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Streamlining the law on non-deduction of TDS
May, 27th 2008

Under the present law, some special purpose vehicles set up as joint ventures are outside the ambit of the definition of person responsible for TDS.

About a third of income-tax collections in the annual Budget came from tax deduction at source (TDS).

The law regarding TDS is getting more stringent. Section 201 of the Income-Tax Act 1961 deals with failure to deduct tax at source or failure to deposit such TDS in government account. TDS has to be paid into government account within the prescribed time.

Section 201 treats a person failing to do so as an assessee in default. Courts have held that if the person who has received the payment without TDS had already paid the tax on the amount, then there can be no liability on the part of the deductor for interest on the amount which should have been deducted.

There can be no question of double recovery, both from the person responsible for deduction and from the person who has received the payment without TDS.

CBDT circular

The Central Board of Direct Taxes, in Circular No. 275/201/94-IT (B) of January 29, 1997, had declared that no demand visualised under Section 201 of the Act should be enforced after the tax deductor has satisfied the department that taxes due have been paid by the deductee-assessee. However, this will not alter the liability to charge interest under Section 201 (1A) till the date of payment of taxes by the deductee-assessee or the liability for penalty under Section 271 C of the Act.

This Circular was referred to by the Supreme Court in Hindustan Cococola Beverage (P) Ltd vs CIT (293 ITR 226). It was held that if the deductee had paid the tax, there can be no question of recovering the same once again from the deductor.

Judicial controversy arose with regard to liability for tax/interest on the person responsible for TDS in cases covered by payments by the deductee. The Finance Act, 2008 has amended both Sections 201 and 191.

The amendment

It is clarified that where a person does not deduct tax or, after so deducting, fails to pay the same into government account, he will be deemed a defaulter.

There will be a liability both for interest and penalty. To enlarge the scope for TDS, the amendment includes Association of Persons (AoP) and Body of Individuals (BoI) as persons responsible for TDS under Section 194C covering payments to contractors and sub-contractors.

Under the present law, some Special Purpose Vehicles (SPV) set up as joint ventures are outside the ambit of the definition of person responsible for TDS. The amendment also lays down that payment attracting Section 195 regarding non-residents should be intimated to the department in the prescribed manner.

Normally remittances made to non-residents covered under Section 195 are required to observe the prescribed procedure of the Reserve Bank of India in its Circular No. 3 (A.P) DIR Series 2007-08/100.

The payer and the chartered accountant concerned are required to give an undertaking about the nature of the transactions and the tax obligations.

A copy of the undertaking is given to the assessing officer (AO). There is an exhaustive Circular, dated October 9, 2002, in this regard. Section 195 has also been amended in a redundant manner. The newly inserted sub-section (6) of Section 195 read with Section 295(2) prescribes the form and the manner of supply of information relating to TDS.

Scope enhanced

The amendment also covers Section 191. The Explanation under Section 191 is now substituted with a new Explanation clarifying that where a person is required to deduct tax at source but fails to do so, he shall also be deemed to be an assessee in default. The amendment takes retrospective effect from June 1, 2003, that is, the date from which the earlier Explanation was introduced.

Transnational corporations have been indulging in the practice of transferring shares of Indian companies to foreign companies outside India and disclaiming any tax liability on the transaction.

The amendments now effected to Sections 191 and 201 may help the Revenue fight the cases in the courts and get a declaration that such transnational corporations should be considered defaulters for purposes of the income-tax law. That appears to be the intention behind the retrospective operation given to the Explanation to Section 191 w.e.f June 1, 2003 and Section 201 w.e.f. June 1, 2002.

T. C. A. Ramanujam
(The author is a former Chief Commissioner of Income-Tax)

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