TDS to be cut from advance paid under works contract

Amit Bhagat, Jayanta Kalita Posted online: Friday, Jan 31, 2014 at 0000 hrs
Our company is Gujarat-based and we propose to set up a power generation plant. We have engaged a contractor for a lumpsum consideration for undertaking erection, commissioning, installation etc. As per the agreement with our contractor, we are obliged to pay an advance of 10% of the total agreed consideration immediately post-execution of the agreement. Kindly let us know whether we are obligated to deduct works contract TDS (WC TDS) from the advance payments being made, even though no work has actually started at the proposed site.

Section 59B (3) (a) of the Gujarat VAT Act prescribes as follows: “Any person responsible for paying specified sale price to a contractor for carrying out any work in pursuance of a specified works contract, shall at the time of payment of the whole or part of the specified sale price, deduct from such price an amount at the rate as may be specified by the state government by notification in the official gazette of such payment as a tax on specified sales.”

On perusal of the above, it is clearly evident that a contractee is required to deduct WC TDS where: A contractee is responsible for making any payments of specified sale price to the contractor; and the payment is made by the contractee in pursuance of an existing works contract.

Thus, where any payment is made by a contractee to a contractor pursuant to an existing works contract and the payments is towards the specified sales price, the contractee is required to deduct WCT TDS therefrom.

In the instant case, we understand that the payment is an advance payment which has been fixed as a percentage of the total lumpsum consideration. Accordingly, the said payment is towards a portion of the agreed sale consideration.

Hence, basis the provisions highlighted above, WC TDS would be required to be deducted from the aforesaid advance payment.

Determination of transaction value

We are a manufacturer of automotive components. Recently, we were awarded a contract for supply of components to a subsidiary of a vehicle manufacturer. As per the contract, the components are purchased by the subsidiary at a discount. The quotation provided by us discloses the discount as a commission fee. No post-sale services are received by us from the subsidiary in lieu of the discount i.e. there is no flow back of consideration in lieu of the discount.

We understand that the goods are thereafter sold to the holding company (vehicle manufacturer) at full price. Kindly let us know whether we would be required to charge excise duty on the total price or the discounted price.

As per the excise law, generally, a manufacturer is required to pay excise duty on ‘transaction value’ of the manufactured goods. The definition of ‘transaction value’ provides that any amount payable as value of goods (whether in form of expenses such as warranty, commission, etc), excluding statutory taxes, constitutes transaction value.

In other words, all amounts payable towards sale consideration (whether directly or indirectly), constitutes the value at which excise duty is required to be paid. In this regard, it is also relevant to discuss the concept of ‘discount’.

The term discount has not specifically been defined under excise laws. Generally, a discount is referred to as a percentage deduction given from the sales price. Hence, any discount leads to a reduction in the price payable.

Since, there is a deduction in the ‘price payable’ and excise duty is liable to be paid on the sale consideration/ price payable for goods, the discount amount should also be excluded from the ‘transaction value’. In this regard, reference may also be made to Circular No.643/34/ 2002-Cx dated 1 July 2002 wherein it has been specifically provided that where a discount is passed on to an unrelated customer, it shall be allowed as deduction from the ‘transaction value’.

In the instant case, even though the discount amount has been termed as a ‘commission fee’ it is essentially a discount which has resulted in a reduction of the price payable. Accordingly, excise duty should be payable on the discounted value.

However, since the discount has been termed as a commission, the authorities may contend that the same is on account of services being carried by the subsidiary for you. In such a scenario, they may dispute this position.

The replies do not constitute professional advice. Neither EY nor FE is liable for any action taken on the basis of these replies. Readers may mail their queries to sme@expressindia.com