Under the Income Tax Act, Section 194H deals with the TDS on commission other than insurance commission or brokerage, the threshold limits for deduction, applicability of such TDS, exceptions to the law and 194H TDS rate specifications. Let us now understand who is the deductor, who is the deductee, what is the threshold limit, what is the rate of TDS and important circulars and case laws pertaining to TDS on Commission.
Section 194H – Deductors and Deductees
TDS on commission u/s 194H has to be deducted on commission payments by any person other than an individual, HUF, AOP or BOI not having a total sales or gross receipts from business or profession excedding Rs. 1 crore or Rs.50 lakhs respectively in the preceding FY.
The deductee can be resident person.
Threshold Limit
This section is applicable when any of the deductors as explained above are liable to make a commission payment to any resident exceeding Rs. 15,000 during a financial year. Therefore, no TDS on commission will be deducted where the commission amount does not exceed Rs. 15,000.
When do we have deduct TDS u/s 194H?
TDS on commission u/s 194H has to be deducted:-
- At the time of crediting such sum to the account to the payee, or
- At the time of payment,
Whichever is earlier.
Even when the income is credited to any account in the nature of “Suspense Account” in the books of accounts of the payee, such credit shall be deemed to be credit of such income to the account of the payee.
Rate of TDS
The 194H TDS Rate Structure is as under:-
- Where the PAN of the deductee is available – 194H TDS Rate will be 5%. However, this rate has been reduced to 2% from 1st October, 2024.
- Where the PAN of the deductee is not available – 194H TDS Rate will be 20%.
Therefore, where the PAN of the deductee is not available, whether resident individual or HUF or any other resident, the 194H TDS rate will be 20%.
Time limit for TDS to be deposited
Once the TDS on commission has been deducted as per the rate structure as explained above, the deductor is required to be deposited as per the following timelines:-
- Payment has been made by or on behalf of the Government – TDS as to be deposited on the same day.
- Payment has been made for all cases other than the Government – TDS has to be deposited within 7 days from the end of the month in which the deduction has been made. However, for the month of March, the TDS has to be deposited on or before 30th April.
TDS on Commission paid to employees
In many companies, commission is paid to employees and employee directors as incentives, however, these commissions are not covered u/s 194H. Therefore, TDS on commission payments to employees and employee directors are covered u/s 192 i.e. the section pertaining to TDS on salary along with the other components of their salary.
Securities and Commodities transactions
TDS on commission u/s 194H will be deducted on brokerage and commission paid for commodities transactions. However, no TDS u/s 194H will be deducted on brokerage and commission on securities. This is because of a specific exclusion from the definition of commission/brokerage in securities.
The exclusion of brokerage/commission on securities from the TDS provisions under Section 194H comes from the interpretation that such payments, specifically for securities transactions, are governed under separate regulatory provisions, mainly the Securities Contracts (Regulation) Act, 1956. This act excludes them from the general purview of Section 194H, as securities markets have a different regulatory and taxation framework.
In the case of commodities transactions, if a person pays brokerage or commission for these transactions, TDS will be deducted. This is because commodities are not covered by the definition of “securities” under the Securities Contract (Regulation) Act, 1956, and are treated as goods or other tradable items.
Exemptions from TDS
There are certain exemptions for deduction of TDS on commission as explained below:-
- Commission payments to employees and employee directors
- Aggregate commission payments to a single party not exceeding Rs. 15,000 in a financial year
- Commission on insurance
- On an application filed by the deductee, if the Assessing Officer is satisfied that on the basis of the total income of the deductee, a lower rate of income tax or no deduction of income tax is justified, then the AO will issue a certificate than can be furnished to the deductors for lower or nil rates of tax deduction.
- Any payment of commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees.
- Brokerage and commission on securities
- Turnover Commission payable by the RBI to the Agency Banks.
Landmark Case – Vodafone Essar Cellular Limited (Kerala)
Discounts given on supply of sim cards and recharge coupons by a telecom company to its distributors under a prepaid scheme will be treated as commission to attract the TDS provisions u/s 194H. The distributor only acts as a middleman on behalf of the assessee for procuring and retaining customers and thus these discounts are covered under the meaning of commission.
CBDT Circular on TDS in advertising business
As per the CBDT Circular No. 715 dated 8th August, 1995, there are broadly two categories of payments involved in the advertising business –
- Payment by client to the advertising agency, and
- Payment by advertising company to the television channels/newspaper companies.
The CBDT circular clarifies that TDS u/s 194C will be applicable on payments by clients to the advertising agency as this is in the nature of works contract. However, no TDS u/s 194C will be applicable on payments by advertising company to the television channels/newspaper companies.
A common question is whether payments made to media houses through advertising agencies should be treated as commission or a contractual payment. The CBDT clarified that when an agency books an advertisement in print or electronic media on behalf of a client, the payment made by the client to the agency is considered a contractual payment and is subject to TDS under Section 194C.
However, if the media house gives a commission to the agency (for bringing in the client), such a commission is treated separately under Section 194 H, and the agency should deduct TDS on such commission.
These clarifications aim to streamline the process of tax deduction in the advertising industry and eliminate any confusion regarding the appropriate section and rate for different types of transactions.
Jagran Prakashan Ltd. v. DCIT (TDS) (2012)
Issue: Whether payments to advertising agents should be treated as “commission”?
Ruling: The Allahabad High Court held that since the relationship was principal-to-principal, TDS under Section 194H was not applicable.
CIT v. Singapore Airlines Ltd. (2013)
Issue: Whether discounts given to travel agents by airlines constitute “commission”?
Ruling: The Delhi High Court ruled that the discounts were trade discounts, not commission, so no TDS under Section 194H was applicable.