Day 14

TDS on contract payments Case 1. Mr. A is running a brass factory and his turnover for the year 2011-12 was Rs. 1,84,00,000. During the year 2012-13, he gave an annual maintenance contract to ABC Pvt. Ltd. for the maintenance of the factory machinery. The annual contract payments will amount to Rs. 1,90,000. He informed the director of the company that he will be deducting tax at source from the contract payments @ 2%. The director argued that an individual making contract payment has to deduct tax @ 1% and not @ 2%. The rate of 2% applies only if the person making the payment is other than an individual. Is the contention of the director correct? Solution As per section 194C, in respect of contract payments to be made to any individual or a HUF (and not by an individual or HUF) will be liable to TDS @ 1%. In other words, the rate of @ 1% will apply only in a case where the payee is an individual/HUF. In this case, the payee is a company and TDS will apply @ 2% and not @ 1%. Thus, the contention of the director is incorrect. Case 2. Mr. A is running a brass factory. His turnover for the year 2011-12 was Rs. 1,84,00,000. During the year 2012-13, he gave a contract to construct his residential bungalow. The contract payments to be made for construction of the bungalow were Rs. 84,000. Mr. A intimated to the contractor that he will be deducting tax @ 1% from the contract payments. The contractor argued that the provisions of section 194C do not apply in case of contract payments made by an individual/ HUF for his/its personal purposes. Is the contention of the contractor correct? Solution As per section 194C, an individual or HUF will not be liable to deduct tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of HUF. In this case, the contract payments were towards construction of personal residential bungalow of Mr. A and, hence, there was no requirement of deduction of tax at source. Thus, the argument of the contractor is correct. Case 3. Mr. X, the proprietor of X & Co., gave an annual maintenance contract for maintenance of office air-conditioners to Mr. Y. As per the agreed terms, the payment to be made to Mr. Y were as follows : Rs. 18,400 to be paid in December 2012. Rs. 20,000 to be paid in March 2013. Mr. X intimated to Mr. Y that at the time of payment in the month of March, he would be deducting tax @ 1% since the total payment exceeded Rs. 30,000. However, Mr. Y argued that payment made to him would not attract TDS since none of the single payment exceeded Rs. 30,000 and the total payment would not exceed Rs. 75,000. Is the contention of Mr. Y correct? Solution

As per section 194C, no TDS will apply if single payment does not exceed Rs. 30,000 and the aggregate payment made during the year does not exceed Rs. 75,000. In this case, both the payments were below Rs. 30,000 and the total payment to be made during the year was below Rs. 75,000. Hence, there was no requirement to deduct tax from the contract payments to be made to Mr. Y. The argument of Mr. Y is correct. Case 4. Mr. X, the proprietor of X & Co., gave an annual maintenance contract for maintenance of office air-conditioners to Mr. Y. As per the agreed terms, the payment to be made to Mr. Y was as follows : Rs. 31,000 to be paid in December 2012. Rs. 31,000 to be paid in March 2013. Mr. X intimated to Mr. Y that at the time of payment in the month of March, he would be deducting tax @ 1% from the payment to be made to him. However, Mr. Y argued that payment made to him would not attract TDS, since the total payment would not exceed Rs. 75,000. Is the contention of Mr. Y correct? Solution As per section 194C, no TDS will apply if single payment does not exceed Rs. 30,000 and the aggregate payment made during the year does not exceed Rs. 75,000. In this case, both the payments exceed Rs. 30,000 and, hence, would attract TDS. The argument of Mr. Y is not correct. Moreover, Mr. X will have to deduct tax in December 2012 also. Case 5. Mr. X, the proprietor of X & Co. gave an annual maintenance contract for maintenance of office air-conditioners to Mr. Y. As per the agreed terms, the payments to be made to Mr. Y were as follows : Rs. 25,000 to be paid in December 2012. Rs. 25,000 to be paid in January 2013.

Rs. 40,000 to be paid in March 2013. Mr. X deducted tax on the entire amount of Rs. 90,000. Entire tax was deducted from the last payment of Rs. 40,000. However, Mr. Y argued that payment made to him exceed Rs. 75,000, hence, TDS would apply but it would not apply to entire payment of Rs. 90,000, but would apply only to the payment exceeding Rs. 75,000 (i.e., only on Rs. 15,000). Is the contention of Mr. Y correct? Solution As per section 194C, no TDS will apply if single payment does not exceed Rs. 30,000 and the aggregate payment made during the year does not exceed Rs. 75,000. Once the payment exceeds Rs. 75,000, the entire amount will be liable to TDS. Thus, in this case, the argument of Mr. Y is not correct and Mr. X is correct in deduction of TDS on the entire payment of Rs. 90,000. In this case, payment is to be made to Mr. Y who is an individual, hence, tax will be deducted @ 1%. TDS will come to Rs. 900 (1% of Rs. 90,000). Suppose in this case the payee is a company, tax will be deducted @ 2% (i.e., Rs. 1,800).

Case 6. AB & Co., a partnership firm of A and B, gave a work contract to Mr. Z for manufacturing the goods as per their specifications from the raw-materials to be supplied by AB & Co. The total contract payment was agreed at Rs. 84,000. AB & Co. intimated Mr. Z to produce his PAN, since they will be deducting tax @ 1% from the contract payments. The contractor argued that there was no need to deduct tax in respect of contract of manufacturing of goods, since it was a contract of sale of goods and not a contract for any work or service. Is the contention of the contractor correct? Solution The definition of work as given in section 194C includes the activity of manufacturing or supplying any product according to the requirement or specification of a customer by using material purchased from such customer. However, work will not include the activity of manufacturing or supplying any product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. Thus, the activity of manufacturing/supplying any product as per the requirement of other person will be liable to TDS, if such product is manufactured from the raw-materials provided by the person giving the contract. If such product is manufactured from rawmaterials purchased from a person other than the person giving the contract, then the activity will not be liable to TDS. In the above case, the goods were to be manufactured from the raw-materials supplied by AB & Co. (i.e., the customer only) and not any outsider, hence, the activity was liable to TDS. The argument of the contractor is not correct. Case 7. AB & Co., a partnership firm of A and B, gave a work contract to Mr. Z for manufacturing the goods as per their specifications. The raw-materials required for manufacturing the goods were to be acquired by Z on his own account from the market. The total contract payment was agreed at Rs. 4,84,000. AB & Co. intimated to Mr. Z to produce his PAN, since they would be deducting tax @ 1% from the contract payments. The contractor argued that there was no need to deduct tax in respect of contract of manufacturing of goods, since it was a contract of sale of goods and not a contract for any work or service. Is the contention of the contractor correct? Solution The definition of work as given in section 194C includes the activity of manufacturing/ supplying any product according to the requirement or specification of a customer by using material purchased from such customer. However, work will not include the activity of manufacturing/supplying any product according to the requirement or specification of a customer by using material purchased from a person, other than such customer. Thus, the activity of manufacturing/supplying of any product as per the requirement of other person will be liable to TDS, if such product is manufactured from the rawmaterials provided by the person giving the contract. If such product is manufactured from raw-materials purchased from a person other than such customer, then the activity will not be liable to TDS.

In the above case, the goods were to be manufactured from the raw-materials acquired by Z from person other than AB & Co. (i.e., person other than the customer), hence, the activity would not be liable to TDS. The argument of the contractor is correct. Case 8. AB & Co., a partnership firm of A and B, gave an advertising contract for marketing their product to Mr. Z. The total payment to be made for the advertising contract was Rs. 5,84,000. The firm intimated the contractor that they would be deducting tax @ 1% from the contract payments. The contractor argued that, as per section 194C, TDS applies only in respect of contract for carrying out any work (including supply of labour for carrying out any work) and advertisement contract is not covered under the scope of section 194C. Is the argument of the contractor correct? Solution As per section 194C, TDS applies in respect of contract for carrying out any work (including supply of labour for carrying out any work). It is specifically provided in section 194C that work will include following activities : Advertising Broadcasting and telecasting, including production of programmes for such broadcasting or telecasting. Carriage of goods or passengers by any mode of transport other than by railways. Catering

Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer and not any other person. Thus, the argument of the contractor is not correct and TDS will apply in respect of advertising contracts. Case 9. AB & Co., a partnership firm of A and B, gave an advertising contract for marketing their product to Mr. Z. The total payment to be made for the advertising contract was Rs.8,40,000. Entire payment had to be made in advance before commencement of contract. Determine the TDS liability of the firm. Solution As per section 194C tax is to be deducted as follows : @ 1% when the contract payment is being made or credit is being given to an individual or a HUF.

@ 2% when the contract payment is being made or credit is being given to any person other than an individual or a HUF. In this case, the contractor was Mr. B, i.e., an individual, hence, TDS would apply @ 1%. Total payment to be made was Rs. 8,40,000, TDS @ 1% will come to Rs. 8,400. Suppose, in the above case, the contract was given to XYZ Pvt. Ltd. instead of Mr. Z, then the amount of TDS would come to Rs. 16,800, being @ 2% on Rs. 8,40,000.

Case 10. Mr. A was running a proprietary business under the name of A & Co. (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, he had to pay contract payments of Rs. 1,84,000 to Mr. X for job work contract. In addition to contract payments of Rs. 1,84,000, the job worker demanded service tax of Rs. 22,742. Total payment to be made to Mr. X (including service tax) amounted to Rs. 2,06,742. Mr. A informed Mr. X that he would be deducting tax @ 1% from entire payment of Rs. 2,06,742 including service-tax. Mr. X argued that there was no requirement of deducting tax in respect of service tax. TDS would apply only on Rs. 1,84,000. Is the contention of Mr. X correct? Solution No, the contention of Mr. X is not correct. In respect of contract payments, tax is to be deducted on the amount of contract charges including service tax.

TDS on rent
Case 11. X & Co. is a proprietorship of Mr. X (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, the firm will pay Rs. 4,84,000 towards rent of factory building. The accounts manager of to the firm intimated the landlord that the firm will be deducting tax from the rent @ 10%. The landlord argued that, as per section 194I there is no requirement to deduct tax from rent of factory building, TDS is applicable only on rent of office building. Is the contention of landlord correct? Solution As per section 194I, tax is to be deducted on any amount paid towards rent. For the purpose of section 194I, rent means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any : Land Building (including factory building) Land appurtenant to a building (including factory building) Machinery Plant Equipment Furniture Fittings The above items may or may not be owned by the payee. Thus, tax is to be deducted in respect of rent for factory building also. The argument of the landlord is not correct. Case 12. X & Co. is a proprietorship of Mr. X (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, the firm will be paying Rs. 4,84,000 towards rent of the equipments. The equipments are taken on rent from Mr. A, who, in turn has taken the same on rent from Mr. Y. The accounts manager of the firm intimated to Mr. A that the firm will be deducting tax from the rent @ 2%. Mr. A argued that as per section 194I

there is no requirement to deduct tax from rent, if the payee is not the owner of the equipments. TDS is applicable only if the rented property is owned by the person from whom the property is rented. Is the contention of Mr. A correct? Solution It is specified in section 194I that the rented property may or may not be owned by the person from whom the property is taken on rent. Hence, in this case, the firm has to deduct tax from the rent to be paid to Mr. A and the argument of Mr. A is not correct. Case 13. X & Co. is a proprietorship of Mr. X (turnover during the preceding year was Rs. 2,84,00,000). For the year 2012-13, the firm will be paying Rs. 4,84,000 towards rent of its office furniture. The accounts manager of the firm intimated to the owner that the firm will be deducting tax from rent @ 10%. The owner argued that, as per section 194I, tax is to be deducted @ 2% in respect of rent of furniture. Is the contention of the owner correct? Solution As per section 194I, in respect of rent of land or building or furniture or fittings tax is to be deducted @ 10%. Thus, in the above case, the owner is incorrect. In this case tax will be deducted @ 10%. Case 14. X & Co. is a proprietorship of Mr. X (turnover during the preceding year was Rs. 2,84,00,000). For the year 2012-13, the firm will be paying Rs. 4,84,000 towards rent of its equipments. The accounts manager of the firm intimated to the owner that the firm will be deducting tax from rent @ 10%. The owner argued that as per section 194I tax is to be deducted @ 2% in respect of rent of equipments. Is the contention of the owner correct? Solution As per section 194I, in respect of rent of land or building or furniture or fittings, tax is to be deducted @10% and @ 2% in respect of rent of any other item. Thus, in the above case, the owner is correct. In this case, tax will be deducted @ 2%. Case 15. Mr. A is running a proprietary business under the name of A & Co. (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, he has to pay rent of factory building of Rs. 1,25,200 to Mr. X. He informed Mr. X that he will be deducting tax @ 10% from the rent. Mr. X argued that there was no requirement of deducting tax in respect of rent if the amount of rent did not exceed Rs. 1,50,000. Is the contention of Mr. X correct? Solution As per section 194I, there is no requirement of deduction of tax from rent, if aggregate amount of rent to be paid during the year to a person does not exceed Rs. 1,80,000. In this case, the aggregate amount of rent was below Rs. 1,80,000, hence, there was no requirement of deducting tax from such rent. In this case, both the parties are incorrect, since Mr. A wants to deduct tax from rent even if the rent is below Rs. 1,80,000 and Mr. X argued that no tax is to be deducted if the annual rent is below Rs. 1,50,000 (the limit is Rs. 1,80,000).

Case 16. Mr. A is running a proprietary business under the name of A & Co. (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, he has to pay rent of factory building of Rs. 1,84,000 to Mr. X. He informed Mr. X that he will be deducting tax @ 10% from entire rent. Mr. X argued that there was no requirement of deducting tax in respect of entire rent, TDS would apply only in respect of rent in excess of Rs. 1,80,000, i.e., only on Rs. 4,000. Is the contention of Mr. X correct? Solution As per section 194I, tax is to be deducted from rent, if aggregate amount of rent to be paid during the year to a person exceeds Rs. 1,80,000. If the amount exceeds Rs. 1,80,000, then tax is to be deducted on the entire amount and not only on the excess. Thus, the contention of Mr. X is not correct. Case 17. Mr. A is running a proprietary business under the name of A & Co. (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, he has to pay rent of factory building of Rs. 1,84,000 to Mr. X. In addition to rent of Rs. 1,84,000, the landlord demanded service tax of Rs. 22,742. Total payment to be made to Mr. X (including service tax) amounted to Rs. 2,06,742. Mr. A informed Mr. X that he would be deducting tax @ 10% from entire payment of Rs. 2,06,742 including service-tax. Mr. X argued that there was no requirement of deducting tax in respect of service tax. TDS would apply only on Rs. 1,84,000. Is the contention of Mr. X correct? Solution Yes, the contention of Mr. X is correct. In respect of rental payments, tax is to be deducted on the amount of rent excluding service tax. Case 18. Mr. A is running a proprietary business under the name of A & Co. (turnover during the preceding year was Rs. 2,52,00,000). For the year 2012-13, he has to pay rent of factory building of Rs. 1,84,000 to Mr. X. In addition to rent of Rs. 1,84,000, he has to pay a refundable deposit of Rs. 2,00,000. He informed Mr. X that he would be deducting tax @ 10% from rent and deposit. Mr. X argued that there was no requirement of deducting tax in respect of refundable deposit and TDS would apply only in respect of non-refundable deposits. Is the contention of Mr. X correct? Solution The contention of Mr. X is correct. In respect of refundable deposits no TDS will apply. TDS will apply only in respect of non-refundable deposits. Case 19. AB & Co. is a partnership firm. For the year 2012-13, the firm will be paying Rs. 4,84,000 towards rent of its office building. The accounts manager of the firm intimated to the landlord that the firm would be deducting tax from rent @ 2%. The landlord argued that, as per section 194I, tax is to be deducted @ 1% if the person to whom rent is to be paid is an individual. Is the contention of the land lord correct? Solution As per section 194I, in respect of rent of land or building or furniture or fittings, tax is to be deducted @ 10%. Thus, in the above case, accounts manager as well as the land lord, both were incorrect. In this case, tax will have to be deducted @ 10%.