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Section 197 of Income Tax Act, 1961

Section 197 of the Income Tax Act, 1961 provides for the facility of NIL deduction of tax at source or at a deduction at a Lower rate of tax. To avail of this benefit the assessee whose TDS is likely to be deducted on certain receipts should make an application before the TDS Assessing Officer who has a jurisdiction….

Background & Facts:

Section 197 of the Income Tax Act, 1961 provides for the facility of NIL deduction of tax at source or at a deduction at a Lower rate of tax. To avail of this benefit the assessee whose TDS is likely to be deducted on certain receipts should make an application before the TDS Assessing Officer who has a jurisdiction over his/ her/ its case. The assessee/ deductee concerned may apply for a certificate for Nil or lower deduction of TDS on their receipts in Form No 13.

The issue under consideration is what should be rate of TDS applicable that is the Rate prescribed under various sections of the Act 192, 193, 194, 194A, 194C, 194D, 194G, 194H, 194I, 194J, 194K, 194LA, 194LBB, 194LBC, 194M and 195 of the Act hereinafter called as “Normal Rate”

OR

The lower rate as given in certificate under Section 197 of the Act when the below three events happen at different dates may be all or any prior to the date of certificate u/s 197 or all or any after the date of lower tax certificate hereinafter called as “Lower Rate”.

  • Date of Invoice
  • Date of Payment
  • Period of service provided

Our advice has been sought keeping in view:

  • Provisions of Income Tax Act, 1961 read with Income tax rules 1962
  • Circular issued by CBDT
  • Judgments of courts/Tribunal on similar issue
  • Accounting Standards as prescribed by ICAI

Analysis:

In order to further analyze the query it is imperative to quote the relevant provisions of law, Circular issued under Income Tax and Accounting Standard at this juncture –

Payments to contractors.

194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

  1. one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
  2. two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,

of such sum as income-tax on income comprised therein

Insurance commission.

194D. Any person responsible for paying to a resident any income by way of remuneration or reward, whether by way of commission or otherwise, for soliciting or procuring insurance business (including business relating to the continuance, renewal or revival of policies of insurance) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :

Provided that no deduction shall be made under this section from any such income credited or paid before the 1st day of June, 1973.

[Provided further that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed fifteen thousand rupees.]

Commission or brokerage.

194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent :

Provided that no deduction shall be made under this section in a case where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid or likely to be credited or paid during the financial year to the account of, or to, the payee, does not exceed fifteen thousand rupees:

Fees for professional or technical services.

194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

    1. fees for professional services, or
    2. fees for technical services, or
      1. b(a).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, or
    3. royalty, or
    4. any sum referred to in clause (va) of section 28.

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein:

Section 197 Certificate for deduction at lower rate

(1) Subject to rules made under sub-section (2A), where, in the case of any income of any person [or sum payable to any person], income-tax is required to be deducted at the time of credit or, as the case may be, at the time of payment at the rates in force under the provisions of section 192,  193, 194, 194A, 194C, 194D, 194G, 194H, 194-I, 194J, 194K, 194LA, 194LBB, 194LBC, 194M and 195, the Assessing Officer is satisfied that the total income of the recipient justifies the deduction of income-tax at any lower rates or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by the assessee in this behalf, give to him such certificate as may be appropriate.

(2) Where any such certificate is given, the person responsible for paying the income shall, until such certificate is cancelled by the [Assessing] Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be.

[(2A) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (1) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.]

Whether certificate issued under section 197(1) will be applicable only in respect of credit or payments, as the case may be, subject to tax deduction at source, made on or after date of such certificate

CIRCULAR NO.774, DATED 17-3-1999

1 Section 197(1) of the Act envisages that, where tax is deductible at source in terms of sections 192, 193, 194, 194A, 194D, 194-I, 194K and 195 of the Income-tax Act, and the recipient justifies the deduction of tax at any lower rate or no deduction of tax to the satisfaction of the Assessing Officer, the

Assessing Officer shall issue an appropriate certificate. It has come to the notice of the Board that in certain charges a practice has developed to issue certificates under section 197(1) of the Income-tax Act even after the credit or payment of amounts subject to tax deduction at source. This is not in accordance with the provisions of law.

  1. It is, therefore, clarified that the certificate issued under section 197(1) of the Income-tax Act will be applicable only in respect of credit or payments, as the case may be, subject to tax deduction at source, made on or after the date of such certificate. Therefore, no certificate under section 197(1) of the Income-tax Act should be issued after the amounts subject to tax deduction at source stand credited or paid, whichever is earlier.
  2. In other words, henceforth, application requesting for certificate under section 197(1) should not be acted upon if submitted after credit/payment of the amount subject to tax deduction at source. However, assessees having genuine hardship in submitting such applications on time may refer to the Board for condonation of delay in terms of section 119(2)(b) of the Income-tax Act.

On perusal of each of Section that is Section 194C, 194H, 194D and 194 J the language of the law and the circular is unambiguous which states that –

“shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate in force”.

Thus it is very clearly defined in the law that the relevant date for considering the rate in force or the rate specified shall be the date on which credit to the account of payee or to any suspense account or by any other name

OR

at the date of payment

whichever is earlier.

Accounting Standard 9 - Revenue Recognition

  1. Effect of Uncertainties on Revenue Recognition

9.1 Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.

9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.

 9.3 When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.

9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.

9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.

  1. Revenue from service transactions should be recognised when the requirements as to performance set out in paragraph 12 are satisfied, provided that at the time of performance it is not unreasonable to expect ultimate collection. If at the time of raising of any claim it is unreasonable to expect ultimate collection, revenue recognition should be postponed.
  2. In a transaction involving the rendering of services, performance should be measured either under the completed service contract method or under the proportionate completion method, whichever relates the revenue to the work accomplished. Such performance should be regarded as being achieved when no significant uncertainty exists regarding the amount of the consideration that will be derived from rendering the service.

Thus from above it is clearly implied that revenue against rendering of services should be recognized when the –

  1. Rendering of service is completed and
  2. Revenue is measurable and
  3. There is reasonable certainty exists regarding the ultimate collection that will be derived from rendering the service.

Now different type of Scenarios could be tabulated as under –

S. No Particulars Type of TDS Applicable
1. Services are completed before cutoff date however Uncertainty exist regarding ultimate collection or the revenue is not measurable till the cutoff date and the invoicing is done after cutoff date Lower Rate
2. Services are completed before cutoff date and there is uncertainty of ultimate collection till cutoff date though the revenue is measurable before cutoff date and the invoicing is done after cutoff date

 

Lower Rate
3. Services are completed before cutoff date and there is reasonable certainty of ultimate collection and the revenue is measured. Also the Invoice is raised before the cutoff date but the customer has booked the invoice on or after cutoff date This is debatable. Strictly according to interpretation of law which speaks of credit or payment whichever is earlier and not provision of service this should be lower rate however this could be contested by Income Tax Authorities if or otherwise there is malafide intention observed  to get TDS deducted at lower rate.
4. Services are completed on or after cutoff date and invoicing and payment is on or after cut off date Lower Rate
5. Services are completed before Cutoff date and Invoice is also credited in customer books or advance is paid before cutoff date. Normal Rate

Disclaimer:

Our conclusions are based on the completeness & accuracy of the facts stated therein & assumptions, which if not entirely complete or accurate, should be communicated to us, as the inaccuracy or incompleteness could have a material impact on our conclusions. The conclusions reached & views expressed in the note are based on our understanding of the law & regulations prevailing as of the date of this note as well as our past experience with the tax and / or regulatory authorities. However, there can be no assurance that the tax authorities or regulators will concur with our views.

Legislation, its judicial interpretation & the policies of the tax and / or regulatory authorities are subject to change from time to time & these may have a bearing on the advice that we have given. Accordingly, any change or amendment in the law or relevant regulations would necessitate a review of our comments & recommendations contained in this note. Unless specifically requested, we have no responsibility to carry out any review of our comments for changes in laws or regulations occurring after the date of this note.

Without prior permission of DMCGLOBAL SERVICES LLP, the contents of this study / note may not be quoted in whole or in part or otherwise referred to in any documents. This document is for the specific purpose and we accept no responsibility or liability to any party.

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