-By Manish Agarwal
TDS ON SALARIES AND CROSS
CHARGE OF SALARY COSTS ON
SECONDMENTS
TDS ON DOMESTIC SALARY
PAYMENTS
SN Sub
section Contents
1 1 Charge & Method 2 1A & 1B Perquisites.
3 2 More than one employer 4 2A Relief u/s 89(1)
5 2B Other Income
6 2C Issuance of Form 16
7 3 Adjustment of excess/ short payment 8 4 Payment of Provident Fund
9 5 Payment of Super- Annuation 10 6 Foreign exchange rate.
• As per section 192(1) every person responsible for paying salary
income shall deduct income tax (TDS) on the estimated income for the financial year.
• The estimation of the income require to be done by the employer at
the beginning of the year and require to be review periodically.
• The tax require to be calculated on the income tax rates in forces
during the period and the net tax liability require to be estimated after considering all allowance, deductions & rebates. The employee must submit investment declaration in this regard to the employer.
• Every month 1/12th of net tax liability is required to be deducted from
the salary of the employee.
• As per section 192(1A) & 192(1B), the employer also required to deduct TDS on the income of employee in the nature of
perquisites.
• Sub section 2 of section 192 deals with situation where an employee is working under more than a employer during a financial year. The employee under this scenario required to provide to the present employer, the details of salary earned & TDS deducted by his previous employer. The present employer now required to deduct TDS on the aggregate amount of salary i.e. salary received from the previous employer as declared by the employee. (Circular No. 504 dated 8.2.1980)
PERQUISITES & MORE THAN ONE
EMPLOYER
For claiming relief to be granted u/s 89(1) if applicable under section 192(2A) by employee of : Government Company Co-op. Society Local Authority University Institution Association or Body
Require to fill Form 10E under rule 21 Form 10E and employee to account for such relief and deduct tax accordingly.
E.g.: revision of Salary, leave encashment, super annuation , VRS, etc.
• If the Employee has income other than Salary also, then as per 192(2B), employee required to provide information of such income and TDS thereon to the Employer in form 12C as per rule 26B.
• Only in case of house property , there can be a loss and there cannot be any loss under any other heads of income.
• The employer to account for such income for the Purpose of TDS and result should not reduce the TDS otherwise deductible (except house property loss).
• As per section 192(2C), Employer required to furnish to the employee
statement giving correct and complete details consisting of :
Particulars of Salary Particulars of Perquisites Profit in lieu of Salary
In the Form 16 and 12BA (Refer Rule 26)
• Sub section 3 of section 192 permits adjustments to be made during
the Financial Year in relation to excess or shortage in deduction during the earlier deductions.
• In the decision of Hero Honda Motors Limited, 112 Taxmann 154 & CIT v Enron Expat
Services Inc, 194 Taxmann 70, there cannot be any interest u/s 201 but negative decision comes in the case of Madhya Gujrat Vij Co. Limited v ITO , 14 Taxmann.com 156.
ISSUANCE OF FORM 16 & ADJUSTMENT
OF EXCESS/ SHORT PAYMENT
• Sub section 4 of section 192 directs Trustees of Recognized Provident
Fund to deduct TDS on payment of accumulated balances as per Rule 9(1) of Part A of Fourth Schedule as provided in Rule 10 of Part A of Fourth Schedule.
• Sub section 5 of section 192 directs Trustees of Recognized
Superannuation Fund to deduct TDS on payment of accumulated balances from such fund in relation to contribution made by the employer and interest thereon as provided in Rule 6 of Part B of Fourth Schedule
• As per section 192(6), in case the salary is paid in Foreign Exchange,
the same is to be converted to rupees as per the rates prescribed under Rule 26 and 115. (Telegraphic Transfer buying rate – Circular No. 8/2012 dated October 5, 2012)
PAYMENT OF PROVIDENT FUND/ SUPER-
• TDS u/s 192 required to be done at the time of payment of salary only. No deduction u/s 192 is required in case where a payment towards salary has accrued but not made.
-CIT v Tej Quebecor Printing Limited , 281 ITR 170 (Del).
Example – Provision for bonus made at the end of the financial year, but the payment of bonus in the next financial year. The TDS require to be withheld at the time of payment only.
• TDS required to be deducted at the time of payment of advance salary
EMPLOYEE AGENT
Instructions with not only what he has to do but also how he has to do
Instructions with only what he has to do and not how he has to do More direct control More indirect control
No authority to enter into contract
on behalf of the employer Normally enters into contract on behalf of the principal Payment in terms of wages and
salaries Payment by commission
DISTINCTION BETWEEN EMPLOYEE AND
AGENT
EMPLOYER EMPLOYEE RELATIONSHIP
SN Situation TDS required to be deducted u/s 192 No TDS required to be deducted u/s 1921 Consultant Based on contract with the company 2 Temporary Labor on
daily wages Yes No.
3 Short duration Yes No.
4 Part – time Teachers Yes (268 ITR 31)- Max Muller Bhawan No.
5 Doctor & Nurses. Based on contract with the company 6 Management
Trainee Yes No.
7 Partner of firms Not salary ( expl 2 –sec 15) 8 Director Sitting Fees/
Salary paid to director
192 is applicable based on engagement of director
• Donation should not be deducted from gross income while computing tax by the employer.
• Employee will claim the deduction in his return of income and claim refund of taxes.
• As per Circular no. 2/2005 dated January 12, 2005 it had been clarified that in respect of donation made by an employee to the Prime Minister‟s National Relief Fund, the Chief Minister‟s Relief Fund and the Lieutenant Governor‟s Relief Fund, through their respective employer, the employer will consider the deduction while computing gross income of the employer for tax purpose.
• There cannot be any undertaking from employees that they will pay their taxes
- Major Gen. Vinay kumar Singh v Union of India , 123 Taxmann 723./ John Patterson & Co. India Ltd v ITO 36 ITR 499/ Narain Singh v Bharat Sanchar Nigam Limited, 161 Taxmann 119.
• No TDS u/s 192 when employee received arrear salary along with interest
under direction of court.
- All India Reporter Ltd v Ramachandra D. Datar, 41 ITR 446 SC.
• Adjustment by employer of tax refund of one employee with tax payable of
other employee. Please note that this is a criminal proceedings u/s 276BB.
• Excess deduction of TDS by employer cannot be refunded to employee by
employer. Employee require to claim the same in his return of income and claim refund accordingly.
• Reimbursements of business expenditures. CIT (TDS) v. Oil and Natural Gas Corporation (India) Ltd, 358 ITR 131
• There are number of exemptions available to armed forced under section 10 and various circulars.
• Gratuitous payment to the family of employee who dies in active service is not taxable under Income tax . Circular No. 532 dated 17.3.1989.
• TDS to be done for compensation for voluntary retirement part which is taxable.
- Management of ITC v Presiding officer labor court & Another, 244 ITR 731.
• Receipt of notice period pay amount is taxable and there is no deduction for payment of notice pay.
• Reimbursement of joining expenses to employee is taxable as they are not in the nature of transfer allowance.
• Payment to employees under industrial dispute is liable to TDS u/s 192
• Different rules of TDS on Salary on sea-men.
• Demand raised on employees due to mismatch in TDS Credit. • For Financial year 2014-15, refer circular no. 17/2014 dated
10-12-14 for rate of tax & other instructions
Practical use of Lower rate certificate u/s 197 by the employee.
• Employer should collect proofs of travels done by employer which include copies of tickets and boarding passes.
• Also employer should verify that employee availed leave during this period.
• Collection of documents is mandatory to provide benefit u/s 10(5). There cannot be any self declaration from in this regard. • Supreme court in the case of CIT v Larsen & Toubro Limited,
181 Taxmann 71 and CIT v ITI Ltd, 183 Taxmann 219 held that there is no CBDT circular which directs employer to collect & examine the supporting's evidence in respect of LTA claim.
• Circular No. 9/ 2005 dated November 30, 2005.
(21) The Drawing and Disbursing Officers should satisfy themselves about the actual deposits/
subscriptions / payments made by the employees, by calling for such particulars/ information as they deem necessary before allowing the aforesaid deductions. In case the DDO is not satisfied about the genuineness of the employee's claim regarding any deposit/subscription/payment made by the employee, he should not allow the same, and the employee would be free to claim the deduction/ rebate on such amount by filing his return of income and furnishing the necessary proof etc., therewith, to the satisfaction of the Assessing Officer.
Employee required to considered for deduction investments made upto March 31st of the
financial year. Circular No. 483 (F No. 276/64/86- IT(B) dated 31-3-1987.
The Employer has no authority in law to examine the source of investment made and record its satisfaction.
- State Bank of Patiala v CIT, 102 Taxman 240.
Practical problems of the employer & employee
.SN Rule No. Description
1 2A Limits for the purpose of claiming house rent allowance under section 10(13A). 2 2BA Guidelines for purpose of section 10(10C) for voluntary retirement.
3 21A Relief when salary is paid in arrears or in advance under section 89(1). 4 26A Furnishing of particulars of income under the head Salary.
5 26B Statement of Particulars of income under the head of Income other than Salary for deduction of tax deducted at source.
• While deducting TDS from employee‟s income employer is not
expected to step into shoes of Assessing Officer and determine actual income. Where employer has deducted TDS on estimated income of employee and such estimate is found to be incorrect, this fact alone would not make employer an assessee in default under section 201 (1), unless an inference can reasonably raised that employer has not acted honestly and fairly. Assessee school was providing free educational facilities to Wards of teachers / staff members and cost of education was less than Rs 1000 per month per child, assessee was entitled to benefit of proviso to rule (3) ( 5) and consequently , could not be treated as assessee in default. - CIT v Delhi Public School , 63 DTR 325.
• Even if TDS deduction under salary is short deducted, same cannot
be recovered & penalized - CIT V Shri Synthetics Limited, 151 ITR 634.
CASE LAW – INCORRECT ESTIMATION
OF INCOME.
• Carrying of official work from residence and maintaining office were two different aspects. Since there as no office in residence of assessee, perquisite value pertaining to sweeper, gardner, watchman, rent free accommodation, etc. received by assessee from company in which he was director could not be considered to be used for official purposes. Therefore, the same was taxable in hands of the assessee as perquisite. Refer, CIT .v. Subrata Roy, 219 Taxman 133.
• In the case of CIT v . Shankar Krishnan, 349 ITR 685, it was held that valuation of rent free accommodation should be as per rule 3 and no notional rent should be computed in this regard. • Similar decision also provided in the case of Scott R. Bayman v.
CIT, 76 DTR 113 (Delhi)(High Court), where the expenditure on repair of the house occupied by employee should be computed as per rule 3
• ACIT v. Infosys BPO – Bangalore ITAT.
• The assessee recruited employees under a contract of employment which provided the salary as a „cost to company‟ The employee was permitted to choose what would be the various components of his salary and for this purpose a basket of allowances was made available for the employee to choose from. The maximum allowance for each such allowance was fixed by the assessee. The said allowances included a component towards medical expenditure & leave travel concession (LTC). If the employee submitted proof of having incurred the expenditure towards medical treatment, he was allowed exemption to the extent provided in proviso (iv) to s.17(2) of the Act. Likewise, if the employee submitted proof regarding leave travel, he was allowed exemption u/s 10(5) read with Rule 2B.
• The AO held that as Proviso (iv) to s. 17(2) and s.10(5) used the expression “actually incurred”, the exemption towards medical reimbursement and LTC could be conferred only for amounts paid as reimbursement after they were incurred by the employee and not before. She held that as the assessee was paying medical reimbursement & LTC as a component of salary every month, without the employee having incurred expenditure, the same had to be considered as salary disbursement for purposes of TDS u/s 192. The assessee was accordingly treated as being in default.
• The ITAT held that his obligation is only to make an ”estimate” of the income under the head “salaries” and such estimate has to be a bona fide estimate. The primary liability of the payee to pay tax remains. In a situation of honest difference of opinion, it is not the deductor that is to be proceeded against but the payees of the sums. On facts, as the assessee had granted exemption towards medical expenditure and leave travel after verifying the details and evidence furnished by the employees, it could not be treated as an assessee-in-default.
CASE LAW- REIMBURSEMENT OF
MEDICAL & LTA
TDS OBLIGATION ON REIMBURSEMENT OF
SALARY IN CASE OF SECONDMENT
• Reasons for secondment Rapid globalization
Requirement of specialized skills Growth requirement of business .
Control of parent company on international subsidiary companies.
• Under Income tax there is no standard definition of secondment and
as per business terms it means movement of employees from one organization to another for a definite period
• Overseas employer remains the legal employer so that employee does not have to
suffer on account of social security schemes
• Indian company becomes the economic employer which means that employee works
under direct control, direction and supervision of the Indian Subsidiary
• Overseas company does not become responsible for the work and performance of the
employee
• The risk and reward of the work done by the seconded employee would go to the Indian
Company
• The Indian Company has the right to demand the replacement of the employee and
parent company also retains the right to replace or terminate the employee
• Overseas company pays salary to the seconded employee which is reimbursed on cost
to cost basis by the Indian Subsidiary
• Certain local benefits such as accommodation, local conveyance etc. is provided
locally by the Indian Subsidiary to such seconded employee
• Tax payable by secondment employees in the home & host
country. (192)
• Social Security payment. • Creation of PE (Service) • Transfer Pricing
• Reimbursement of Salary to home country of secondment
employee considered as FTS. (195)
• Payment received by seconded employees from his employer
constitute salary.
• TDS obligation under section 192(1) if payment is chargeable under
the head „salaries‟ in India. The same will be based on the residential status of the employee.
• Obligation to deduct tax at source is on any person responsible to
make payment chargeable under the head „salaries‟. „Employer‟ is
the „person responsible for paying‟ - section 204(i)
• Employer include formal as well as real employer.
• Means Indian employer require to pay TDS u/s 192 on the salary
income (taxable in India) of the seconded employee.
Section 195 contains • Any person
• Payment to Non Resident
• Any other sum chargeable to tax except salary
• Sub clause (vii) of section 9 explaining fees for technical services. Explanation 2 says that it covers any managerial or technical or consultancy service including provision of personal.
- Refer FTS Clause.
• Definition of „fees for technical services‟ in different treaties. • Satisfaction of „make available‟ condition (if applicable).
Example ( USA, Singapore, Japan)
- Refer Business Income clause if not satisfied FTS
• Payment to foreign co for seconding its employees would be
taxable in the other Contracting State only if the payment is attributable to permanent establishment (PE) situated in the other Contracting State.
• What constitutes a PE is defined in the Treaty.
(i) That reimbursement of salary by the Indian Subsidiary to the parent overseas company is actually payment for technical or managerial or consultancy services provided by the overseas parent company .
(ii) That services performed by the seconded employee are actually performed on behalf of the parent company and not as employee of the Indian Company.
(iii) That the amount received by the parent company is in fact receipt of income and further payment of the salary is only application of the income on which
employee is liable to tax as per his nature of income and residential status.
(iv) That Indian subsidiary of the employee is not legal employer and therefore
payment by Indian company to overseas company could not be construed to be reimbursement of the salary.
(v) That the parent company has the right of dismissal and further in absence of
obligation of Indian company to pay salary to the employee , it cannot be said to be an economic employer.
(vi) That in the secondment arrangement , the right of the seconded employees to seek their salaries is against the parent overseas company and they cannot claim it as right against Indian Company
(i) That agreement between the Indian Company and overseas parent company is an agreement for secondment of staff and not agreement for rendering of services by the parent overseas company , hence the reimbursement of salary on costs to cost basis cannot be regarded as Fees for Technical services.
(ii) The Indian Subsidiary company exercising the rights to hire or accept secondees, right to control, supervise, instruct and terminate secondees from secondment along with being liable on its own account for their performance is real and economic employer of the
secondees as against the foreign company which is only a legal employer.
(iii) In this context, substance should prevail over the form , i.e. employer should be the person who is having the rights on the work produced and bearing the relative
responsibility and the risks.
(iv) That parent company opts to remain legal employer to protect their interest relating to benefit of pension contributions, social security and other benefits under laws of home
country.
(v) That overseas parent company does not render any service to Indian enterprise and is only paying salary to the seconded employee for administrative convenience. The
amount reimbursed by the Indian company on cost to cost basis would only be
reimbursement of salary and therefore no sum is chargeable to tax in India which requires deduction of tax at source.
(vi) Since seconded employee works under direct control, supervision and instructions of the Indian Company and does not render any service on behalf of parent overseas
company , the secondment would not tantamount to rendering any technical, professional or consultancy service.
In favour of Employer In favour of Revenue
Tekmark Global Solutions LLC(2010) 131
TTJ 173 (Mum-Trib) Virizon Data Services India (2011) 337 ITR 192 (AAR) IDS Software solutions India(P) Ltd.(2009)
122 TTJ 410 (Bang Trib) AT&S India (P) Ltd. (2006) 287 ITR 421(AAR Abbey Business Services (India) Pvt.
Ltd.(2012) 23 taxmann.com 346(Bang-Trib) Target Corporation Indian (P) Ltd. (2012) 348 ITR 61 (AAR Cholamandalam MS General Insurance
Co. Ltd. (2009) 178 Taxmann 100 (AAR) Centrica India Offshore (P) Ltd.(2012) 206 Taxmann 545 (AAR) De Beers India Mineral Ltd. [2012] 21
Taxmann .com 214(Kar.)
• When an employee moves to a different country under secondment agreement, their
taxes are usually affected – either positively or negatively.
• Employer in home country formulates a policy where in tax liability arising out of
secondment assignment in the other country is borne by the employer in home country. This policy is known as tax equalization policy.
• Objective is to ensure that the secondment assignment is tax neutral. In other words
expatriate would only pay as much tax as he/she would have paid if he/she had not gone on assignment.
• Hypothetical tax is the tax which employee would have paid on the same level of
income in the home country. This would also be the amount of tax that the employer would consider for the purpose of withholding tax from the compensation paid to the employee.
• However, it may be noted that this tax is not the actual tax payable by the employee in
the host country; hence the name „hypothetical tax‟.
• The actual tax liability in the host country is discharged by the employer.
• The difference between hypothetical tax and actual tax results in „tax perquisite‟.
• Perquisite in India and referable to tax obligation is taxable as a part of salary of the
employee under section 17(2)(iv).
• The employer would thus have to gross up the salary factoring in the tax perquisite and
tax rate in the host country in such a manner that the net take home salary of the employee is the same as he would have received in his home country
• Where Non-Residents are deputed to work in India and taxes are borne by the employer, if any refund becomes due to the employee after he has already left India and has no bank account in India by the time the assessment orders are passed, the refund can be issued to the employer as the tax has been borne by it [Circular No. 707 dated 11.07.1995].
• In respect of non-residents, the salary paid for services rendered in India shall be regarded as income earned in India. It has been specifically provided in the Act that any salary payable for rest period or leave period which is both preceded or succeeded by service in India and forms part of the service contract of employment will also be regarded as income earned in India.
• Amounts paid directly by employer to discharge employees' income-tax liability, falls within included category of monetary benefits exempt under section 10(10CC). Social security, pension and medical insurance contributions by employer are not taxable as perquisites, as assessee does not get a vested right at the time of contribution to fund by employer, which continues to remain invested till assessee becomes entitled to receive it. Where tax is deposited in respect of non-monetary perquisite, it is exempt under section 10(10CC) and multiple stage grossing up is not applicable. Where employees' tax liability was borne by employer, tax refunds in respect of same could not be taxed in hands of employee, as such amount never belonged to employee. Refer, Yoshio Kubo .v. CIT, 218 Taxman 164.
• Overseas maintenance allowance paid by assessee by way of reimbursement of maintenance expenses incurred by employees deputed abroad was not part of salary, but covered by Rule 2BB(1)(b), hence, could not be disallowed u/s. 40(a)(iii) for non deduction of tax at source. - Information Architects, 123 TTJ 35
CASE LAW – OVERSEAS MAINTENANCE
ALLOWANCE
• Assessee deemed to be an “Assessee in default” for not deducting the TDS
or not depositing the Tax - Section 140A(3)
• Tax demand u/s 201(1) which is equal to the tax amount not deducted.
• Interest under section 201(1A) at the rate of 1.5 % per month or part of the
month from the date on which tax was deductible to the date of payment
• As per rule 119A(b), any fraction of a month shall be deemed to be a full month • Interest is not tax deductible
• Iyer & Sons [1 ITD 502](Del)
• Interest is mandatory and there is no precondition of reasonable cause for
non payment in time of tax deducted
• Pantagon Engineering P Ltd [212 ITR 92
• Penalty under section 221 – Not exceeding amount of tax in arrears
• Penalty under section 271C (Only for failure to deduct tax) – Amount equal to tax which a person fails to deduct. This
penalty is not for failure to deposit tax.
• Disallowance of certain expenditure under section 40(a)
• Imprisonment for a minimum tenure of 3 months & maximum of 7 years under section 276B.
