Tax Deducted At Source (TDS) Under Section 194 C And 194 I (Practical)

1.      Provisions relating to time when tax is to be deducted at source from payment to resident-contractors 

Illustration

Mr. Kapoor, the proprietor of Kapoor & Co., gave an annual maintenance contract (AMC) for maintenance of office furniture to Mr. Soham on a charge of Rs. 2,52,000. As per the agreed terms, Mr. Kapoor has to make a payment of Rs. 2,00,000 in advance and the balance is to be paid at the time of completion of the AMC. Mr. Kapoor intimated Mr. soham that he will be deducting tax on the amount of advance. However, Mr. Soham argued that there was no need to deduct tax at the time of payment of advance. Tax was to be deducted only when the bill of the contract work would be raised by him. Is the contention of Mr. Soham correct?

Solution

As per section 194C, tax is to be deducted at the time of credit of sum to the account of the contractor or at the time of payment thereof in cash or by issuance of a cheque or draft or by any other mode, whichever is earlier. Considering the above provisions, advance of Rs. 2,00,000 will be liable to TDS and the argument of Mr. Soham is not correct.

Note: In the above case the provisions are discussed considering a specific case of section 194C. The above mentioned provisions (i.e., deduction of tax at the time of payment or credit, whichever is earlier) will apply to all the payments liable to TDS, viz., interest other than interest on securities (section 194A), commission/brokerage (section 194H), rent (section 194I), fees for professional/technical services (section 194J), etc.

In case of salary liable to TDS under section 192, tax is to be deducted at the time of actual payment of salary and, hence, if salary is paid in advance, then tax is to be deducted from advance salary. However, no tax is to be deducted from salary which is not paid but is credited to the account of the employee. In such a case tax will be deducted at the time of payment of salary.

2.      Rates of deduction of tax from payment to resident-contractors

Illustration

SM Corporation, a partnership firm of Mr. Kumar and Mr. Kapoor, gave a catering contract on the occasion of celebration party on completion on 25 years of their partnership to Mr. Soham. The total payment to be made for the catering contract is Rs.5,84,000. Entire payment has 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 an HUF.

        @ 2% when the contract payment is being made or credit is being given to any person other than an individual or an HUF.

In this case the contractor is Mr. Soham, i.e., an individual. Hence, TDS would apply @ 1%. Total payment to be made is Rs. 5,84,000, TDS @ 1% will come to Rs. 5,840.

Suppose in the above case the contract is given to SM Pvt. Ltd. instead of Mr. Soham, then the amount of TDS would come to Rs. 11,680, being @ 2% on Rs. 5,84,000.

Illustration

Mr. Raja is running a garment factory and his turnover for the previous year 2011-12 was Rs. 2,52,00,000. During the previous year 2012-13, he gave an annual maintenance contract to SM Pvt. Ltd. for the maintenance of the furniture of factory. The annual contract payments will amount to Rs. 1,84,000. 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 be deducted @ 2% and not @ 1%. Thus, the contention of the director is incorrect.

3.      Individual or HUF not to deduct tax if the payment or amount credited to contractor is for personal use

Illustration

Mr. Kumar is running a garment factory. His turnover for the previous year 2011-12 was Rs. 2,52,00,000. During the year 2012-13, he gave a contract to construct his residential bungalow. The contract payment to be made for construction of the bungalow was Rs. 2,52,000. Mr. Kumar intimated to the contractor that he would 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 an individual or any member of HUF. In this case, the contract payment was towards construction of personal residential bungalow of Mr. Kumar and, hence, there was no requirement of deduction of tax at source. Thus, the argument of the contractor is correct.

4.      No tax is to be deducted at source if single payment does not exceed Rs. 30,000 and the aggregate payment does not exceed Rs. 75,000

Illustration

Mr. Kumar, the proprietor of Kumar& Co., gave an annual maintenance contract for maintenance of office air-conditioners to Mr. Shan. As per the agreed terms, the payments to be made to Mr. Shan were as follows:

        Rs. 25,200 to be paid on 5-5-2012.

        Rs. 8,400 to be paid on 30-9-2012.

        Rs. 12,800 to be paid on 17-10-2012.

        Rs. 19,800 to be paid on 23-3-2013.

Mr. Kumar intimated to Mr. Shan that at the time of payment in the month of March, 2013 he would be deducting tax @ 1% since the total payment exceeded Rs. 30,000. However, Mr. Shan argued that payment made to him would not attract TDS since none of the payment exceeded Rs. 30,000 and the total payment would not exceed Rs. 75,000. Is the contention of Mr. Shan 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, all 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. Shan. Thus, the argument of Mr. Shan is correct.

Illustration

Mr. Kumar, the proprietor of Kumar & Co., gave an annual maintenance contract for maintenance of office furniture to Mr. Soham. As per the agreed terms, the payment to be made to Mr. Soham was as follows:

        Rs. 44,000 to be paid in October, 2012.

        Rs. 30,800 to be paid in February, 2013.

Mr. Kumar intimated to Mr. Soham that at the time of payment in the month of February, he would be deducting tax @ 1% from the payment to be made to him. However, Mr. Soham 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. Soham 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. Soham is not correct. Moreover, Mr. Kumar will have to deduct tax in October, 2012 also.

Illustration

Mr. Raja, the proprietor of Raja & Co. gave an annual maintenance contract for maintenance of office furniture to Mr. Shan. As per the agreed terms, the payments to be made to Mr. Shan were as follows:

        Rs. 18,484 to be paid in October, 2012.

        Rs. 13,264to be paid in December, 2012.

        Rs. 52,252to be paid in March, 2013.

Mr. Raja deducted tax on the entire amount of Rs. 84,000. Entire tax was deducted from the last payment of Rs. 52,252. However, Mr. Shan argued that payment made to him exceeded Rs. 75,000, hence, TDS would apply but it would not apply to entire payment of Rs. 84,000, but would apply only to the payment exceeding Rs. 75,000 (i.e., only on Rs. 9,000). Is the contention of Mr. Shan 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. Shan is not correct and Mr. Raja is correct in deduction of TDS on the entire payment of Rs. 84,000.

In this case payment is to be made to Mr. Shan who is an individual. Hence, tax will be deducted @ 1%. TDS will come to Rs. 840 (1% of Rs. 84,000). Suppose in this case the payee is a company, tax will be deducted @ 2%(i.e., Rs. 1,680).

5.      Definition of “Work” given under section 194C

Illustration

SM Corporation, a partnership firm of Mr. Kumar and Mr. Kapoor, gave a works contract to Mr. Shan for manufacturing of the goods as per their specifications from the raw-materials to be supplied by SM Corporation. The total contract payment was agreed at Rs. 2,52,000. SM Corporation intimated Mr. Shan to produce his PAN, since they will be deducting tax @ 1% from the contract payments. Mr. Shan 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 Mr. Shan 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 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 SM Corporation, i.e., the customer only and not any outsider, hence, the activity was liable to TDS. Thus, the argument of Mr. Shan is not correct.

Illustration

SM Corporation, a partnership firm of Mr. Kumar and Mr. Kapoor, gave a work contract to Mr. Shan for manufacturing the goods as per their specifications. The raw-materials required for manufacturing the goods were to be acquired by Mr. Shan on his own account from the market. The total contract payment was agreed at Rs. 5,52,000. SM Corporation intimated to Mr. Shan 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 Mr. Shan 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 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.

In the above case the goods were to be manufactured from the raw-materials acquired by Mr. Shan from person other than SM Corporation (i.e., person other than the customer), hence, the activity would not be liable to TDS. Thus, the argument of the contractor is correct.

Illustration

SM Corporation, a partnership firm of Mr. Kumar and Mr. Kapoor, gave a catering contract on the occasion of celebration party on completion of 25 years of their partnership to Mr. Soham. The total payment to be made for the catering contract was Rs. 8,25,000. The firm intimated Mr. Soham that they would be deducting tax @ 1% from the contract payments. Mr. Soham 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 catering contract was not covered under the scope of section 194C. Is the argument of Mr. Soham 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 programs 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 materials purchased from such customer and not any other person

Thus, the argument of Mr. Soham is not correct and TDS will apply in respect of catering contracts.

6.      Time-limit of deposit of TDS to the credit of Central Government

Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,84,00,000). He made a payments of Rs. 2,52,000 (for the previous year 2012-13) to Mr. Shan for job work contract in March, 2013 and also deducted tax at @ 1% while making the payment. Mr. Raja does not know the time-limit up to which he can deposit the tax with Government. Advise him in this regard.

Solution

As per rule 30, time-limit of deposit of TDS with the Government is as follows:

Hence, Mr. Raja can deposit the TDS with the Government on or before 30th April, 2013.

7.      Provisions relating to the applicability of Form No. 16A and time-limit of issuance of TDS certificate in Form No. 16A

Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,84,00,000). He made payments of Rs. 84,000 during each quarter of the previous year 2012-13 to Mr. Shan for job work contract. Mr. Raja deducted tax at @ 1% while making the payment and also deposited the TDS with the Government within the time-limit prescribed under rule 30. However, he does not know the Form No. in which TDS certificate is to be issued and time-limit within which he can issue a TDS certificate. Advise Mr. Raja in this regard.

Solution

In case of payments other than salary, TDS certificates are to be issued on quarterly basis in Form No.16A.

As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by following dates:

Mr. Raja can issue TDS certificate in Form No. 16A within 30 days from the end of each quarter in respect of quarter April to June, July to September and October to December. However, in respect of quarter January to March he can issue TDS certificate up to 30th May, 2013.

8.      Provisions relating to issuance of TDS certificate

Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,84,00,000). He makes payments of Rs. 84,000 during each quarter of the previous year 2012-13 to Mr. Shan for job work contract. Mr. Raja deducted tax at @ 1% while making the payment and also deposited the TDS with the Government within the time-limit prescribed under rule 30. However, he does not know how to generate a TDS certificate. Advise him in this regard.

Solution

As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012.

The certificate so issued can be authenticated either by using digital signature or manual signature.

9.      Meaning of “Rent” and applicability of section 194 I in case of lease, sub-lease, tenancy or any other agreement or arrangement for use of specific assets

Illustration

Kapoor & Co. is a proprietorship of Mr. Kapoor (turnover during the preceding year was Rs. 1,84,00,000). For the previous year 2012-13, the firm has to pay Rs. 6,48,000 towards rent of office building. The accountants of 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 office building. TDS is applicable only on rent of factory 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 office building also. Hence, the argument of the landlord is not correct.

Illustration

Kapoor & Co. is a proprietorship of Mr. Kapoor (turnover during the preceding year was Rs. 1,84,00,000). For the previous year 2012-13, the firm has to pay Rs. 2,52,000 towards rent of the machineries. The machineries are taken on rent from Mr. Kumar, who, in turn, has taken the same on rent from Mr. Raja. The accountant of the firm intimated to Mr. Kumar that the firm will be deducting tax from the rent @ 2%. Mr. Kumar argued that as per section 194I there is no requirement to deduct tax from rent, if the payee is not the owner of the machineries. TDS is applicable only if the rented property is owned by the person from whom the property is rented. Is the contention of Mr. Kumar 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. Kumar. The argument of Mr. Kumar is not correct.

10.    Rates of deduction of tax from rental payments

 Illustration

Kapoor & Co. is a proprietorship of Mr. Kapoor (turnover during the preceding year was Rs. 2,52,00,000). For the previous year 2012-13, the firm has to pay Rs. 1,84,000 towards rent of its office building. The accountant 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 building. 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%.

Illustration

Kapoor & Co. is a proprietorship of Mr. Kapoor (turnover during the preceding year was Rs. 1,52,00,000). For the previous year 2012-13, the firm has to pay Rs. 1,52,000 towards rent of its equipments. The accountant 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 in respect of rent of any other items, tax is to be deducted@ 2%. Thus, in the above case the owner is correct. In this case tax will be deducted @ 2%.

Illustration

SM Corporation is a partnership firm. For the previous year 2012-13, the firm has to pay Rs. 2,52,000 towards rent of its office building. The accountant 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 landlord 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 accountant as well as the land lord, both were incorrect. In this case tax will have to be deducted @ 10%.

11.    No deduction of tax at source from rental payments if the aggregate amount does not exceed Rs. 1,80,000

 Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,52,52,000). For the previous year 2012-13, he has to pay rent of office building of Rs. 84,000 to Mr. Shubham. He informed Mr. Shubham that he will be deducting tax @ 10% from the rent. Mr. Shubham argued that there was no requirement of deducting tax in respect of rent if the amount of rent does not exceed Rs. 1,50,000. Is the contention of Mr. Shubham 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 were incorrect, since Mr. Raja wanted to deduct tax from rent even if the rent was below Rs. 1,80,000 and Mr. Shubham argued that no tax was to be deducted if the annual rent was below Rs. 1,50,000 (the limit is Rs. 1,80,000).

Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,52,52,000). For the previous year 2012-13, he has to pay rent of office building of Rs. 1,92,000 to Mr. Shan. He informed Mr. Shan that he will be deducting tax @ 10% from entire rent. Mr. Shan 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. 12,000. Is the contention of Mr. Shan 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 amount. Thus, the contention of Mr. Shan is not correct.

12.    Provisions relating to deduction of tax from rental payments excluding the amount of service tax

 Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 1,84,52,000). For the previous year 2012-13, he has to pay rent of office building of Rs. 2,84,000 to Mr. Soham. In addition to rent of Rs. 2,84,000, the landlord demanded service tax of Rs. 35,102. Total payment to be made to Mr. Soham (including service tax) amounted to Rs. 3,19,102. Mr. Raja informed Mr. Soham that he would be deducting tax @ 10% from entire payment of Rs. 3,19,102 including service-tax. Mr. Soham argued that there was no requirement of deducting tax in respect of service tax. TDS would apply only on Rs. 2,84,000. Is the contention of Mr. Soham correct?

Solution

Yes, the contention of Mr. Soham is correct. In respect of rental payments, tax is to be deducted on the amount of rent excluding service tax.

13.    Provisions relating to inclusion/exclusion of amount of deposits while deducting tax from rental payments

Illustration

Mr. Raja is running a proprietary business under the name of Raja& Co. (turnover during the preceding year was Rs. 184,52,000). For the previous year 2012-13, he has to pay rent of office building of Rs. 2,52,000 to Mr. Shivam. In addition to rent of Rs. 2,52,000, he has to pay a non-refundable deposit of Rs. 3,84,000. He informed Mr. Shivam that he would be deducting tax @ 10% from rent and deposit. Mr. Shivam argued that there was no requirement of deducting tax in respect of non-refundable deposit and TDS would apply only in respect of refundable deposits. Is the contention of Mr. Shivam correct?

Solution

The contention of Mr. Shivam is not correct. In respect of refundable deposits no TDS will apply. TDS will apply only in respect of non-refundable deposits. Hence, Mr. Raja is required to deduct tax @ 10% from rent as well as from non-refundable deposits.

14.    Time-limit of deposit of tax to the credit of the Central Government

 Illustration

Mr. Raja is running a factory (turnover during the preceding year was Rs. 1,84,00,000). He pays rent of factory building of Rs. 30,000 (for the month of March, 2013) to Mr. Shan in February, 2013 and deducted tax at @ 10% while making the payment. However, Mr. Raja does not know the time-limit up to which he can deposit the tax with the Government. Advise him in this regard.

Solution

As per rule 30, time-limit of deposit of TDS with the Government is as follows:

Hence, Mr. Raja can deposit the TDS with the Government on or before 7thMarch, 2013.

15.    Provisions relating to the applicability of Form No. 16A and time-limit of issuance of TDS certificate in Form No. 16A

Illustration

Mr. Raja is running a factory (turnover during the preceding year was Rs. 1,84,00,000). He paid monthly rent of factory building of Rs. 84,000(for the previous year 2012-13) to Mr. Shan. Mr. Raja deducted tax at @ 10% while making the payment and also deposited the TDS with the Government within the time-limit prescribed under rule 30. However, he does not know the Form No. in which TDS certificate is to be issued and time-limit within which he can issue a TDS certificate. Advise Mr. Raja in this regard.

Solution

In case of payments other than salary, TDS certificates are to be issued on quarterly basis in Form No.16A.

As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by following dates:

Hence, Mr. Raja can issue TDS certificate in Form No. 16A within the following time-limits:

16.    Provisions relating to issuance of TDS certificate

 Illustration

Mr. Raja is running a factory (turnover during the preceding year was Rs. 1,84,00,000). He pays monthly rent of factory building of Rs. 84,000(for the previous year 2012-13) to Mr. Shan. Mr. Raja has deducted tax at @ 10% while making the payment and also deposited the TDS with the Government within the time-limit prescribed under rule 30. However, he does not know how to generate a TDS certificate. Advise him in this regard.

Solution

As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using digital signature or manual signature.