TDS lianility of principal or Agent ?

[subbufca]

A Principal engages an agent for a region. The agent fails to deduct TDS u/s 194C, which he has incurred on behalf of his principal . Principal settles his account with agent without noticing the same, but deducts TDS from Agent's fee . Principal says that he could claim expenditure though agent failed to deduct TDS on same.As for Agent, he says that he is not concerned with disallowance as he is not claiming the expense in the Profit & Loss a/c. Whose expenditure is legitimately attracted for disallowance -Principal or agent ? or is this a loophole ? What recourse is available to the principal , if he is disallowed the claim ?Please share your views

[Harshavardhana Datar]

It will be better to verify the bills in this case.

[probal_shome]

A Principal engages an agent for a region. The agent fails to deduct TDS u/s 194C, which he has incurred on behalf of his principal . Principal settles his account with agent without noticing the same, but deducts TDS from Agent's fee . Principal says that he could claim expenditure though agent failed to deduct TDS on same.As for Agent, he says that he is not concerned with disallowance as he is not claiming the expense in the Profit & Loss a/c. Whose expenditure is legitimately attracted for disallowance -Principal or agent ? or is this a loophole ? What recourse is available to the principal , if he is disallowed the claim ?Please share your views

Facts aere not clear:

(i) Was the agent required to pay sub-contractors on behalf of the principal?

(ii) Are such payments being claimed by the principal as a deduction?

(iii) What is the TDS deduction that the principal did when he paid the agent? Is it only on the agent's commission?

If the agent was required to pay sub-contrators on behalf of the principal then the failure by the agent to deduct tax at source will disable the principal's right to claim deduction of the payments.

[subbufca]

A Principal engages an agent for a region. The agent fails to deduct TDS u/s 194C, which he has incurred on behalf of his principal . Principal settles his account with agent without noticing the same, but deducts TDS from Agent's fee . Principal says that he could claim expenditure though agent failed to deduct TDS on same.As for Agent, he says that he is not concerned with disallowance as he is not claiming the expense in the Profit & Loss a/c. Whose expenditure is legitimately attracted for disallowance -Principal or agent ? or is this a loophole ? What recourse is available to the principal , if he is disallowed the claim ?Please share your views

Facts aere not clear:

(i) Was the agent required to pay sub-contractors on behalf of the principal?

(ii) Are such payments being claimed by the principal as a deduction?

(iii) What is the TDS deduction that the principal did when he paid the agent? Is it only on the agent's commission?

If the agent was required to pay sub-contractors on behalf of the principal then the failure by the agent to deduct tax at source will disable the principal's right to claim deduction of the payments.

Please note :
i)Yes, the agent is to pay sub-contractor for such  works  that are covered under the agency agreement. To be more clear, the agent gets the work done on behalf of principal and meets the expe3nditure at first instance and later accounts for it with the  principal and gets settled  with him
ii) Yes, as the expenses are those incurred by him through the agent.
iii)the principal deducted TDS only from the agency charges and not from the reimbursements  he made to the agent. He says the TDS liability should be taken care by the agent, who made the direct payment for the work.
Pls  share your views . Also state  case law; if any  on this point.
With best regards
K S Iyer     

[satyanveshi]

As for the facts mentioned in the problem, the agent will prepare his P & L account crediting the same with the commission received from principal. The principal prepares his P & L account by debiting the expenditure paid to the contractors ( infact paid by the agent without deducting the TDS). Therefore, the expenditure claimed by the principal will be disallowed because TDS is not deducted. It is immaterial whether the payment is made by the agent on behalf of the principal or the principal had directly made the payment. The amount debited in the P & L account of the principal will be disallowed since no TDS is deducted.

[probal_shome]

As for the facts mentioned in the problem, the agent will prepare his P & L account crediting the same with the commission received from principal. The principal prepares his P & L account by debiting the expenditure paid to the contractors ( infact paid by the agent without deducting the TDS). Therefore, the expenditure claimed by the principal will be disallowed because TDS is not deducted. It is immaterial whether the payment is made by the agent on behalf of the principal or the principal had directly made the payment. The amount debited in the P & L account of the principal will be disallowed since no TDS is deducted.

I agree with this analysis.

[subbufca]

As for the facts mentioned in the problem, the agent will prepare his P & L account crediting the same with the commission received from principal. The principal prepares his P & L account by debiting the expenditure paid to the contractors ( infact paid by the agent without deducting the TDS). Therefore, the expenditure claimed by the principal will be disallowed because TDS is not deducted. It is immaterial whether the payment is made by the agent on behalf of the principal or the principal had directly made the payment. The amount debited in the P & L account of the principal will be disallowed since no TDS is deducted.

Satyanveshi Sir

Thanks for your learned views and I note the application of Principal's liability for the acts and omissions of his Agent in general law. This is really tedious for a Principal who is caught unaware, especially one who is at a distant place and comes to know about the agent's ignorance and failure  belatedly. In a case where it relates to 194C, not only that such a principal's 100% expense is disallowed for failure to deduct a 2% but becomes liable for consequential liabilities!

Lets once more see sec 40(ia)  that disallows various sums if ......" tax is deductible at source under Chapter XVII-B and such tax has not been deducted ...." . In Chapter XVII , See 194 C that begins with...."  Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor........ and sec 204 (iii) that explains  "Meaning of person responsible for paying." ..in the case of credit, or, as the case may be, payment] of any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the principal officer thereof."  On a combined reading of 194C and Sec 204 , I note that the  Agent is squarely responsible . Since sec 40(ia) prescribes for dis allowance  with reference to  TDS provisions contained in  Chapter XVII-B , is it fair to penalize a Principal  in genuine cases ? Are there any case laws where such dis allowance are disputed and settled against principal . Is it because of  lack of clarity of governing provisions due to failure to conceive such cases? Please throw some light .

With reagrds
K S Iyer   

[satyanveshi]

From the reply posted it appears that you are differing with the opinion expressed by me. This forum is meant for sharing  the ideas of different people and explore any new angle and solution to the problem that is faced in practical situations. Coming to the problem, sec. 194C says not only at the time of payment but also at the time of credit of such sum to the account of the contractor. Therefore, in the books of principal the expenditure is debited and the account of contractors will be credited. At this juncture provisions of section 194C are applicable.  Of course, the said creditors account again will be nullified by passing a JV with the  payment made to agent. Please note that the agent is working on behalf of the principal and he himself is not a contractor. If the case is otherwise, then principal is supposed to deduct the taxes on the whole amount paid to agent but infact, he is deducting taxes only on the commission paid to agent but not on the whole amount paid to agent. So without any iota of doubt we can say that it is the responsibility of the principal to deduct the taxes or giving directions to the agent as to how he had to execute the work. Because, he failed in his duty, he is liable for all consequences. If at all any mistake is occurred, that is at the time of appointing an agent who is not aware of the provisions. Ignorance of law is not excusable. As mentioned in the problem, why TDS is not deducted by the agent, because the agent is not aware of the provisions. If the principal, himself, is not aware and doesnot  deduct then what happens, he will have to bear the consequences. In the same way, the principal is to bear the consequences in the given situation also,  and therefore, he cannot escape from the disallowance of expenditure as the expenditure is ultimately debited in the hands of the principal. Since the facts are apparent, no need to take the assistance of any case law in this regard. If reverse argument is taken, then case law is required. When the facts are visible to the naked eye, in my opinion, no case law is required to support the said argument. I hope I am clear with my opinion.   

[satyanveshi]

I found a useful discussion in the following paragraphs which will be relevant to your problem. The author didnot quote any caselaws, however, the discussion appears to be logical. However, recently, Madras High Court also held that the provisions of Sec. 40a(ia) are constitutionally valid. In view of this judgement, the below mentioned analysis lost its importance. Even  then it appears that it commands some value. Please go thru and take support from the same

"Yes, the issue raised is very much relevant and logical. Once, it is proved that tax has been paid by the deductee, then there is no loss to revenue. Therefore, the enforcement of TDS in the hands of deductor appears to be non logical. But there is no answer for the question that TDS provisions will become redundant once this argument is accepted. But other side of the  logic is more reasonable and nobody could find any fault with it. Till a circular is issued by the board in 1997, nobody from revenue side accepted the argument that once the deductee paid  the taxes, decuctor should not be treated as assessee in default in respect of that TDS. Since many courts have accepted the argument and relieved the deductors from the demand u/s 201(1), finally CBDT had issued a circular in 1997 and ultimately made an amendment( not directly but indirectly) in Sec. 191 as per which the above mentioned proposition has been accepted.

                  Further, after this amendment also, many argue that once the deductee pays the tax, demand u/s 201(1) can be waived but not the demand u/s 201(1A). They quote the case law reported in 293 ITR 226 to support their argument. In my opinion, this is also not correct. once it is proved that the deductee paid the taxes alongwith interest u/s 234B and 234C then the department didnot lose anything. Because, the interest received from deductee u/s 234B and 234C is more or less equal to the interest chargeable u/s 201(1A) in the hands of the deductor. Though this is not directly enunciated, but indirectly supported the judgements reported in 271 ITR 395, 287 ITR 354, 288 ITR 379, 304 ITR 338(AT), 253 ITR 310 and 91 ITD 450. I dont say that penalty u/s 271C should also waived once the deductee pays the taxes.

                  Futher, there is no answer to this question that there is no provision existed as on today to prevent the revenue from enforcing the provisions of sec 40a(ia) when it is brought to the notice that deductee had already paid the taxes. Since TDS is not the liability of the assessee and the liability of some body else discharged by the assessee, it cannot be written off in his books and should be reduced from the payment to be made to the deductee or else he should request the deductee to return that amount by issuing a TDS certificate to that effect in case the payment is already made by him. In fact, nothing prevented him from issuing the TDS certificate. Even in the case of deductee also, if no claim is made in the return and two years are already over, he cannot made a frest claim which is against the provisions of Sec. 155(14). But natural justice says the same amount cannot be collected twice. Once from the deductee as a tax liability and secondly from the deductor in the form of enfocing the provisions of Sec. 40a(ia).

                Even the amendment brought in the F.Y. 2008 wherein it has been allowed to pay the TDS deducted before filing of the return of income is applicable only to the deductions made during the month of March of the preceeding F.Y.. For other payments, the amended provision is not applicable and the same should be remitted before the expiry of the F.Y. otherwise, there is every possibility that the relevant expenditure will be disallowed by the A.Os invoking the provisions of Sec. 40a(ia). In view of the above, this issue needs further elobaration and requires further amendment commensurating the argument that provisions of sec 40a(ia) are not applicable when it is proved that deductee had already paid the relevant taxes. But as of now, this argument will not be accepted by the revenue authorities."

[subbufca]

Satyanveshi  Sir

Thanks for sharing your views and for valuable time

With regards
K S Iyer