TDS deducted under 94J but engagement letter is of employment

[Deepak Bubna]

One tax payer filed ITR-3 claiming gross receipts under Income from Profession because the employer deducted TDS u/s 194J . However, the letter of engagement states that the tax payer was employee of the company. The tax payer did not register himself under service tax. The Service Tax department now wants to collect Service tax based on ITR filed and entries appearing in Form 26AS under the head 'Business or Profession'

[Amit Agrawal]

Merely 'engagement letter of employment' will not help the tax-payer when he himself said that he had provided professional services while filing his income tax return and when service receiver had also not treated him "employee' while deducting TDS.

[KASTURI SETHI]

Dear Querist,

Has the tax payer received show cause notice or a simple letter ? Can you post major contents of the SCN or letter ? Is tax payer able to establish that the nature of relationship was 'Master & Servant' ? Was it a typographical error mentioning the words 'professional income' instead of 'salary income' ? Terms and conditions of contract are very very important in this case. Is there any clause of 'hire & fire' in the contract or appointment letter ? Undoubtedly, the department will rely on the records of Income Tax Department and issue SCN. Only through litigation relief is possible. Case laws are available on this issue.It is a hard nut to crack but it is better to take decision for fighting the case instead of 'No decision' and sit silently.

[Deepak Bubna]

Sir,

The Tax payer received SCN. The letter of engagement clearly mentions the words "Employment", "Wages", "Employee" etc repeatedly wherefer reference to concerned party or the subject is required. Moot point here is, Can deducting tax u/s 194J and the tax payer filing his ITR as income from services over-ride employee employer relationship which has been brought in writing and make an employee a consultant ?

[KASTURI SETHI]

The department has very strong documentary evidences against the Noticee. The burden of proof is cast upon the Noticee/person who avails exemption from Service Tax in terms of the judgement of Supreme Court. It will be a long fight with the department. The matter may travel up to High Court.No hope for getting relief at the first stage (adjudicating stage).

Regarding the overriding effect of Income Tax Returns and 26AS, nothing can be said without examining the copy of the contract/appointment letter and other related records/proofs of the Noticee.

[Shilpi Jain]

Deduction of tax u/s 194J is a mistake by the deductor and not the service provide.

Taxation under ST cannot be decided basis the IT tax deduction though it would have persuasive value.

In this case the appointment letter clearly indicates that there is an employer employee relationship. There should be no ST liability.

[Deepak Bubna]

Thank you everyone for sparing your time and sharing your views. Immensely appreciated. :)

[Ravinesh Sinha]

Dedutor of TDS and deductee (ITR-3) shows same profession but one paper shows employee and employer relation ship. Test of the said relationship depends upon other deductions like PF etc. The noticee has to prove the relationship with coroborative docunents other wise the SCN will prevail upon

[DEV KUMAR KOTHARI]

As I understand, there is no definition of employer and employee in provisions of GST. In Income-tax Act also there are different heads of income for computation purposes to determine taxable income after allowing some relief and deductions and also denying some deductions though expenses may be incurred.

Therefore, general aspects related to employer and employee are to be considered. Tax deduction under particular provision or inclusion of income under any particular head under Income tax Act are not conclusive for GST/ services.

For employment, in context of service tax, essential aspects are responsibility and accountability to do some work and report progress. The work can be specified or can be unspecified. Accordingly there will be combination of work done and time reserved for doing such work. Reward will be for work and time both. In some situation even if no work is done or less work is done yet reward is basically dependent on time, and in some situations reward is fixed for work likely to be done and time reserved.

Work is done and reported from time to time to employer/ principal. Ultimate decision of employer will prevail and ultimate responsibility will be of the employer.

There must be relationship of principal and agent in such a manner and situation that the agent is responsible for doing some work and has to report to principal. He is not responsible to any other party in relation to work done by him. Ultimate responsibility in relation to such work is that of principal / employer and not of agent / employed person. In that case there is employer –employee relationship exists in the context of service tax or GST

However, when agent ( employed person) is having ultimate responsibility in relation to work done by him not only to employer but also to third parties, then employed person will be independent of employer and will be a service provider as independent person providing services.

Remuneration can be called by any name or nomenclature, it can be determined and discharged in any manner that will not be conclusive.

The accounting treatment , and disclosures in documents , incidental aspects which are specific to laws governing employment like PF, ESI, Gratuity, pension,profession tax etc. will be considered prima facie and main evidences of employment.

This is likely to be highly contentious issue if dispute arise.

[KASTURI SETHI]

Dear Sir,

Thanks a lot for providing more information on the issue. Really full of substance.

Employer-employee status disputed after TDS deduction; service tax liability hinges on contract terms and employment indicia. A taxpayer had TDS deducted under section 194J but possessed an engagement letter describing an employer-employee relationship(AI Summary)