No taxes to be withheld on the service tax component in payments made to Residents:
The Central Board of Direct Taxes (CBDT) vide Circular No. 1/2014 dated 13 January 2014 has clarified that tax is not required to be withheld on service tax, provided such service tax is indicated separately in the invoice and also the same is in line with the terms of the agreement/contract between the payer and payee.
Earlier, the CBDT had issued Circular No. 4/2008 dated 28 April 2008, wherein it was clarified that tax is required to be withheld under section 194-I of the Income Tax Act, 1961 (ITA) on the amount of rent paid/payable exclusive of the service tax component. Except rental payments, tax is required to be withheld on all other payments including the service tax component as there was no specific clarification similar to rental payments. In fact, the CBDT had clarified that Circular No. 4/2008 would be applicable only on rental payments due to the peculiar language of section 194-I vis-à-vis the language of other sections dealing with withholding tax provisions. However, very recently the Rajasthan High Court delivered a landmark decision holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional or technical services, no tax is required to be withheld on the service tax component under section 194J of the ITA. Hence, on the premise of the said decision and based on several representations/letters received by the CBDT, it decided to extend the benefit granted vide Circular No. 4/2008 in respect of rental payments to other payments also. Hence, the CBDT has now issued Circular No. 1/2014.
The CBDT has drawn reference to the numerous representations/letters received from taxpayers wherein it was requested that similar to rental payments, relief should also be extended to other payments attracting TDS i.e. TDS provisions should not be made applicable to the service tax component in other payments as well made to the Residents. Further, the CBDT also drew support from the recent landmark decision of the Rajasthan High Court, which held that, if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional or technical services, no TDS is required to be made on the service tax component u/s 194J of the Income Tax Act, 1961.