Withholding Tax Provisions, TDS

and TCS on sale of Goods,

Software Taxation
Samir Kanabar
Basic concepts
Scope of total income
Scope of total income – Resident taxpayer

► Total income of a resident taxpayer includes:

► Income which is received or is deemed to be received in India, by or on

behalf of such person; or

► Income which accrues or arises or is deemed to accrue or arise to him in

India; or

► Income which accrues or arises to him outside India during the year

For a resident taxpayer, global income is taxable under the Income-tax Act, 1961
Scope of total income – Non-resident taxpayer

► Total income of non-resident taxpayer includes:

► Income which is received or is deemed to be received in India, by or on

behalf of such person; or
► Income which accrues or arises or is deemed to accrue or arise to him in
India; or

For non-resident taxpayer, only the income accrues, receives, deemed to accrue or
deemed to received in India is taxable under the Income-tax Act, 1961
Objective of Tax Deduction at Source
Objective of Tax Deduction at Source

Emphasizes pay
as you earn

Regular inflow of
Expand nations
revenue for
tax base
Government

Collect
Curb fake and
information
bogus claims
about the
made
deductee

Overview
► A scheme of “collection and recovery of tax”
► Tentative in nature, subject to determination of final liability
► Payments to residents/ non-residents
Tax Deduction at Source - Procedure
Tax Deduction at Source - Procedure

General TDS Procedure

► Ascertain TDS obligation
► Determine TDS liability by applying rates specified in relevant sections of Chapter-
XVII-B
► Deposit TDS with the Government
► File quarterly e-TDS returns
► Issue TDS certificates to payee
► Payee to claim credit of TDS against tax liability while filing its return of income
Tax Deduction at Source - Procedure

1 Ascertain TDS obligation

4 File quarterly e-TDS returns

Determine TDS liability by

2 applying rates specified in

relevant sections of
Chapter- XVII-B
5 Issue TDS certificates to
payee

Payee to claim credit of TDS

3 Deposit TDS with the
Government 6 against tax liability while
filing its return of income

Page 10 9 April 2022 Presentation title

Key concepts
Key concepts

Payer and person responsible for paying

► Obligation on payer to withhold/ retain taxes at the time of payment/ credit and deposit that
into government treasury on behalf of the recipient
► Obligation to withhold taxes is not triggered if the applicable section does not cast such
responsibility on a category of payers
► Section 204 specifies who is person responsible for paying, thus casting responsibility to
comply with withholding tax provisions
► Section 190 is the enabling provision withholding of tax and payment of advance tax
► The section specifies that withholding provisions do not prejudice the provisions of section 4
which provides for charging of income-tax (i.e., whether or not withholding is provided for,
the amount and rate at which it is provided does not impact the charging provision).
Key concepts

► Each withholding section provides the trigger point for withholding

► Except for salary payments on which withholding is triggered at time
Timing of tax of payment, other sections provide for withholding at time of payment
withholding
or credit, whichever is earlier

Payment Credit
Payment refers to payment in cash or ► Book entry recording the liability.
by cheque or draft or by any other
mode ► Need not be to account of payee (eg, in case of
provision created as discussed earlier)
► Taxes are required to withheld on amount
transferred to suspense account only if relevant
section provides so specifically
Domestic withholding – overview of key withholding
provisions
Domestic withholding – overview of key withholding
provisions
Section Relevant Provision
192 Salary payments
193 Interest on Securities
194 Dividends
194A Interest other than interest on securities
194B/
194BB / Winning from lottery or crossword / horse race / Insurance commission
194D
194C Contractual payments
194H Commission or Brokerage
194I Rental Payments
194-IA Payment on transfer of certain immovable property other than
agricultural land
194-IB Payment of rent by certain individuals or Hindu Undivided Family
194 J Fees for professional or technical services
Section 192 - Tax withholding on salary

► As per section 192 of the Act, any person responsible for paying any income
chargeable under the head ‘salaries’, shall deduct income tax on the amount payable
at the average rate of tax computed on the basis of the rates in force, on the
estimated income of the taxpayer;

► The tax shall be deducted at the time of payment

Rates in force

Taxable Income Slab Rate (%)

*/#
Upto INR 2,50,000 Nil

INR 250,001 – INR 500,000 5

INR 500,001 – INR 1000,000 20

INR 1,000,001 and above 30

*For resident senior citizens (60 years and above), this limit will be INR 300,000.
#For resident very senior citizens (80 years and above), this limit will be INR 500,000.
► As per section 87A, a rebate of INR 12,500 (increased from INR 5,000 w.e.f.
01 April 2019) or the tax payable, whichever is less is available to resident individuals whose total income
does not exceed INR 500,000
► An additional surcharge of 10% leviable on amount of income tax if income exceeds INR 5 million but does
not exceed INR 10 million
► An additional surcharge of 15% leviable on amount of income tax if income exceeds INR 10 million
► Health and education cess of 4% would be levied on income tax and surcharge (if any)
Section 193 – Interest on securities

► Any person responsible for paying to a resident any income by way of interest on
securities shall at the time of payment or credit , deduct income tax at a flat rate of
10%.

► Where any income by way of interest on securities is credited to any account,

whether called ‘Interest payable account’ or ‘Suspense account’ or by any other
name, in the books of account of the persons liable to pay such income, it shall be
deemed to be crediting of income in the account of the payee, and the provisions of
section 193 shall apply.

► This section would not apply for certain prescribed payments (Eg: National Defense
Bonds, Specified issues of NSC, Securities of the Central and State Govt etc.)
Section 194 – Dividends

► Companies at the time of declaring the Dividends had to pay Dividend Distribution Tax (DDT) @ 20.56% at the
time of declaring the dividend. Consequently, dividends were made exempt in the hands of the shareholders.

► An Indian Company before making payment of dividend in any mode to a resident* shareholder shall deduct
income tax at the rate of 10% [the rate is effective from 01 April 2020].

► For non –resident shareholders – 20% (plus Surcharge and Cess) in case whether there is not tax treaty and
treaty rates in case of treaty (generally treaty rates are 10% / 15%)

► No deduction shall be made in case of a shareholder being an individual, if:

► Dividend is paid by company in any mode other than cash

► Aggregate dividend paid or likely to be paid during the financial year does not exceed 5,000

► The provisions of this section shall not apply to payment made to LIC, General Insurance corporation if India, any
other insurer in respect of any shares owned by it
Section 194A – Interest other than “Interest on
securities”
► Any person, not being an individual or a HUF, responsible for paying to a resident any income by way of
interest, other than on securities, shall at the time of payment or credit , deduct income tax at a flat rate of
10%.

► No TDS if interest payment is less than INR 5,000. In case of payment to senior citizen, no TDS if less than
INR 50,000

► In case the person responsible for payment is an individual or HUF, tax shall be deducted at the time of
payment or credit, only if the total sales, gross receipts or turnover from business or profession carried on by
them exceeds the monetary limits specified under section 44AB during the immediately preceeding financial
year.

The monetary limits specified under section 44AB are as follows:

➢ In case of a person carrying on business – the total sales, turnover or gross receipts in the business
exceed INR 10 million
➢ In case of a person carrying on profession – the gross receipt in the profession exceed INR 5 million
Section 194B/194BB / 194D – Winning from lottery or crossword
/ horse race / Insurance commission

Nature of payment Payer Payee Rate of Threshold Limit

TDS
Winnings from lottery or Any person Any person 30% 10,000
crossword puzzle (194B)

Winning from horse races Any person being a Any person 30% 10,000
(194BB) bookmaker or a
person to whom a
licencse has been
granted by
government for
horse racing
Insurance commission (194D) Any person Any person 5% 15,000
Section 194C – Payment to contractors

Applicability Payer Payee Rate Exemptions

of
TDS
Any sum Any Individual 1% ► Contract payment not exceeding INR 30,000 per
payable for specified or HUF contract or aggregate INR 100,000 in a year
carrying out any person Any other 2% ► If value of material mentioned separately in invoice,
work* in person no TDS on the clause of material (only in respect of
pursuance of a other than manufacture using material purchased from the
contract customer)
individual
between or HUF ► No TDS from payments to a person carrying out
contractor and business of plying, hiring or leasing goods carriages
specified (owning 10 or less goods carriage subject to
person furnishing of declaration and PAN)
► Payment exclusively for personal purposes of
Individuals and HUF

*Work includes advertising, broadcasting and telecasting (including production), carriage of goods or passengers
by any mode other than railways, catering, manufacturing or supplying a product according to the requirement
or specification of a customer by using material purchased from such customer
Section 194H – Commission or brokerage

Applicability Payer Payee Rate of Exemptions

TDS
194H – Any person Resident 5% ► Aggregate payment during the Financial Year
Commission or other than does not exceed INR 15,000
brokerage individual or ► Payments of brokerage on purchase and sale
(other than HUF (unless of securities
194D – TDS on they are liable ► Not being Insurance commission
insurance to tax audit u/s
commission) 44AB)

► Explanation to Section 194H provides for an inclusive definition of the term “commission” which covers
three types of payments-

► Payment received or receivable, directly or indirectly, by a person

► acting on behalf of another person for services rendered (not being professional services);

► for any services in the course of buying or selling of goods;

► in relation to any transaction relating to any asset, valuable article or thing, not being securities.
Section 194-I – Rental payments

Applicability Payer Payee Rate of TDS Exemptions

194-I (a) Any person Resident 2% ► When aggregate payments to

Payments by way of other than the payee during a financial

rent on Plant and individual or year does not exceed INR

Machinery or HUF (unless 240,000

Equipment they are liable

to tax audit u/s
44AB)
194-I (b) Payments by Resident 10%
way of rent on Land and
Building or Furniture or
fittings
Section 194-I – Case study
Case study – Provision of Service vs Hire Arrangements
(cont.)
Circular No. 1/2008 Facts:

➢ The customer brings the products for

COLD STORAGE UNIT preservation for a required period and

takes away the same after paying cooling
charges

Are the cooling charges paid ➢ The main function of the cold storage is
to the cold storage unit Cooling to preserve the perishable goods by the
Cold storage considered as rent and liable Charges Paid
service means of a mechanical process, and
for TDS under section 194I or
whether section 194C will storage is only incidental in nature
apply?
➢ The customer is not given any right to
use any space/ equipment.

Customer
Case study – Provision of Service vs Hire Arrangements
(cont.)
Analysis:

➢ The main function of cold storage is to preserve the perishable goods by means of a mechanical

process, and storage is just incidental in nature ;

➢ The customer is not given any demarcated space or the machinery to of the cold storage and

thus doesn’t become a tenant;

➢ Such payment doesn’t amount to hire of the cold storage unit and 194I is not applicable;

➢ However, this arrangement is basically contractual in nature, the provision of section 194-C will

be applicable to the amounts paid as cooling charges by the customers of the cold storage
Section 194-IA / 194-IB / 194DA

Applicability Payer Payee Rate of TDS Exemptions

194-IA – Payment on Any person Any resident 1% ► Where consideration for

transfer of certain being a transfer of immovable
immovable property transferee property is less than INR
other than 50,00,000
agricultural land

194-IB – Payment of Individual Any resident 5% ► Where rent amount is

rent by certain or HUF less than INR 50,000 for
Individuals or HUF a month or part of the
month
Sum under life Any person Any person 5% 1,00,000
insurance policy
(other than the
amounts which is
exempt for taxation)
(194DA)
Section 194J – Professional and Technical Services /
Royalty payments
Applicability Payer Payee Rate of TDS Exemptions

► Fees for Professional Any person Resident 10% ► Payment exclusively

and Technical services other than (2% where payee for personal purposes

► Remuneration to individual or engaged only in the of Individuals and

Director, other than HUF (unless business of call HUF

salary they are liable centre)
► Royalty to tax audit u/s With effect from 1
44AB) April 2020, TDS rate
► Non compete fee

► Non sharing of on fees for technical

intellectual property services (other than

professional services)
paid to residents,
reduced from 10% to
2% in line with 194C
Section 194J – Professional and Technical Services /
Royalty payments (cont.)
► The expression “Professional Services” has been defined to include legal, medical,
engineering, architect, accountancy or technical consultancy, interior decorator, advertising,
notified services by the board

► No deduction shall be made under this section where the aggregate payments during a
financial year does not exceed INR 30,000 in the case of:

► Fees for Professional services;

► Fees for Technical services;

► Royalty; and

► Non compete fee

Section 195A- Grossing up of tax

In certain transactions, the payer of an income agrees to bear the income-tax liability of the payee
in such situation, the tax paid by payer on behalf of payee is also treated as income of the payee requiring
grossing up of tax. An illustration of the same is provided below:

Particulars Amount (in INR)

Example:
Amount payable (net of tax) 100
Tax rate applicable 20%
Gross-up income: 100 * 100 ___
125
(100-20)
Tax payable (INR 125 * 20%) 25
Net amount paid to payee (INR 125 – INR 25) 100
Analysis of Section 195
Section 195(1) – Scope and applicability

* Not being interest referred to in S. 194LB or S. 194LC or S. 194LD

Exclusions from Section 195:

► Dividends referred to in S.115-O

► Income chargeable under the head salaries (Covered by section 192)

WHT obligation arises even where any interest or other sum is credited to any account called
“Interest Payable Account” or “Suspense Account”
Scope and applicability

► Section 195 casts an obligation on a payer to withhold tax from payments to be made to non –
resident or foreign company, if such payment is chargeable to tax in India at rates in force.
► Payer can be a resident as well as a non – resident
► Unlike other provisions in Chapter XVII (TDS provisions), Section 195 uses a special phrase “any
sum chargeable under the provisions of this Act”
► Sum chargeable to tax is to be determined under Section 5 read with Section 9 of the Act
► Nature of payment to be determined from payee’s point of view
► Subject to beneficial provisions of the DTAAs with respective countries
► Sum which are not at all chargeable to tax in India (under the Act or the Treaty) shall
continue to remain outside the ambit of Section 195
► For any sum to be chargeable to tax in India, it has to be
► Received in India (Section 5 of the Act)
► Accrue or arise in India (Section 5 of the Act)
► Deemed to received accrue or arise in India (Section 9 of the Act)
Consequences of failure to deduct and pay taxes
Consequences of failure to deduct or pay tax
(Applicable to resident and non-resident)

Who is required to Does not deduct, or

Where any person,
deduct tax under any does not pay after
including the principal
of the forgoing deduction, the whole
officer of the company
sections or part of the tax

Then, such person shall be deemed to be a taxpayer in default (Section 201 of the Act)

Once a taxpayer is deemed to be in default under section 201, interest shall be leviable under
section 201(1A) at the rate of :

1% per month or part thereof From the date on which tax was
deductible till the date of actual
deduction
1.5% per month or part thereof From the date of deduction till the
date of actual payment
Consequences of failure to deduct or pay tax
(Applicable only to resident)
Any person, including the principal officer of the company, who fails to deduct tax
shall not be deemed to be a taxpayer in default in respect of such tax if (only in the
case of resident payee):

➢ The payee has furnished his return of income under section 139;

➢ The payee has taken into account such sum for computing his total income; and

➢ The payee furnishes a certificate to this effect from a Chartered Accountant’s

certificate in the prescribed form.
Example - Consequences on non-compliance of TDS
(example in case of NR)

► ICo pays service fee of INR 10 mn to FCo, without WHT under Section 195(1)

► This default in WHT leads to following consequences for ICo:

FCo

Section Consequences Amount Cash Impact

(INR in mn) (INR in mn)
Disallowance of service fee
Fees
40(a)(i) expense while computing the 10 10 Services
(10 mn)
taxable income
201(1) Treatment as taxpayer-in- 1 1
default (AID) (10 x 10% #)
Interest levy at 1% for every
201(1A) month or part of a month on 0.36* 0.36
such tax (say for 3 years) (1 x 1% x 36)
ICo
Liable to a penalty of a sum
271C equal to the amount of tax not 1 1
deducted
* From the date when tax was deductible till the date the taxes are deducted & paid
# Tax rate as per the provisions of section 115A of the Act
TDS and TCS on Sale of Goods
TCS on sale of goods

► Applicable if seller’s total sales, turnover or gross

receipts from
business > INR 10 Cr in preceding FY
► Applicable to any person who purchases goods of INR
50 Lacs or more (in aggregate) in a FY
► Seller to collect TCS @ 0.1% (1% in case of no PAN)
► TCS credit available to the buyer Applicable from
► Exclusions
1 October 2020
► Goods exported outside India
► If Buyer is liable for withholding and has withheld
taxes
► Person importing goods into India
► Compliances for the seller
► Monthly payment of TCS collected
► Quarterly filing of TCS return
Purchase of Goods – New TDS levy u/s 194Q

▪ Every buyer having turnover more than 10 Crores on

purchase of goods (B2B + B2C) shall now be liable to
deduct TDS @ 0.1% on the payments made to
resident seller for sums exceeding 50 lacs.
▪ Higher rate to be applicable in case vendors do not
have PAN (s. 206AA) or does not file IT returns (s.
206AB)
▪ Deduction shall be at the time of credit of such sum
to the account of the seller or at the time of payment
by any mode, whichever is earlier
▪ The provisions are attracted even if the amount
is credited to “suspense account”.
▪ Where TDS is deducted under any other section –
194Q is not applicable
Interplay of 194Q vs 206C(1H)
(Domestic transaction: buyer and seller are residents)
Selle Buye Receipt/ Amount Selle Buy TDS TCS Liabl Releva Exclusio Reason
r T/O r T/O payment on which r er e nt n section
for sale of tax will PAN PAN Pers sectio
purchase be on n
of goods in calculate
FY d (excess
of 50L)
9 Cr 12 Cr 54L 4L Yes Yes Yes NA Buyer 194Q Out of Seller T/O less than 10
@ scope of Cr
0.1% 206C(1H)
14 Cr 8 Cr 57L 7L Yes Yes NA Yes@ Seller 206C(1 Out of Buyer T/O less than 10
0.1% H) scope of Cr
194Q
13 Cr 14 Cr 62L 12L Yes Yes Yes NA Buyer 194Q Out of Exclusion provided
@ scope of under 206C(1H)
0.1% 206C(1H)
9 Cr 12 Cr 54L 4L No Yes Yes NA Buyer 194Q/ Out of Seller T/O less than 10
@ 206AA scope of Cr
5% 206C(1H)
14 Cr 8 Cr 57L 7L Yes No NA Yes@ Seller 206C(1 Out of Buyer T/O less than 10
1% H)/ scope of Cr
206CC 194Q
9 Cr 8 Cr 60L 10L Yes Yes NA NA NA NA Out of Buyer T/O and Seller
scope of T/O less than 10 Cr
194Q and
206C(1H)

TDS u/s 194Q to get precedence over TCS provisions u/s 206C(1H) by virtue of proviso to section 206C(1H) but if TDS is not
applicable, TCS will trigger (if conditions are fulfilled)
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence

► Controversy on software taxation in India

► The debate principally has focused on characterizing transactions as generating either
“royalty” or “sales” income
► Tax authorities have generally taken a position that income involving grant of software
program/license should be characterized as “royalty”, irrespective of the nature of rights
acquired by the end user
► Divergent Rulings on the issue
► Karnataka HC Ruling – held software payments to be in the nature of Royalty
► Delhi HC Ruling – held that copyrighted or shrink-wrapped software is not in the nature of Royalty
► Amendment to the Income Tax Act in 2012 with retrospective effect from 1976 to clarify that
the transfer of all or any rights in respect of any right, property or information includes and
has always included transfer of all or any right for use or right to use a computer software
(including granting of a licence) irrespective of the medium through which such right is
transferred.
► DTAA – despite the amendment in the Act, under the respective treaties, position adopted
that under the treaty payments for copyrighted article or shrink-wrapped software not
taxable
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence

► Provisions of Indian Copyright Act

► A copyright means an exclusive right to do or to authorize to do certain acts in respect of a
“work”, including an exclusive right, inter alia, to reproduce the copyright in the work in any
material form and exploit the same by way of sale, transfer or license etc.
► A computer program (software) qualifies as a “literary work” for the purposes of the ICA. As
per Section 30 of the ICA, the owner of copyright in a “literary work” is entitled to grant any
interest in his rights by way of a license in return for a royalty payment.
► In cases where a license is granted, an infringement of copyright under the ICA would take
place only when there is any use of the rights contrary to the license so granted.
► Copyright is an exclusive right, which is negative in nature, being a right to restrict others
from doing certain acts.
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence

► Terms of Sample Agreements

► Distributors were granted a non- exclusive, non-transferable license to resell
computer software to end users.
► Distributors did not have a right to use the software.
► The agreement specifically stated that the copyright in the software was not
transferred, either to the distributor or to the ultimate end user.
► End users were allowed only to use the software and they were restricted from
sub-licensing, transferring, reverse engineering, modifying, or reproducing the
software.
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence

► Ruling of the SC
► In case of license, the end user only gets a right to use computer software and not any of the
rights conferred on the owner of a copyright under the ICA.
► There is a difference between the ownership of a physical item in which the software is
embedded and ownership of the copyright.
► Making a copy or adaptation of a computer program in order to utilize it for the purpose for
which it was supplied, making back-up copies as a protection against loss, does not result in
infringement of copyright under the ICA. Even storage of computer program, per se, would
not result in infringement.
► The nomenclature of the agreement does not matter. What is relevant to be considered is
the real nature of the transaction, having regard to the overall terms of the agreement and
surrounding circumstances.
► What is “licensed” by the foreign, NR supplier to the distributor and resold to the resident
end user or directly supplied to the resident end user is, in fact, the sale of a physical object
which contains an embedded computer program. This is sale of goods, which does not
involve transfer of a copyright in the software.
SC ruling on Taxation of software in India
Engineering Analysis Centre Of Excellence

► Ruling of the SC
► Royalty definition under the ITA v. DTAA
► The DTAA contains an exhaustive definition of the term “royalty”. It includes payment made for the use
or right to use any copyright in a literary work. The royalty definition under the ITA is different and
wider as compared to the royalty definition under the DTAA. The ITA refers to consideration paid for
transfer of all or any rights, including by way of a license, in respect of any copyright.
► Since the license granted to the distributors and end users did not involve granting of any interest in
the rights of an owner of a copyright, payment made for such license does not qualify as royalty both
under the ITA provisions, as subsisted till 2012, as well as the DTAA.
► The ITA was amended in 2012 to provide that transfer of all or any rights includes transfer of all or any
rights for use of a computer software. This amendment expands the royalty definition and may not be
considered as clarificatory in nature. However, such payments would not qualify as royalty for the
purposes of the DTAA.
► Relevance to OECD commentary
► No retrospective amendment obligation to withhold taxes.
► Treaty benefits to be considered for withholding under section 195
Questions
Thank You!!