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TDS review for a consumer health products company

Engagement: The client was the Indian subsidiary of one of the Fortune 500 companies dealing in consumer health products, headquartered in the US. It is one of the world’s largest and most diverse medical devices and diagnostics companies. The client outsourced its Accounts Payable and Accounts Receivable functions to an Outside Service Provider (OSP). Their accounts were maintained on SAP. The client wanted to have a third-party review with regards to compliance with TDS provisions and the process followed by the OSP.


  • As the entire accounts payable function was outsourced, the decision regarding the applicability of TDS provisions was primarily being taken by the OSP. We visited the OSP’s office to understand the procedure followed for processing the payments and their understanding of the TDS provisions.
  • The complete data dump of accounts payable consisting of approximately 1,65,000 line items was verified and observations with respect to short/non-deductions were brought out in the report highlighting the risk in terms of potential cash outflow.


The quantification of short and non-deduction of TDS is presented in the following table:

No.            Particulars                            Gross Amount (INR)           TDS Amount (INR)           Transaction Count

 1            Non-deduction                               97,573,925                             (4,465,848)                        1,633

 2            Short-deduction                             41,347,615                             (2,869,267)                          486

                     Total                                        138,921,540                           (7,335,115)                        2,119

  • Physical verification of invoices was carried out for approximately 900 line items to verify the nature of the transaction and its booking with respect to the head of account, etc.
  • The Vendor Master was reviewed separately. Errors on account of PAN inconsistencies and issues with respect to the Vendor Master were separately identified and reported.


Value Delivered

  • We detected the possible disallowance under section 40(a)(ia) of the Income Tax Act, 1961 (ITA) so that the tax could be deducted and paid at the earliest. This could enable the company to claim the deduction of expenses in the future and also lower the liability of interest under section 201(1A) of the ITA (i.e. on liability to pay simple interest).
  • Identified the contentious nature of payments to enable the company to properly comply with TDS provisions in the future to avoid any disallowance of expenditure under section 40(a)(ia) of the ITA.
  • The payments on which applicability of TDS was in a grey area were brought in the report with recommendations for the stand to be taken to avoid litigation risk and to support the case of the company where it has defaulted in withholding taxes and where a contrary view was possible with relevant judicial precedents and/or circulars, if applicable. An illustrative list of such items is as follows:
  1. Purchase of computer software
  2. Payment of internet charges
  3. Payment for hotel charges
  4. Payment for consolidated invoices including reimbursement of expenses
  5. Reimbursement of expenses/sharing of common expense
  6. Consolidated invoice in respect of rent and charges for other services
  7. Payment of record-keeping charges, whether under 194C or 194I
  8. Stall hire charges, whether under 194C or 194I
  9. Payments to educational institutions for training, whether can be covered under 194J


  • Early detection of the cases of non/short-deduction could save the company from the possibility of levy of penalty under sections 271C/221 by making the payment of taxes at the earliest and proving it is bona fide before the revenue authorities.
  • Observations with respect to the process followed by the OSP were also captured in the report with recommendations on process improvements and controls to be put in place to avoid the risk of litigation and cash outlay on account of defaults.