Often deductors lack clarity on the question if the deduction of income tax at source (TDS) should be made on the amount Including service tax or excluding service tax while making the payment of rent or professional or technical fee?

Initial Stand of Income Tax Department
Initially  the Income Tax Department had a view that tax is required to be deducted at source on rent or professional-technical fee inclusive of service tax.

On 3rd July, 2007, Commissioner of Income Tax (TDS) Mumbai replying under RTI Act clarified the same with respect to payment of rent under section 194I. Also clarifying the same question on payment of professional-technical fee under section 194J he referred to CBDT letter F. No. 275/I/2006 dated 21-07-2006 which also took the stand that tax is required to be deducted at source on professional-technical fee inclusive of service tax.

Read the letters under RTI Click Here >>

Current Status
1. Payment of Rent under section 194I 
On 28-04-2008 CBDT came with circular no. 04/2008 which has excluded the service tax part from the deduction of tax at source.

Para 3 of the circular states:

"Service tax paid by the tenant doesn't partake the nature of "income" of the landlord. The landlord only acts as a collecting agency for Government for collection of service tax. Therefore it has been decided that tax deduction at source (TDS) under sections 194-I of Income-tax Act would be required to be made on the amount of rent paid/payable without including the service tax."

Read the circular Click Here >>

2. Payment of Professional-Technical Fee:

Stand of CBDT:
Strangely, CBDT took a totally different stand on deduction of tax on payments of professional-technical fee.

As per its circular no. F.No. 275/73/2007-IT(B), dated 30-6-2008, CBDT stated that:

"the payments made under section 194-I differ significantly from payment made under section 194J in 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 194J TDS 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 rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated April 28, 2008 to such payment under section 194J"

Read the Circular Click Here >>

Judgment of Hon'ble High Court of Rajasthan dated 01-07-2013

On the matter of deduction of tax on service tax on payment of professional-technical fee, the Hon'ble High Court of Rajasthan has delivered a recent judgement against the CBDT circular no 275/73/2007-IT(B) dated 30-06-2008.

It was held that the words, "any sum paid", used in Section 194J of the Act, relate to fees for professional services, or fees for 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 or fees for technical services.

Read the Judgment Order Click Here >>

Applicability of the Judgment

Unless a contrary decision is delivered by any other High Court on this subject or the above judgement of the Hon'ble High Court of Rajasthan is overruled, it is fairly settled that that income tax is not required to be deducted on payments of professional fee-technical fee.

It shall not be out of context to mention the following remarks of Hon'ble Delhi High Court here:

"The Income-tax Authorities acting anywhere in the country, however, have to respect the law laid down by the High Court, whether of the State in which they are functioning or of a different State, in the absence of any contrary decision of any other High Court" All India Lakshmi Commercial Bank Officers' Union v. Union of India [1984] 150 ITR 1 (Delhi).

CBDT latest Circular No. 01/2014 dated 13-01-2014 in line with the above Judgment

CBDT has accordingly has come up with a clarification on the line of the above judgement of Hon'ble High Court of Rajasthan. Read the circular Click Here >>