Tds

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2012 A Company had entered into a contract with a proprietorship concern for providing Car Hire service for the period starting from Aug 2012 to Aug 13. The Company was however not satisfied with the services provided by the firm and decided to terminate the contract as specifically mentioned in the Contract. Whether it is required to deduct TDS on Compensation paid for termination of contract???

Please reply. Thanking you in Advance

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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15 April 2012 In case a single payment (>30000/) or t Total contract amounts+compensation (>75000) to the defaulting contractor exceeds the prescribed limits U/s 194C, you have to deduct TDS @ 1%.

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2012 Dear Sir

Is there any specific clause or any case law supporting this?

CA PRAVEEN SINGH

CA PRAVEEN SINGH (Expert)
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15 April 2012 YES AGREE WITH ABOVE..
TOTAL AMOUNT PAID WHETHER IN FORM OF CONTRACT AMOUNT & COMPENSATION BOTH ARE INCLUDED.IN CALCULATION LIMIT OF Rs 30000 of single bill or Rs 75000 annually.
Rate:-
TDS @ 1% For individual/huf,other than individual/huf.2%
TDS DEDUCTED U/S 194C.

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2012 Dear Experts

Section 194C states that

"Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein."

So as per this section TDS is to deducted for any work to be done as per Contract but here a compensation is being paid so whether TDS is to be deducted by the Company???

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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15 April 2012 "paying any sum" in the first line ...
It includes compensation in this case.

Querist : Anonymous

Querist : Anonymous (Querist)

15 April 2012 Sir I think we should read it as a sentence. The sentence also states that any payment for carrying of a WORK.

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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27 July 2025 Great discussion here! Let me clarify the position on **TDS on compensation paid for termination of a contract** under **Section 194C**:

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### Key points:

* **Section 194C** applies to "any sum" paid to a contractor for carrying out any work under a contract.
* The term **“any sum”** is broad and includes all payments made to the contractor related to the contract, including compensation or damages.
* However, the **payment must be for “carrying out any work”** under the contract.

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### Is compensation for termination covered?

* Compensation paid for termination is **not payment for carrying out the work** but rather **payment for breach or termination**.
* Therefore, strictly speaking, **compensation for termination is not covered under Section 194C** as it is not payment for execution of work.
* But if the contract or the compensation is treated as a part of contract payment for work done, then TDS may be applicable.

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### Practical view & judicial precedents:

* Many experts interpret **"any sum"** broadly and apply TDS on total payments including compensation.
* But legal rulings indicate that **compensation or damages** paid for termination **are not fees for carrying out work**, so may not attract TDS u/s 194C.
* Some cases have ruled that TDS is not deductible on damages/compensation as it’s not "payment for work".

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### Conclusion:

* **If compensation is purely for termination (damages) and not for work done, TDS under 194C may not be required.**
* But if the compensation is part of overall payment for work or part of the contract value, TDS should be deducted.
* To be safe and compliant, companies often deduct TDS on full amount including compensation, especially if the total crosses thresholds.

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Would you like me to help draft a formal note or suggest compliance steps based on your exact case?

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