D.C.I.T. V/s. Shri Surendra Mohan Mukhija

1.    Summary

It is important to note that to make the provisions of section 194H applicable, three requisites need to be complied with. These requisites are the essence of section 194H namely; service is rendered by the person receiving commission, the payments should have been given in lieu of such services rendered and there should be a principal/agent relationship the two parties. The assessee gave discounts to the purchasers of flats on account of pre-launch booking to attract the potential customers in the market. Such discounts cannot be treated as distribution of commission income. Hence on this basis the entire disallowance of expenses on account of discounts given to purchasers cannot be done under section 40(a)(ia) and the provisions of these sections cannot be made applicable.

2.    Facts of the case:

2.1 The assessee being director of M/S Surendra Buildtech Pvt. Ltd was served notice under section 143(2) on 29.09.2009.

2.2 The assessee declared his income to the tune of Rs. 1, 11, 16, 550. In assessment proceedings it came to notice of Assessing officer that assessee received total commission of Rs. 3,13, 23, 388 and claimed an expense under the head ‘marketing expenses’ which included ‘Incentive & discount’ to the tune of Rs. 51, 37, 584.

2.3 The assessee gave incentives to purchasers who booked under pre-launch booking. The payment for discount was made through account payee cheques only and they received commission only when the person concerned paid the full amount to the builder. The assessee also enclosed details and photocopies of confirmation.

2.4 It was held that marketing expenses was actually passed on to various persons who booked/purchased the property referred above. Subsequently Assessing officer disallowed such marketing expenses.

3.    Contention of department :

The department contended that any amount is subject to TDS provisions of section 194 H i.e TDS on payment of commission; only  in following cases:

i) services are rendered by the recipient.

ii) That the payments should have been given in lieu of such services.

iii) There should be a principal/agent relationship.

The department contended that no services are rendered by purchasers of flats to the assessee in this case, infact it was seen that assessee gave discount to purchasers of flat with a view to have competitive edge in the market. Department also held that since there were no services which were received assessee hence question of commission do not arises in any case. Also there was no principal/agent relationship between purchasers of flats and assessee. The department claimed that Assessing Officer failed to cite any instance in assessment order that the discount has been given to persons other than those who had made the original booking.

Hence discount offered by him cannot be treated as commission and decided in favour of assessee saying that the provisions of section 40(a)(ia) of Income-tax Act were not  applicable and hence the marketing expense of  Rs. 51, 37, 584 were allowed as expenses.

4.    Contention of Assessee:

4.1 The assessee was of contention that the expenditure under the head marketing expenses was incurred wholly and exclusively for the purpose of business.

4.2 There were number of brokers, who offered discount to persons, who booked pre-launch booking with them. He gave incentives or discount to persons, who had booked order through him.

4.3 The payment for discount was made through account payee cheques only.

4.4 The persons received discount only when they paid the full amount to the builder.

4.5 The assessee in order to support above contention, enclosed details and photocopies of confirmation.

4.6 Hence assessee contended that the entire expenses of Rs. 51, 37, 584 should not be disallowed.

5.    ITAT-Rulings:

5.1 ITAT ruled that if any person receives commission directly or indirectly on behalf of another person for the services rendered, then it would be considered as commission provided such services should not be professional services.

5.2 It further stated that the persons to whom discount was granted by the assessee were not acting as an agent for the assessee; rather they were the purchaser of the property. They have not provided any type of services to the assessee. They have just booked the flat through the assessee.

5.3 Hence assessee is an agent between the builder and the ultimate purchaser of the flats.

5.4 The parting of commission was done by assessee which it actually received from builder and out of that commission some part of commission was diverted to ultimate purchasers as discount  with a view to earn more commission.

5.5 It also contended that the relationship between the assessee and the purchaser of the flat is of buyer and seller.

6.    High Court decision:

6.1  High Court contended that while making payment, discounted price was actually paid by the buyers and hence in these circumstances, the provisions of section 194H cannot be invoked in any manner.

6.2 The assessee parted with a portion of his commission received from the builder for helping the intending buyers of flats. In other words discount was received in the purchase price by the purchasers.

6.3 High Court rather dismissed the contention that purchasers of flats rendered any service to the assessee and said that the assessee rendered services to the intending purchasers.

6.4 The High Court declined to interfere with the findings of learned CIT as no other material was placed to negate such findings. It further pronounced that the provisions of section 40(a)(ia) were not applicable in given case.

TDS ON REMUNERATION PAID TO DIRECTORS

Finance minister in budget 2012 deepened the worry lines of the directors of innumerable companies who were enjoying the remuneration from company without deduction of tax at source by inserting a new clause 1(ba) in Section 194J which expand TDS net to on any remuneration paid to Directors of a company. This clause will be effective from 1st July, 2012.

In accordance with newly inserted clause 1(ba) in Section 194J, TDS @ 10% is to be deducted from any remuneration paid to Directors of accompany with effect from 1st July, 2012. This clause reads as follows

“Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company shall liable to be deducted @10%.”

This decision of finance ministry was the result of bundle of uncertainties hovering over the deduction of tax at source on sitting fees, commission and remuneration paid to the directors. Sitting fees is the fees which are given to the directors for attending the meeting of board or any committee as the case may be. But now with the introduction of the above new clause (1)(ba) in section 194J, it is clear that TDS on any remuneration other than covered under salary or fees paid to directors or sitting fees or any payment of same nature by other name shall be covered under the ambit of sec. 194J and will be subjected to TDS @10%.

For the sake of easy understanding of our readers the whole issue may be bifurcated into two parts where the payments are made to directors in two ways:

a.       By way of salary.

b.      By way of fees paid for the professional services.

a)      By way salary: The readers may notice that when payments are made in nature of salary, then provisions of sec.192 are attracted. It clearly means that under such situations directors are considered as employee of the company. Generally the executive directors are paid salary and they are not entitled to sitting fees or for other services.

b)     By way of fees paid for the professional services: It may be noticed that directors’ remuneration includes payments made to Directors for services rendered in any other capacity as per the Companies Act, 1956. To further clarify this type of payments to directors the relevant sections of companies Act, 1956 i.e. sec. 198 and 309 can be relied upon. The collective interpretation of this section reveals that remuneration paid to whole time director/ managing director include payments made on account of

·         Commission,

·         sitting fees

·         any other fees paid for rendering professional services.

From above analysis and careful reading of newly inserted clause in sec.194J it is very clear that before amendment sec.194J use to apply only on amount paid for professional and technical services but with above said insertion, the sitting fees and commission paid and any payment by whatever name are dragged into realm of Sec.194J.

On above scrutiny some confusion which may arise

1.       Whether the service tax is payable when directors are paid on account of rendering services?

The board vide Circular No. 115/09/2009- ST, dated 31-7-2009 clarified that

If Companies make payments to Managing Director/Directors whether Whole-time or Independent, referring those payments as ‘Commissions’, then such payment remitted by companies to their Managing directors or directors even though termed as commission, is not the ‘commission’ that is within the ambit of business auxiliary service. Therefore there is no question of chargeability of service tax on such amount.

The board further clarified that Managing Director or Directors being perform managerial functions and they do not any perform consultancy or advisory function. The definition of management consultant service makes it clear that what is envisaged from a consultant and where the expertise of consultant is asked for is termed as advisory service and not the actual performance of the management function. The payments made by Companies, to Directors cannot be termed as payments for providing management consultancy service.

       Therefore, it is reiterated that service-tax is not chargeable under the category ‘Management Consultancy service’ on the amount paid to Directors whether Whole-time or Independent is not chargeable to service tax under. However, service –tax is chargeable if such directors provide any advice or consultancy to the company and they separately paid for such services.

2.       Whether the commission payable to director will be covered under section 194J OR 194H?

With insertion of new clause in Finance bill 2012 in sec.194J namely clause (1)(ba), it is very clear that commission or any other sum paid by any name to the director which is not covered under section 192 will fall within the ambit of sec. 194J.

3.       Whether sec.194J will attract on payment to the foreign director also?

Foreign director will be on equal footing with the Indian directors for the sake of application of TDS provisions. Hence if foreign director is full time director in any company then he will get remuneration or salary as the case maybe after deducting tax at source under section 192. On other hand if company gets professional or other management services from its foreign director then he will be called non-executive director and any payment remitted to him will attract section 194J and TDS will be deducted thereof.

No accumulation can be done under sec. 40(a)(ia) if assessee is not liable to deduct tax at source

With Contract agreements becoming more prominent and rampant in the country through not only the domestic contractors but also through their international counterparts, the applicability of sec. 194C demands lot more understanding and indulgent care wherever contract payments are remitted or received. At times the understandings of different sections are misinterpreted without taking into consideration different angles contained into other sections which are correlated to it. Now whether expenses of a contractor can be disallowed only on the basis of non-submission of Form No. 15J within prescribed time-limit is an issue before the contractors. This core problem was resolved in the case Valibhai Khanbhai Mankad VS. Deputy Commissioner of Income-tax (OSD), Circle-9, Ahmedabad.

The point to be noted here is that if during a financial year a contractor receives Form No. 15I from its sub-contractor, then mere non-submission of Form No. 15J under rule 29D to assessing officer within prescribed time-limit cannot pave way for disallowance of expenses under 40(a)(ia).

Case:  Valibhai Khanbhai Mankad VS. Deputy Commissioner of Income-tax (OSD), Circle-9, Ahmedabad.

Citation:  [2011] 12 taxmann.com 160 (AHD.) / [2011] 46 SOT 469 (AHD.)

One should know: Every contractor, other than an individual or a HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.

Applicable section and rules in above case: Section 194(C)(3),  40(a)(ia)  and Rule 29D.

Facts:  The payment of Rs. 7, 93, 34,193 was made to sub-contractors by contractor on account of sub-contract for hiring and the Form 15-I were obtained from sub-contractors thereof and hence TDS was not deductible. The assessing officer disallowed the entire expenses to the tune of Rs. 7, 93, 34, 193 on the ground that the assessee instead of filing the Form no. 15J on or before 30^th June, 2006, filed the same on 26.02.2009 after the assessment was completed.

The Assessing officer was of contention that since Forms 15-I were duly obtained from the transporters, the same were not furnished to the CIT in Form 15J as per Rule 29D of the IT Rules, 1962.

Requirement of rule no. 29D:

Ø  The declaration by a sub-contractor shall be made in Form no. 15-I to contractor for non-deduction of tax at source before such sum is credited or paid to sub-contractor.

Ø  The particulars referred under the third proviso to section 194C(3) shall be furnished in Form No. 15J to the commissioner of income –tax on or before 30^th June following the financial year.

Therefore the assessing officer contended that held that once the assessee failed to furnish Form 15J enclosing therewith Form 15-I to the CIT before 30th June, 2006, he failed to fulfill the conditions laid down u/s. 194C(3)(ii). He accordingly added back the sum paid without TDS u/s 40(a)(ia).

Conclusion:

The requirement to file Form No. 15J by 30^th June 2006 was though required as per income tax rules but was not mandatory. If the contractor has obtained Form No. 15-I before the payment is made in the year to sub-contractor and he has taken reasonable assurance that there are no undisputed contents in the particulars of form and its genuineness cannot be doubted in any manner, then there is no requirement to deduct tax at source. So assessee is not liable to deduct tax at source u/s 194C and additions u/s 40(a)(ia) cannot be approved only on ground that Form No. 15J has not been submitted in prescribed time. The submission of Form no. 15J is immaterial as far as additions u/s 40(a)(ia) is concerned as this is an event which is suppose to occur after the end of financial year. If any sub-contractors have furnished Form No. 15-I during the financial year then contractor cannot be made liable for deducting tax at source only because the said contractor do not furnishes Form No. 15J within 3 months from the end of financial year.

Case relied upon while arriving on judgement:  ACIT vs. M/s Shree Pramukh Transport Co. Bhutadi, Baroda pronounced on 31.08.2010

“4. The learned CIT(A) considering the material on record noted that the
AO has not disputed that the assessee claimed that he had obtained
declaration in Form No.15-I from the payees. The learned CIT(A) noted
that ultimately Form No.15-I was filed with delay in the office of the
Commissioner, but the assessee in fact had obtained the declaration and
therefore, it cannot be said that the assessee had violated the mandate
given by the payees not to deduct tax. The addition was accordingly
deleted.
5. On consideration of the rival submissions, we are of the view that no
interference is called for in the matter. The learned DR submitted that
Rule 29 D of the IT Rules is procedural in nature. The submission of the
learned DR itself shows that since the compliance of the rule was
procedural only, therefore, when the assessee obtained requisite
declaration and filed the same with delay with the office of the
Commissioner and also filed the same before the AO at the assessment
stage, would prove that the addition is clearly unjustified in the matter.
According to section 194(C)(3) of the IT Act, the assessee complied with
the second proviso by obtaining declaration in the prescribed form.
Therefore, there was no liability for deduction of tax at source. The
genuineness of the certificate is not doubted by the authorities below.
Therefore, the assessee has substantially complied with the provisions of
law. In case of procedural irregularities, the assessee cannot be put to
unnecessary hardship in the matter and that too when certain exemption
has been given to the assessee in section proviso to section 194(c)(3) of
the IT Act. Since, there is sufficient compliance of the provisions of law,
therefore, the learned CIT(A) was justified in deleting the addition. We,
therefore, do not find any justification to interfere with the order of the
learned CIT (A). We confirm his findings and dismiss the appeal of the
revenue.”

Notified Reporting activities of liaison offices

CA MANEET PAL SINGH

maneet@capasricha.com

9810774806

Foreign companies or firms or an association of individuals does not file a return of income with regard to its liaison office on the ground that no business activity is allowed to be carried out in India. In order to inquire about regular information from non-resident entities in respect of the kind of activities conducted by their liaison offices in India, the Government of India in the Union Budget 2011 had introduced Section 285 to the Income Tax Act. As per this section non-resident entities having liaison offices in India are required to submit prescribed annual statement in respect of their activities to the tax authorities within 60 days from the end of the financial year.

Section 285 was made effective from 1 June 2011, but the form was not notified by the board. Recently, CBDT has notified the form by introducing Rule 114DA and Form No. 49C to the Income-tax Rules, 1962. The annual statement shall be duly verified by the Chartered Accountant or the Authorised Signatory of the non-resident entity. Further, as per the Rule, the annual statement in Form 49C shall be furnished in electronic form along with digital signature. The rules and form shall come in force from 1 April 2012. It appears that there may be increased questioning on the activities of the liaison office in India. Therefore, permanent establishment exposure, etc, should be carefully ascertained before filing such information.

Specimen of Form 49C is given below

"FORM No. 49C

[See rule 114DA]

Annual Statement under section 285 of the Income-tax Act, 1961

S No.	Particulars	Details
1	Financial Year for which the Statement is being submitted
2	Name and Principal Address of the non- resident person in India
3	Head Office Address of the non-resident person
4	Permanent Account Number (if Allotted)
5	Tax Identification No., if any, of country of Incorporation or residence
6	Liaison Office (L.O.) Registration No. granted by RBI
7	Nature of activities undertaken by L.O.
8	Date of opening of L.O. in India
9	Date of RBI approval for L.O. opening
10	Address of L.O./L.O.s in India
11	Date of submitting Annual Activity Certificate (AAC) for the Financial Year to RBI
12	Name, address and Membership No. of the Chartered Accountant signing the Annual Activity Certificate (AAC) as prescribed by RBI
13	India specific financial details for the financial year i.e., receipts, income and expenses of the non-resident person from or in India (not only of the L.O.)
14	Details of all purchases, sales of material, and services from/to Indian parties during the year by the non-resident person (not limited to transactions made by (L.O.)
15	Name & Designation of Officer In charge for each Office of the non-resident person in India
16	Details of any salary or compensation of any sort payable outside India to any employee working in India or for services rendered in India
17	Total Number of employees working in the LO/L.O.s during the year. Particulars of employees drawing salary of Rs. 50,000 or above per month specifying their Name Designation and sitting location
18	Details (with complete addresses Including PAN) of agents/representative/distributors of the non-resident person in India.
19	Names & addresses of the top five parties in India with whom the L.O. has been doing the liaisoning
20	Details of Products or services for which liaisoning activity is done by the L.O.
21	Details of any other entity (including PAN, if any) for which liaisoning activity is done by the (L.O.)
22	Details of Group entities (with addresses and PAN, if any) present in India as Branch Office/Companies/LLPs etc., incorporated in India and nature their business activities.
23	Details (with addresses) of other L.O.s of the Group entities in India
24	Other Group entities operating from the same premises as the office of the L.O.

VERIFICATION

I, ……… [full name in block letters] …………………. son/daughter of ………………………………….. holding Permanent Account Number…………………………………………..……………………….. solemnly declare that to the best of my knowledge and belief, the information given in the form is correct and complete and that the other particulars shown therein ore truly stated. I further declare that I am submitting this form in my capacity as ………………………. and I am also competent to make this submission and verify it.

Verified today the ……………. day of ……………..

Place

Signature of Authorised Signatory

Name …………………………………….."

CA MANEET PAL SINGH

maneet@capasricha.com

9810774806