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July 25, 2020

Know all about TDS on Commission and Brokerage as per section 194H

Know all about TDS on Commission and Brokerage as per section 194H

Tax deduction at source is a means of collecting tax on income, dividends or asset sales, by requiring the payer to deduct tax due before paying the balance to the payee. In India, under the Indian Income Tax Act of 1961, income tax must be deducted at source as per the provisions of the Income Tax Act, 1961. In this article we will discuss Tax deducted at source on commission and brokerage. Section 194D deals with the scheme of deduction of tax at source on commission and brokerage.

When does section 194H TDS on commission and brokerage applies?

Any person who is responsible for paying any income by way of commission (other than insurance commission) or brokerage to a resident shall deduct income tax at the time of payment of commission or brokerage. However, an individual or HUF whose total sales, gross receipts or turnover from  the business or profession carried on by him do not exceed the monetary limits of Rs. 1 crore and Rs. 50 lakhs, respectively, specified under section 44AB during the immediately preceding financial year is not liable to deduct tax at source.

When does section 194H TDS on commission and brokerage does not applies?

This section is not applicable to professional services. “Professional Services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or such other profession as notified by the CBDT for the purpose of compulsory maintenance of books of account under section 44AA.

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Further, there would be no requirement to deduct tax at source on commission or brokerage payments by BSNL or MTNL to their public call office (PCO) franchisees.

What are the manner and rate of deduction of TDS under section 194H?

A. Manner of deduction of TDS:

The deduction shall be made at the time such income is credited to the account of the payee or at the time of payment in cash or by issue of cheque or draft or by any other mode, whichever is earlier.

Even where income is credited to some other account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit to the account of the payee for the purposes of this section.

No deduction is required if the amount of such income or the aggregate of such amount does not exceed Rs.15,000 during the financial year.

B. Rate of TDS

Any person who is responsible for paying any income by way of commission (other than insurance commission) or brokerage to a resident shall deduct income tax at the rate of 5% in case the payment is made on or before 14th May 2020. Where, brokerage and commission is paid after 14th May 2020 than TDS is to be deducted at the rate of 3.75%. The reduced rate is applicable only for the period from 14th May 2020 to 31st March 2021.

For more information on Change in TDS rates for FY 2020-21 Click here

What is the meaning of commission and brokerage under section 194H?

“Commission or brokerage” includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered, 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, other than securities.

Case laws related to TDS on Commission and Brokerage:

1. Discount given to stamp vendors on purchase of stamp papers not to be treated as ‘commission or brokerage’ and does not to attract the provisions for tax deduction under section 194H. (CIT v. Ahmedabad Stamp Vendors Association)

In the above case the issue under consideration before the Supreme court is whether discount given to stamp vendors on purchase of stamp papers to be treated as ‘commission or brokerage’ to attract the provisions for tax deduction under section 194H.

The Supreme Court affirmed the above decision of the High Court holding that the given transaction is a sale and the discount given to stamp vendors for purchasing stamps in bulk quantity is in the nature of cash discount and consequently, section 194H has no application in this case.

2. Can incentives given to stockists and distributors by a manufacturing company be treated as “commission” to attract –

i. The provisions for tax deduction at source under section 194H; and

ii. Consequent disallowance under section 40(a)(ia) for failure to deduct tax at source?

CIT v. Intervet India P Ltd (2014)

In the above case the issue under consideration before the High court is that assessee was paying the stockists/distributors for the services rendered by them for buying and selling goods, on the basis of quantum of sales effected, such payment has to be considered as commission, on which tax was deductible at source under section 194H. Consequently, disallowance under section 40(a)(ia) was attracted for failure to deduct tax at source.

The High Court, accordingly, held that the stockists and distributors were not acting on behalf of the assessee and most of the credit was by way of goods on meeting the sales target which could not be said to be a commission within the meaning of the Explanation (i) to section 194H. Accordingly, the High Court affirmed the order of the Tribunal which held that such payment does not attract deduction of tax at source. Consequently, disallowance under section 40(a)(ia) would not be attracted.

3. Can discount given on supply of SIM cards and pre-paid cards by a telecom company to its franchisee be treated as commission to attract the TDS provisions under section 194H. (Bharti Cellular Ltd. v. ACIT).

In the above case the issue under consideration before the High court is that whether discount given on supply of SIM cards and pre-paid cards by a telecom company to its franchisee be treated as commission to attract the TDS provisions under section 194H.

The High Court held that there is an indirect payment of commission, in the form of discount, by the assessee-telecom company to the franchisee. Therefore, the assessee is liable to deduct tax at source on such commission as per the provisions of section 194H.

Understanding with examples:

Mr. X has received commission of Rs. 60,000 from ABC ltd on 20/06/2020.

As per section 194H, a person is required to deduct TDS at the rate of 3.75% in case of payment of commission of more than Rs. 15,000 and paid after 14th May 2020. In this case ABC Pvt Ltd has to deduct TDS of Rs. 2,250 (60,000 * 3.75%) from the payment made to Mr. X.

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