Case Study Day 14
Transcript of Case Study Day 14
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Day 14
TDS on contract paymentsCase 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 bededucting 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, therate of @ 1% will apply only in a case where the payee is an individual/HUF. In thiscase, 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 notapply in case of contract payments made by an individual/ HUF for his/its personal
purposes. Is the contention of the contractor correct?
SolutionAs per section 194C, an individual or HUF will not be liable to deduct tax on the sumcredited 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 argumentof 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 tobe 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 paymentexceeded Rs. 30,000 and the total payment would not exceed Rs. 75,000. Is the
contention of Mr. Y correct?
Solution
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As per section 194C, no TDS will apply if single payment does not exceed Rs. 30,000and 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 thecontract 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 thatpayment 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 formaintenance 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 thepayment 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 bededucted @ 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).
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Case 6. AB & Co., a partnership firm of A and B, gave a work contract to Mr. Z formanufacturing 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 contractpayments. The contractor argued that there was no need to deduct tax in respect ofcontract 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 byusing material purchased from such customer. However, work will not include the
activity of manufacturing or supplying any product according to the requirement orspecification 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 raw-materials 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 byusing material purchased from such customer. However, work will not include the
activity of manufacturing/supplying any product according to the requirement orspecification 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 ofother 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 raw-materials purchased from a person other than such customer, then the activity
will not be liable to TDS.
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In the above case, the goods were to be manufactured from the raw-materials acquired byZ 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 advertisingcontract 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 ofadvertising 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 anindividual or a HUF.
@ 2% when the contract payment is being made or credit is being given to any personother 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.
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Case 10.Mr. A was running a proprietary business under the name of A & Co. (turnoverduring 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. Totalpayment to be made to Mr. X (including service tax) amounted to Rs. 2,06,742. Mr. Ainformed 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 wasRs. 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 firmwill 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 thepurpose 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 FittingsThe 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 rentof 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
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there is no requirement to deduct tax from rent, if the payee is not the owner of theequipments. 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 theperson 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 thefirm 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?
SolutionAs 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 wasRs. 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 isto 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 tobe 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 bededucting 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 norequirement 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).
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Case 16.Mr. A is running a proprietary business under the name of A & Co. (turnoverduring 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 ofdeducting tax in respect of entire rent, TDS would apply only in respect of rent in excessof 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, thelandlord 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 bededucting 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 bededucted 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 topay 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 payingRs. 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%. Thelandlord argued that, as per section 194I, tax is to be deducted @ 1% if the person towhom 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%.