Finance

Act, 1991

Section 194H

Finance Act, 1991

TDS on payments in the nature of commission, brokerage,
etc.
4.2 New section 194Hhaving application from 1st October, 1991,
provides that the person responsible for paying any income by
way of commission or brokerage to a resident for services
rendered (not being professional services) shall deduct income-
tax thereon @ 10%.
4.2-1 Payers covered - The deduction would be required to be
made by all payers, except individuals and HUFs.
4.2-2 Payments covered -The words 'commission and brokerage'
have been given inclusive definition in the section. Hence, the
section will apply to —
♦ all payments of commission and brokerage as normally
understood, whether or not they are covered by the
definition in the section; and
♦ all payments of commission and brokerage covered by the
definition in the section, whether or not such payments
are commission or brokerage as normally understood. In
other words, tax will have to be deducted on :
(a) all payments received or receivable, directly or
indirectly, by a person acting on behalf of another
person for services rendered (not being
professional services) 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 (as per the definition in the section).
 (b) any other payment if it can be termed as
commission or brokerage.
4.2-3 Meaning of commission - In Ilarihar Cotton Pressing
Factory v. C1T [1960] 39ITR 594 (Bom.), it was observed as
follows:
"The expression "commission" has no technical meaning but
both in legal and commercial acceptation of the term it has
definite signification and is understood as allowance for service
or labour in discharging certain duties, such as, for instance of
an agent, factor, broker or any other person who manages the
affairs or undertakes to do some work or renders some service
to another. Mostly it is a percentage on price or value or upon
the amount of money involved in any transaction of sale or
service or the quantum of work involved in a transaction. It can
be for a variety of services and is of the nature of recompense
or reward for such services." (emphasis supplied)
If this wide meaning is adopted, TDS will be required on all types
of commission including commission to banks for demand drafts,
etc.
4.2-4 Meaning of brokerage - Black's Dictionary (6lh cdn.)
defines brokerage as "the wages or commissions of a broker" (p.
193) and broker is defined in the same dictionary as "an agent
employed to make bargains and contracts for compensation; a
middleman or negotiator between parties; an agent of a buyer or
a seller who buys or sells stocks, bonds, commodities, or services,
usually on a commission basis."
4.2-5 Illustrative list of commission, brokerage - An illustrative
list of payments covered by the term "commission or brokerage"
is given below:
♦ Commission to Commission Agent,
♦ Commission to non-employee Directors,
♦ Commission given by Small Savings Agencies/Unit Trust of
India to Agents,
♦ Indenting commission,
♦ Overriding/Incentive commission,
♦ Brokerage on Fixed Deposits with Companies,
♦ Brokerage and commission to underwriters,
♦ Brokerage and sub-brokerage on public issue of securities,
 ♦ Brokerage received by Produce Brokers,
♦ Brokerage on stock exchange transactions,
♦ Brokerage paid to Estate Agents.
However, commission to employees and employee directors which
forms a part of the salary income is liable to TDS under section
192 of the Act and not under this section.
4.2-6 Specific exceptions - Tax is not required to be deducted at
source :
(a) if the aggregate of commission or brokerage credited or
paid or likely to be credited or paid during the financial
year to the account of, or, to the payee, docs not exceed
Rs. 2,500. This exemption is extended to all payees
including companies, cooperative societies, etc. In
determining this sum, for the financial year 1991 - 92, the
payments/credits from 1st April, 1991 to 30th September,
1991 will also have to be considered;
(b) by such payers or class or classes of payers as the Central
Government may, having regard to the extent of
inconvenience caused or likely to be caused to them and
being satisfied that it will not be prejudicial to the
interests of the revenue, by notification in the Official
Gazette specify in this behalf;
(c) in respect of payment for professional services, that is,
services rendered by a person in the course of carrying on
a legal, medical, engineering or architectural profession
or the profession of accountancy or technical consultancy
or interior decoration or such other profession as is
notified by the Board. [Explanation (w) to section 194H]
(d) payment to—

♦ the Central Government

♦ the State Government
♦ the Reserve Bank of India
♦ any corporation established under a Central Act
and which is exempt from income-tax on its income,
e.g. the LIC, UTI etc.
♦ a Mutual Fund set up by a public sector bank or a
public financial institution and exempt from income
tax under section 10(23D).
 (e) insurance commission
4.2-7 Cases in which exemption from TDS is not available - Tax
will have to be deducted even if the total income of the payee is
not likely to exceed the maximum exemption limit or the payee's
other tax payments are sufficient to discharge his ultimate tax
liability on his total income, including the particular commission.
Further, there is no provision regarding non-deduction of tax on
the strength of a declaration from the payee or a certificate from
the Assessing Officer.
4.2-8 When lo deduct tax at source - The deduction of tax is
required on the earliest of the following four events:
♦ Credit to the account of the payee; or
♦ Credit to any other account like'commission payable
account','suspense account', 'outstanding liabilities
account', etc., in respect of the whole or any part of the
amount. Thus, if at the year end, the 'outstanding
liabilities account' is credited in respect of any such
expenditure, TDS is required on such credit although the
credit is not made in the account of the payee; or
♦ Payment in cash or by issue of a cheque or a draft;
♦ Constructive payment to the payee by debiting his account
and crediting some other account.
4.2-9 Advance payment: - If commission or brokerage is paid in
advance even before the services arc rendered and such payment
is liable to be refunded if the services are not rendered, then,
strictly speaking, the payment is not 'income' for the recipient
and hence, tax is not required to be deducted at source at the
time of such payment of advance; tax would be required to be
deducted only at the time of credit of such commission to the
payee.
However, if there arc practical difficulties in recovering the
amount of TDS from die payee at the time of credit, it is advisable
that tax is deducted at the time of advance payment.
4.2-10 How much to deduct (rate of deduction) -
NATURE OF ENTITY OF PAYEE RATE OF DEDUCTION
Non-company 11.20%
Company 11.50%
In case where, at the time when the credit/payment is made, it is
expected that the total payment during the financial year would
not exceed Rs. 2,500 but later on it is found that the
credit/payment exceeds that amount, then, strictly speaking
deduction is not required to be made in respect of earlier
credits/payments as well.
It may be noted that the CBDT has taken a contrary view for
section 194C where it has clarified that if a case where, at the
time when the contract was entered into, it was expected that the
total payment thereunder would not exceed Rs. 10,000 (being the
limit for non-deduction under section 194C), but later on it is
found that the payment exceeds that amount, deduction should be
made in respect of earlier payments as well.
4.2-11 Applicability of more than one provision of TDS - This
section requires TDS on all types of commission except
commission to insurance agents liable to TDS under section 194D.
It is quite likely that certain commission payments require
deduction of tax at source under other sections also. To illustrate
♦ a commission to lottery agent is covered by section 194G
as well as this section; and
♦ a payment on commission basis to a works contractor is
covered by section 194C as well as this section.
Just as the same income cannot be taxed twice, it appears that the
same income should also not suffer double deduction of tax a
source. It is also submitted that section 4(2) of the Act which
imposes the liability to deduct tax at source and states that
"income-tax shall be deducted at the source where it is so
deductible ... under any provision of this Act" should be construed
to impose the liability for only one deduction. Again, on
application of the maxim that 'general provisions will not
derogate from special provisions', it appears that TDS on
commission is not required under this section, if it is covered by
the special provisions of section 194G or section 194C.
Nevertheless, a suitable clarificatory amendment to section 194H
stating that the section is not applicable to payments covered by
other sections is undoubtedly desirable to avoid any needless
litigation on this matter.
42-12 Cases in which remittance net of commission is made to
the payer by the agent-It may happen that the sale proceeds are
received by a person on behalf of his principal and he deducts his
commission and remits the net amount to the principal. In such a
case he will now have to remit to the principal a higher sum,
including the tax deductible at source to enable the principal to
make the requisite payment of TDS.