New beginning in New Year - CBDT exempts deduction of tax from service tax component if it's charged separately

CBDT had issued a Circular no. 4/2008 dated 28-04-2008, wherein it was clarified that TDS under section 194-I was required to be made on the amount of rent paid/payable without including service tax.

Thus, the practice prevalent in the industry till now is that no TDS is charged on service tax component comprised in the rent as per provisions of sec. 194-I. In all other cases, tax is being deducted on sums paid to residents including on service tax component comprised therein.

This position was settled one and then came the verdict of Rajasthan High court in case of CIT (TDS) v. Rajasthan Urban Infrastructure [2013] 37 taxmann.com 154 (Rajasthan) in which it was held that if service tax was paid separately and it was not included in fees for professional services or technical services, no TDS was required to be made on the service-tax component under sec. 194J. Yet this Ruling was applicable to sec. 194J and it could be relied upon by taxpayers only if sum charged was liable for TDS under sec. 194J and not for sums paid under other provisions of the Act.

Thus, CBDT has clarified this position and it issued Circular no. 1/2014 which provides that no tax shall be deductible on service tax component comprised in the sums payable to resident, if service tax is indicated separately.

Editor’s comments:

This is a welcome move from the CBDT as it was much awaited circular.Till now deductors were under obligation to deduct tax from the service-tax component as well so as to avoid the litigations and fears of disallowance of expenditure.