Rajasthan High Court in the case of CIT(TDS) vs. Rajashthan Urban Infrastructure held that the words “any sum paid” used in Section 194J of the Income Tax Act, relate to “fees for professional services or fees for technical services”. In terms of the agreement, the amount of Service Tax was to be paid separately and was not included in the fees. Accordingly, it was decided that if Service tax is payable in addition to professional/ technical fees under the contract, the withholding tax will be restricted to the professional fees.
The CBDT vide CBDT Circular No. 1 of 2014 dated 13.01.2014 has decided in exercise of powers u/s 119 that wherever the terms of the agreement/ contract between the payer and the payee, the service tax component comprised in the amount is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.
The aforesaid circular should apply to all kinds of payments made to residents.