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.

Cricke-t-axes Cricket from the view point of Tax

You hear the word Cricket and your brain clicks away a thousand images, images since you were little to the present time, images since you first learnt how to hold a bat to the image of your tiny fist cupping the ball securely in your baby grip. It all comes out all too naturally the see the jam packet stadium, the bright daylight, the roaring of the crowd, the whistles from the stands. There’s just too much passion in this sport for a layman to think about anything apart from winning and grasping the feeling of a proud Indian.

But there are other things as important as the spirit and exuberance of the game, other things which hardly a cricket maniac watching a live telecast on his television would probably ever think. The other word which isn’t as friendly as cricket to the people is “Tax”.

Yes, that’s right just like any other profession even cricket come with tax issues, the Income Tax Department levying taxes on various things that relate to cricket. Let’s suppose its Australia’s tour of India. The only thing that we worry about is will the Indian team perform well and win handsomely in the series scheduled to played across the nation or may be if ever good player is fit and is in form or not. Apart from that nobody pays any attention to any other or rather so many interesting and important aspects of the game. When Australia tours India despite the fact it wins or loses it has to bear the tax burden on the prize money come what may. Nobody wonders about the fiscal policy efforts in promoting the sport. We do enjoy the matches but what about the tax complexities with them? And does anyone ever think about the tax levied on these players and to what extent? It may come to you as a shock that the leading taxpayer is not a businessman or a multi national company MBA graduate or a lawyer or an actor/actress but it’s none other than the personality who is known as the master blaster, Sachin Tendulkar. The IPL has altogether managed to skip the “Tax limelight” very conveniently. The Tamil Nadu Government is thinking on a possible course of action in this respect. Isn’t it a little too late now to levy entertainment tax on the gate collections from IPL? It’s been years the IPL is flourishing and enjoying huge success across the globe, so how come after all these years suddenly a thought crops up as to something thing should be done in this respect. Various young and talented names have come up with the success of this major event but that doesn’t necessarily give it a reason for tax exemption.  

Kolkata HC Ruling

The Kolkata HC after analyzing in detail the sections 2(24), 5, 9, 115BBA, 194E, 194 and 201 of the Income-Tax Act, 1961 came to the conclusion that an alien country playing cricket in India by the high merit of agreement is liable to be charged tax for the prize money irrespective of the fact the team wins or loses. The section 115BBA charges a 10% tax on the income of a country which comes to play in India with the Indian Cricket team. Under Section 158BBA the court ruled that no deduction can be availed, INDCOM had paid an amount to the Team Manager without deduction. If tax is payable under Section 115BBA or 194E the double taxation avoidance agreement that India entered with the following nations namely Australia, New Zealand, Sri Lanka, Kenya and Holland exemption was not given under this provision of the Indian Act. The liability to deduct tax with respect to the incomes of the Umpires and referees was nil in purview of the Section 115BBA as these were neither sportsmen nor non-resident sports associations /or institutions.

Income Tax levied on advertising income 

Section 158BBA charges a tax of 10% on the income earned by non resident sportsperson from participating in the sport or from advertisement or from contribution to the newspaper articles. It also covers guarantee money. Institutions like ICC, PILCOM etc were considered to be association of persons or individuals. Arguments based on extra-territoriality of the Indian Income Tax Act were rejected on the basis of the Supreme Section 10(39) exempts specified income arising from any international sporting event held in India to persons notified by the Central government, if the sporting event involves participation in more than two countries and is approved by the international body regulating the international sport.

Odds of Interpretation: Human intervention required for taxing a payment as ‘fees for technical services’

CA Maneet Pal Pasricha

09810774806

capasricha@gmail.com

www.capasricha.com

Telecom industry in India is suffering from the tussle between the odds of two interpretations. In recent time’s payments for various types of technology-related transactions has been a subject matter of disagreement between taxpayer and income tax department. Telecom industry make payment’s to companies like MTNL and BSNL for availing inter-connectivity ports. These interconnectivity ports come in use when a caller make’s a call from one network (say Airtel) to another network (say Vodafone) i.e., subscribers which fall outside the specified circle of the Taxpayer, then these calls are necessarily to be routed through national long distance telecommunication carriers viz., MTNL and BSNL, which provide interconnection between the two networks.

According to the provisions of Income-tax Act “The Act”, providing any managerial, technical or consultancy services for any consideration is termed as Fees for Technical services “FTS”. Where a payment qualifies as FTS, it is subject to withholding tax i.e tax deducted at source.

Now the point of disagreement is that whether payments made by the Taxpayer to BSNL/MTNL for availing the interconnection/port access services should be subject to withholding tax as FTS.

In respect of this disagreement Delhi High Court had decided the issue in favor of the taxpayer on the basis that these services do not involve any “human interface”. The HC approved the Taxpayer contention that the term ‘technical’ needs to be interpreted in light of the words ‘managerial’ and ‘consultancy’, as it is sandwiched between in the definition of ‘FTS’ under the Income Tax Law. Assorted judgements of the various high courts and tribunals have taken a view that the expression ‘technical services’ has to be read in the narrow sense by following the rule of “Noscitur a sociis” i.e., questionable meaning of a word can be derived from its association with other words.

Thus an element of human intervention is essential for providing managerial and consultancy services and consequently, by applying a similar equivalence, the term ‘technical’ would also have to be construed as involving a human element. This judgement gave any new perspective to the definition of Fees for technical services.

On bringing the matter before the Honourable Supreme court, the court first analysed the evidence’s to construct that human element is involved in the process of interconnectivity ports. But unfortunately or fortunately supreme court found no expert evidence from the tax authority’s to show how human intervention takes place in the present process blueprint. Expert evidence is required to decide whether there is any manual intervention involved during the traffic of such calls. Thus, whether at any stage, any human intervention is involved needs to be examined based on the technical evidence from technical experts. This would enable appellate authorities to decide the legal issue based on factual basis.

Therefore, keeping in mind the importance of the case and the implication of the issue, the matter was remitted to the tax Authority to decide the issue after examining technical experts within a period of four months. Such experts would be cross-examined. The taxpayers are also at liberty to examine the experts and adduce any other evidence. Till such time, the tax administrative authority was asked to issue directions to all its officers that in such cases, the Tax Authority would not proceed against other taxpayers only on the basis of agreements placed before them. Once the issue is settled, the tax authority would be able to levy both interest and penalty on such transactions based on the outcome of the issue.

On remitting the matter to the tax authority to determine the element of human intervention, the SC appears to have acknowledged the fact that human intervention is necessary for a technical service to qualify as FTS.

This interpretation should be of great relevance to telecom companies because when it comes to interconnectivity port charges, the telecom companies need to pay not only to domestic companies but also to the foreign companies for such services. The telecom companies pays interconnectivity charges to domestic companies for providing national long distance calls and similarly for providing International calls services they make some payment to foreign companies like AT&T etc. In addition, number of India’s tax treaties also uses a similar definition for FTS. Therefore for such cross-border technology related payments the issue of determining the applicability of withholding tax on cross-border service fee payments become of huge importance.

Now the telecom companies eagerly wait for the judgement day on the matter. The faith of the matter is in the hands of technical experts. In end, we should hope that our technical experts don’t suffer with any odds of engineering view’s like we suffer from odds of interpretation in income tax act.

Tax effect of Indirect sale distribution channels

CA Maneet Pal Pasricha

(www.capasricha.com)

In fast growing economies like India, china etc.; Global companies are looking forward to pioneer there products to have there share of pie. While introducing products in new markets, one of the major decisions which companies needs to take is to identify the marketing strategy along with the superlative distribution channel for its products. Company has to select the distribution channel from among the various options like distribution through agents (indirect channels), exclusive distribution, intensive distribution etc. The most common and successful channel is indirect channel, Depending on the industry, between 30 percent and 70 percent of all sales worldwide flow through indirect channels, allowing businesses to lower costs, expand more aggressively into new markets and better serve existing customers and reach new ones. In India such distribution model is relied upon by many companies across the sectors like consumer durables, telecommunication, airline companies etc.

But not always indirect distribution channels can be tax effective. According to Income-tax Act, 1961 “the Act” companies need to withhold tax under section 194H on amount of commission paid to its distributors/ agents or anyone else. Generally the companies selling goods through agents sell its product to agents at price less than market price, Now here arise the point of legal action, whether difference between the retail price (at which product is sold to end user) and the price at which product is transferred to agents is “discount” or “commission”. Income-tax authorities consider it to be commission to try cover such transactions under the ambit of section 194H and on the other hand companies consider it to be a discount. In recent times there flowed numerous judgements from various forums dealing on this issue, some against and some in favour of the assessee. Some of the facts on which these cases were decided are principal-agent relationship, Control of company on agents in respect of operations and price of the products, type of agreement etc. It in essence depends on the facts of the cases and technical assessment of these facts. Wrong interpretation can attract huge interest, penalties and disallowance; under section 201(1A), 271C and 40(ia) of the act respectively, of commissions expenses. Such provisions can have severe cash impact on companies, suppose the company has paid commission of INR 100,000 and has not withheld tax on such amount, then such default can lead to cumulative cash outflow of INR 52,000 in terms of interest, penalties and additional loss of tax saving on disallowed expenditure. In addition to this company will also be declared as assessee in default and may further attract the interest and penalty under section 220 and 221 of the act. Thereby giving hit of more than 52% of expense amount in addition to the expense.

In order to avoid lethal effects of Withholding Tax Provisions companies should take experts views for determining the possible effects of tax provisions of major business decisions like putting its distribution channels in place etc.