbesubjectedtotaxdeductionatsourceundersection194CoftheAct.

Question7:Whetheratravelagent/clearingandforwardingagentwouldberequiredtodeducttaxatsourcefromthesumpayablebytheagenttoanairlineorothercarrierofgoodsorpassengers?

Answer:Thetravelagent,issuingticketsonbehalfoftheairlinesfortravelofindividualpassengers,wouldnotberequiredtodeducttaxatsourceasheactsonbehalfoftheairlines.Thepositionofclearingandforwardingagentsisdifferent.Theyactasindependentcontractors.Anypaymentmadetothemwould,hence,beliablefordeductionoftaxatsource.Theywouldalsobeliabletodeducttaxatsourcewhilemakingpaymentstoacarrierofgoods.

Question8:Whethersection194Cwouldbeattractedinrespectofpaymentsmadetocouriersforcarryingdocuments,letters,etc.?

Answer:Thecarriageofdocuments, letters,etc., is in thenatureofcarriageofgoodsand, therefore,provisionsof section194Cwouldbe

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attractedinrespectofpaymentsmadetothecouriers.

Question9:Incaseofpaymentstotransporters,caneachGRbesaidtobeaseparatecontract,eventhoughpaymentsfor severalGRsaremadeunderonebill?

Answer:Normally,eachGRcanbesaidtobeaseparatecontract, if thegoodsaretransportedatonetime.Butifthegoodsaretransportedcontinuouslyinpursuanceofacontractforaspecificperiodorquantity,eachGRwillnotbeaseparatecontractandallGRsrelatingtothatperiodorquantitywillbeaggregatedforthepurposeoftheTDS.

Question10:Whetherthereisanyobligationtodeducttaxatsourceoutofpaymentoffreightwhenthegoodsarereceivedon"freighttopay"basis?

Answer:Yes.Theprovisionsoftaxdeductionatsourceareapplicableirrespectiveoftheactualpayment.

Question11:Whetheracontractforcateringwouldincludeservingfoodinarestaurant/saleofeatables?

Answer: TDS is not required to bemadewhen payment ismade for serving food in a restaurant in the normal course of running of therestaurant/cafe.

Question12:Whetherpaymenttoarecruitmentagencycanbecoveredbysection194C?

Answer:Provisionsofsection194Capply to a contract for carryingout anywork including supplyof labour for carrying out anywork.Paymentstorecruitmentagenciesareinthenatureofpaymentsforservicesrendered.Accordingly,provisionsofsection194Cshallnotapply.Thepaymentwill,however,besubjecttoTDSundersection194JoftheAct.

Question13:Whethersection194Cwouldcoverpaymentsmadebyacompanytoashareregistrar?

Answer:Inviewofanswertotheearlierquestion,suchpaymentswillnotbeliablefortaxdeductionatsourceundersection194C.Butthesewillbeliabletotaxdeductionatsourceundersection194J.

Question14:WhetherFDcommissionandbrokeragecanbecoveredundersection194C?

Answer:No

Question15:Whethersection194Cwouldapplyinrespectofsupplyofprintedmaterialasperprescribedspecifications?

Answer:Yes.

Question16:Whethertaxisrequiredtobedeductedatsourceundersection194Cor194Jonpaymentofcommissiontoexternalpartiesforprocuringordersforthecompanysproduct?

Answer:Renderingofservicesforprocurementofordersisnotcoveredundertheprovisionsofsection194C.However,renderingofsuchservicesmayinvolvepaymentoffeesforprofessionalortechnicalservices,inwhichcasetaxmaybedeductibleundertheprovisionsofsection194J.

Question17:Whetheradvertisementcontractsarecoveredundersection194Conlytotheextentofpaymentofcommissiontothepersonwhoarrangesreleaseofadvertisement,etc.,orwhetherdeductionistobemadeonthegrossamountincludingbillofmedia?

Answer:Taxistobedeductedattherateof1percentofthegrossamountofthebill.

Question18:Whetherdeductionoftaxisrequiredtobemadeundersection194Cforsponsorshipofdebates,seminarsandotherfunctionsheldincolleges,schoolsandassociationswithaviewtoearnpublicitythroughdisplayofbanners,etc.,putupbytheorganisers?

Answer:Theagreementofsponsorshipis,inessence,anagreementforcarryingoutaworkofadvertisement.Therefore,provisionsofsection194Cshallapply.

Question19:Whetherdeductionoftaxisrequiredtobemadeonpaymentsforcostofadvertisementissuedinthesouvenirsbroughtoutbyvariousorganisations?

Answer:Yes.

Question20:Whetherpaymentsmadetoahotelforroomshiredduringtheyearwouldbeofthenatureofrent?

Answer:Paymentsmadebypersons,otherindividualsandHUFsforhotelaccommodationtakenonregularbasiswillbeinthenatureofrentsubjecttoTDSundersection194I.

Question21:WhetherthelimitofRs.1,20,000perannumwouldapplyseparatelyforeachcoownerofaproperty?

Answer:Undersection194I,thetaxisdeductiblefrompaymentbywayofrent,ifsuchpaymentofthepayeeduringtheyearislikelytobeRs.1,20,000ormore.Ifthereareanumberofpayees,eachhavingdefiniteandascertainableshareintheproperty,thelimitofRs.1,20,000willapplytoeachofthepayee/coownerseparately.Thepayersandpayeesare,however,advisednottoenterintoshamagreementstoavoid

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TDSprovisions.

Question22:Whethertherentpaidshouldbeenhancedfornotionalincomeinrespectofdepositgiventothelandlord?

Answer:Thetaxistobedeductedfromactualpaymentandthereisnoneedofcomputingnotionalincomeinrespectofadepositgiventothelandlord.Ifthedepositisadjustableagainstfuturerent,thedepositisinthenatureofadvancerentsubjecttoTDS.

Question23:Whetherpaymentsmadebycompanytakingpremisesonrentbutstylingtheagreementasabusinesscentreagreementwouldattracttheprovisionsofsection194I?

Answer:Thetaxistobedeductedfromrentpaid,bywhatevernamecalled,forhireofaproperty.Theincidenceofdeductionoftaxatsourcedoesnotdependuponthenomenclature,butonthecontentoftheagreementasmentionedinclause(i)ofExplanationtosection194I.

Question24:Whetherinacaseofacompositearrangementforuserofpremisesandprovisionofmanpowerforwhichconsiderationispaidasaspecifiedpercentageofturnover,section194IoftheActwouldbeattracted?

Answer:Ifthecompositearrangementisinessencetheagreementfortakingpremisesonrent,thetaxwillbedeductedundersection194Ifrompaymentsthereof.

Question25:Whetherthereceiptspriorto171995aretobeaggregatedtodeterminelimitofRs.20,000foreachfinancialyear?

Answer:Clause(B)ofprovisotosection194J(1)makesitclearthattaxshallbedeductedatsourceiftheaggregatesumscreditedorpaidorlikelytobecreditedorpaidduringthefinancialyeararelikelytoexceedRs.20,000.Therefore,inregardtofinancialyear199596,thelimitofRs.20,000willhavetobeworkedouttakingintoaccountall thepaymentsfrom141995to3131996.Butthedeductionoftaxatsourcewouldbemadeatthespecifiedrateonlyfromthepaymentmadeonorafter171995.

Question26:Whetherpaymentsmadetoahospitalforrenderingmedicalserviceswillattractdeductionoftaxatsourceundersection194J?

Answer:Yes.

Question27:Whethercommissionreceivedbytheadvertisingagencyfromthemediawouldrequiredeductionoftaxatsourceundersection194JoftheAct?

Answer:Yes.

Question28:Whethertheservicesofaregularelectricianoncontractbasiswillfallintheambitoftechnicalservicestoattracttheprovisionsofsection194JoftheAct?Incasetheservicesoftheelectricianareprovidedbyacontractor,whethertheprovisionsofsection194Cor194Jwouldbeapplicable?

Answer:Thepaymentsmadetoanelectricianortoacontractorwhoprovidestheserviceofanelectricianwillbeinthenatureofpaymentmadeinpursuanceofacontractforcarryingoutanywork.Accordingly,provisionsofsection194Cwillapplyinsuchcases.

Question29:Whetheramaintenancecontractincludingsupplyofspareswouldbecoveredundersection194Cor194JoftheAct?

Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, wheretechnicalservicesarerendered,theprovisionofsection194Jwillapplyinregardtotaxdeductionatsource.

Question30:Whetherthedeductionoftaxatsourceundersections194Cand194Jhastobemadeoutofthegrossamountofthebillincludingreimbursementsorexcludingreimbursementforactualexpenses?

Answer:Sections194Cand194Jrefertoanysumpaid.Obviously,reimbursementscannotbedeductedoutofthebillamountforthepurposeoftaxdeductionatsource.

Question31:WhetherTDSfromincomeinrespectofunitsisapplicabletodividendorisitapplicabletocapitalappreciationdistributedatthetimeofrepurchase/redemptionoftheunits?

Answer:Theprovisionsofsection194K regardingdeductionof tax at source from income in respect of units are applicable to periodicaldistributionofincome,whichisinthenatureofdividend.Theseprovisionsdonotapplytocapitalgainsarisingatthetimeofrepurchaseorredemptionoftheunits.

Question32:WhetherTDSonreinvestmenttermdepositshouldbemadeonaccrualbasis,whichisquarterly,oronceinafinancialyear?

Answer: Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof,whicheverisearlier.Ifcreditisgiventotheaccountofthepayeeorpaymentismadetohimannually,thetaxmaybedeductedannually.Itmaybeclarifiedthatacredittointerestpayableaccountorsuspenseaccount,etc.,isalsotakenascredittotheaccountofthepayee,eventhoughthiscreditisnotreflectedseparatelyinthepayeesaccount.

Question33:Whethervariabledepositschemesareliabletodeductionoftaxatsourcefrominterest?

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Answer:Undersection194A,taxistobedeductedfrominterestfrombanksontimedeposits.Asvariabledepositsareinthenatureoftimedeposits,taxisdeductibleatsourcefrominterestonsuchdeposits.

Question34:Whethertaxhastobedeductedfromprincipalonrenewalofdepositsmadeafter171995butwhichmaturedonorbefore3061995whentherenewalismaderetrospectively?

Answer:Taxhastobedeductedfrominterestcreditedorpaid,whicheverisearlier,ontimedepositswithabankmadeonorafter171995.Whenatimedepositisrenewedretrospectively,therelevantdatefordecidingtheapplicabilityofsection194Awouldbethatdateofrenewal.Thus,ifthetimedepositisrenewedafter171995,thetaxdeductionatsourcewillhavetobemadefrominterestpaidorcreditedinrespectofsuchatimedeposit.

Circular:No.715,dated881995.