Indian Income Tax Issues   

 

TDS on Commission or Brokerage (Section 194H)

 

 

 

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     Here, we shall discuss TDS implications on payments of the nature of Commission or Brokerage as per the Indian Income Tax Act.
 

Person responsible for paying to a resident, any income by way of commission (other than insurance commission) or brokerage shall deduct tax at source there from.

 

Important Note: As per section 206AA, with effect from 1.4.2010, every person who receives income subject to TDS under chapter XVIIB (covers all TDS cases) shall furnish to the deductor, his PAN. If PAN is not so furnished, the rate of TDS will be at the rates specified in the Act or at the rates currently in force or  at 20% whichever is higher. Please note that this applies to non residents also.

The liability to deduct Income tax at source is on any person except individual and HUF. However, individual and HUF are also covered by liability to deduct tax at source if their books are required to be audited under section 44AB during the immediately preceding financial year. [The turnover from business/profession exceeds the limits specified u/s 44AB during the financial year immediately preceding the financial year in which the commission or brokerage is paid or credited].


Tax is to be deducted at source at the time of payment or credit whichever is earlier.

 

Tax has to be deducted @10% w.e.f. 1-6-2007. [Previously 5%].

 

There is no requirement of deduction of tax at source as per Indian Income Tax Act if the aggregate amounts of commission or brokerage paid/credited or likely to be paid/credited during the financial year to the payee does not exceed Rs.5,000/-.

 

No deduction shall be made by BSNL or MTNL to their PCO franchisees.

 

Commission or Brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.

 

Discount availed by stamp vendors is not ‘commission’ or ‘brokerage’ - It is not possible to accept the contention of that the definition of “commission or brokerage” as contained in the Explanation to section 194H is so wide that it would include any payment receivable, directly or indirectly, for services in the course of buying or selling of goods and that, therefore, the discount availed of by the stamp vendors constitutes commission or brokerage within the meaning of section 194H. If this contention were to be accepted, all transactions of sale from a manufacturer to a wholesaler or from a wholesaler to a semi-wholesaler or from a semi-wholesaler to a retailer would be covered by section 194H. Thus, the discount made available to the licensed stamp vendors under the provisions of the Gujarat Stamps Supply and Sales Rules, 1987, does not fall within the expression “commission” or “brokerage” under section 194H - Ahmedabad Stamp Vendors Association v. Union of India [2002] 257 ITR 202/124 Taxman 628 (Guj.)/ Kerala State Stamp Vendors Association v. Office of the Accountant General [2006] 150 Taxman 30 (Ker.).

 

Deduction of tax by airlines from its agent: Tax should be deducted at source under section 194H on amount available to agents being difference between air fare fixed by airlines and price at which agents are enabled to sell tickets - Around the World Travels & Tours (P.) Ltd. v. Union of India [2004] 141 Taxman 53 (Mad.)


  • Commission to Wholetime Directors: In Jahangir Biri Factory (P) Ltd Vs. Dy. CIT (2009) 28 (II) ITCL 114 (Kol 'C' Trib), it was held that Commission paid to directors is not in the nature of commission or brokerage as envisaged in Section 194H.
  • Discount given to distributors/franchisees on sale of SIM Cards and recharge coupons: In Vodafone Essar Cellular Limited Vs. Asst. CIT (2010) 332 ITR 255 (Ker), it was held that the discount given at the time of sale of sim cards and recharge coupons by the assessee to distributors was a payment received or receivable by the distributor for services rendered to the assessee and hence, it is covered under Section 194H.

 

Turnover Commission payable by RBI to Agency Banks - Requirement of tax deduction at source under section 194H is not applicable in respect of Turnover Commission payable by the Reserve Bank of India to the Agency Banks (Banks authorized for conducting Government business) for performing the general banking business of the Central and State Governments on behalf of RBI - Circular : No. 6/2003, dated 3-9-2003.

 

Sometimes, the commission or brokerage is retained by the agent/consignee and not remitted to the principal/consignor while remitting the sale consideration. In such a case, retention of commission/brokerage by the agent/consignee amounts to constructive payment of the same to him by the principal/consignor and TDS needs to be made from such amount. Therefore, the principal/consignor shall have to remit TDS to the credit of the central government within the prescribed time. [Circular No.619 dt.4-12-1991].

 

An issue came up before Kolkata Bench of the Tribunal as to whether the difference in purchase and sale price enjoyed by the distributors / franchisees is to be treated as commission or discount by the assessee who is in the business of cellular mobile telephone services.  Assessee company having treated the same as commission and deducted tax under Section 194H discontinued such approach from July, 2002 and treated the same as discount and not liable for any TDS formalities.  Assessing Officer (AO) rejected such contention and treated the ‘assessee’ as ‘assessee in default’ and charged interest under Section 201(1A) of the Income Tax Act, 1961.  CIT (A) agreed with assessee’s contention and held the same as discount which is not liable for any TDS deduction under Section 194H.  On an appeal to the Tribunal it was held that the agreement between the assessee and its distributors showed that the rights with the prepaid card at all times vested in the assessee till they were sold to the customers.  Distributors / Franchisees have no liberty to tinker with the ultimate price at which it is to be sold to the customer, which was fixed by the assessee.  In the case of principal to principal, relationship the distributor will enjoy full freedom in fixing the ultimate retail price within the maximum price level fixed by the original vendor manufacturer.  However, in the instant case distributors have no independence to reduce their margins and sell at a lower price than what is fixed by the assessee.  In a normal principal to principal situation one cannot control the other.  Assessee was not only holding ownership but also regulating the manner of the business operations of the distributor.  Hence, the margins enjoyed by the distributors are to be treated as commission which is liable for TDS under Section 194H and thereby AO’s action was endorsed.  ACIT Vs. Bharti Cellular Ltd (2007) 294 ITR (AT) 283 (Kolkata)

 

Where the transaction between the assessee-publishing newspaper and its sales agents is on principal to principal basis, assessee is justified in not effecting any TDS from discount given to newspaper agents and charges/commissions retained by advertising agents under section 194H, as commission paid to circulation agents is in the nature of trade discount. CIT Vs. Samaj [2001] 77 ITD 358 ( Cuttack).
 

Disclaimer: All the information provided above is for informative purposes only. You are advised to consult your tax consultant before you act upon any of the above information. In spite of this, if any person acts upon this information and suffers any loss, we are not to be held liable.

     Though all efforts have been made to provide latest information, you are advised to check latest circulars, latest changes in law etc from the Indian Income Tax Department.
 

Other issues on Tax Deducted at Source : TDS on Commission 

 TDS on Interest other than interest on securities  TDS On Contractors(194C)       TDS on Other Sums    TDS On Professional Fees (Sec 194J)                     

   TDS on interest on Securities(193)   TDS on Rent(194-I)

                    TDS on Salaries(192)


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