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TDS query on Staffing services

Naresh Kumar (Finance) (48 Points)

15 November 2010  

Hello - i have a query on TDS on staffing services, requesting your help.

We have agreed to take a person (Mr X) on contract from a HR consulting comopany (ABC&co) for a period of 12 months. We have also agreed to pay a salary of Rs. 100,000 to Mr X. ABC&co will pay this salary to Mr X and we will reimburse the amount to ABC&co.

ABC&Co said they will charge Rs. 10,000 towards their service fee and they will send us monthly 2 invoices as below:

a) Invoice on contract fee (Mr X Salary) ::: Rs. 100,000 + Rs. 10,300 (S.tx) :::: Rs. 110,300

b) Invoice on service fee ::: Rs  10,000+ Rs1,030 (S.tx) ::: Rs. 11,030

We said we will deduct TDS @ 10% on both the invoices and will make a net payment of Rs. 109,197 (TDS applied including S.tx)

ABC&Co says that we need to deduct only @ 2% on both the invoices (after excl. service tax). They say that if we deduct TDS on entire amount then effectively their outgo will be higher than their inflow and hence will have to charge addtional Rs. 10,000.

I do not want to pay any additional amount, but want to consider lowering the TDS value.

Can anyone help in resolving this issue please?

thanks

Naresh


 23 Replies

Aditya Maheshwari (CA in Practice) (35817 Points)
Replied 15 November 2010

Payments to recruitment agencies - Payments to recruitment agencies are in the nature of payments for services rendered and not for carrying out any work including supply of labour for carrying out any work. Hence provisions of section 194C will not apply. The payments will however be sub­jected to TDS under section 194J. Similar would be the position in respect of payments made by a company to a share registrar—Circular : No. 715, dated 8-8-1995.

Naresh Kumar (Finance) (48 Points)
Replied 15 November 2010

thank you Aditya sir. in the meantime i had spoken to a few of my friends working in Finance of Staffing companies who manages 10,000+ outsourced staff. what they had said is that their clients are deducting 2% on the entire invoice value u/s 194C and not 194J, since amount received is not a fee from recruitment services, but is considered as contract labor services.

more views on this matter will really help.

Rahul Agarwal (Future CA) (217 Points)
Replied 15 November 2010

Dear Naresh,


As per the nature of transaction, it is definitely a contractual obligation.

Therefore on Rs 110300 deduct u/s 194C

and on Rs 11030 (including Service Tax) u/s 194J

 

regards,

Rahul

Naresh Kumar (Finance) (48 Points)
Replied 15 November 2010

Rahul sir thx much.

avani (CA. in Industry) (21 Points)
Replied 15 November 2010

Naresh Kumarji , Aditya Maheshwari's answer to your question is correct.

TDS has to be deducted as per 194J & not 194 C. Pl. refer the circular as suggested by Adityaji.

A.Deepa (CA ) (195 Points)
Replied 16 November 2010

Recruitment agencies are different from Manpower supply agencies. Recruitment agencies recruit the people according to the requirements of the clients. However Manpower Supply agencies provides for both skilled & unskilled labour according to the requirements of the client on contract basis. In the former there is no binding contract between the recruited people and the recruitment agencies. Hence TDS has to be deducted u/s 194C for Manpower supply agencies.

1 Like

Naresh Kumar (Finance) (48 Points)
Replied 16 November 2010

avaniji and deepa mam thanks to both of you for your inputs. just to add, we are not paying any finder fee (meaning fee towards identifying the employees to the agency). it is only the monthly salary payable + markup.

i respect the views of all the members here. since it is going to be a policy decision for us, can any of the members let me know if they have actually known any staffing-outsourcing company having any policies w.r.t treatment for taxation.

as mentioned by me previously, i checked with 3~4 staffing companies and all of them have said it is at 2% on entire invoice value after (excluding Service Tax). these companies are having atleast 10,000+ people in their payroll.

 

 

A.Deepa (CA ) (195 Points)
Replied 16 November 2010

We are making payments to the following Manpower Suplply companies, whereby TDS u/s 194C i.e 2% were deducted.

  •  Globe Facility Management
  •  G4S Security Services

Naresh Kumar (Finance) (48 Points)
Replied 16 November 2010

deepa mam. thx that's quite authentic info. from you and thx for sharing.  is there any circular reference which you can provide for this pl? the only circular i have come across is the one mentioned by Aditya sir. i checked with our auditor / tax consultant and they are also quoting cir.715 and they are insisting 194J @ 10%.

info from you will be of immense help. thx again.

Aditya Maheshwari (CA in Practice) (35817 Points)
Replied 16 November 2010

I think is missed one part of the circular which is being reproduced now and will solve everyones query.

Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?

Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

Circular : No. 715, dated 8-8-1995.

So effectively what the agency is telling you is correct.

A.Deepa (CA ) (195 Points)
Replied 16 November 2010

Question No 29 of the circular 715:

Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?

Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.

 

Some of the case laws where the contracts includes the services of professionals/ technicians, TDS has been deducted u/s 194C.

Gujarat State Electricity Corporation Ltd.  v. ITO (2004) 82 TTJ (Ahd-Trib) 456

The appellant entered into an agreement with Gujarat Electricity Board (GEB) titled as "Operation and maintenance agreement". The entire work relating to operation and maintenance of power project set up the appellant-company was entrusted to GEB by virtue of the said agreement. The revenue authorities held that payments made by appellant would be covered under section 194-J as fee for professional or technical services. It was held that the agreement executed between appellant-company and GEB is not an agreement simpliciter for acquiring technical services or professional services from them but it is an agreement requiring GEB to execute the work contract of operating and maintaining the mega power project. Such a contract will come within the  ambit  and scope of section 194C in view of the judgment  of Hon'ble Apex Court in Associated Cement Co. Ltd. v. CIT (1993) 201 ITR 435 (SC). The assessee had, therefore, rightly deducted tax at source as per section 194C.

CIT v. Prasar Bharti (Broadcasting Corporation of India)

The assessee "was a government body which controls and manages various Doordarshan Channels." Assessee was making certain payments to outside producers for programmes under `commissioned category', for which the assessee had been deducting tax at source u/s 194C, by treating them as contract payments. The stand of the revenue was that television programme producers should be treated as professional/technical persons and that payments made to them should be subjected to deduction of tax at source u/s 194J. It was held that payment to contractor for broadcasting and telecasting although also included in s. 194J but that being a general provision, the specific provision of s. 194C, read with Explanation III was to be applied

Conclusion:

In the execution of a contract, professionals, technicians or other persons may be involved. It is neither practicable nor legally necessary to ascertain the background of the persons, in order to decide the applicable section

Naresh Kumar (Finance) (48 Points)
Replied 16 November 2010

thanks again to all the friends and deepa mam

@VaibhavJ (Believe!! Live your dreams!)   (33496 Points)
Replied 16 November 2010

Dear Mr. Aditya Maheshwari.

Staffing Services(purely of Supply of labour) is different from Recruitment Agencies. Leaving aside Service Tax category "Supply of Manpower or Recruitment Agencies" under which both services falls there is nothing similairty in between them.

 

And also extract of S/194C of IT Act, which it self specifically covers supply of labour for carrying out any work under its ambit. Extract of Section 194C is eloborated here for reference:

 

[Payments to contractors]

194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor48) for carrying out any work48 (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.

Where as as per Service Tax; Service Tax Category of "Manpower recruitment or Supply agency" specifically states  (Any  person  engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise, to any other person;   [Substituted vide Finance Bill 2008 w.e.f. 16th May, 2008])

So in both Acts there is one thing common" Supply of labour (i.e. Manpower)

So reading both together we can come to conclusion that TDS @ 2% or 1% is applicable for payments to be made to Staffing Services Provider for Manpower Supply Services.

 

Please revrt if any doubts.

Vaibhav P Joshi.

email @ vaibhavjoshi.in

Anuraag Sharma (Sr Executive Finance) (835 Points)
Replied 17 November 2010

1. TDS is nothing related with inflows & outflows, it is chrged on "Income".

2. HR consulting company providing such workers come under the category of recruitment agency and not under the category of manpower supply agency.

3. Examples of manpower supply agencies are Securiy Services, Roadways Buses & Trucks Operators (e.g. UPSRTC), a replication of sending employees on dedputation...

4. In manpower supply agency the relation of employer and employee exists between agency and the employee and

there is a contract between the agency and the company fr supply of such person.

5. However, in case of recruitment agencies (the only best example is HR consulting company) the relation of employer and employee exists between the company and the employee.

And

The Hr consulting company, the agency, has just performed a professional service for you by just searching th Best person suiting ur employment criterias....

such services whether named as contract or otherwise are just treated as rendering of Professional Services.

6. The HR consulting company, having requisite skills and competence to select the best candidate for your employment and vacancy criteria is just rendering its services as professional

7.  The HR consulting company is never engaged in hiring employees except as required for rendering thier own professional services.....they just select a best candidate suiting the company's criteria.....it is soleley the decision of the company whether to engage or not to engage.

However, in each such cases the company has to pay a certain "Fees" to the onsulting comapny.

8. In case of manpower supply agency(e.g. security agencies)the payment of salary chain work as under:

Company ---> pays money----> agency : referred as payment towards contract. : "Revenue" for manpower agency

Agency ----> pays salary----> employee : referred as salary payment made by the agency to employee : expenses for the agency.

 

The sum paid by the company to agency & by the agency to the company "differs"....

 

The agency is bound to pay salry to employees irrespectively whther the company has paid them the amt of revenue or not

9. In Ur example payment of salary to employee by the consulting company is just the "Reimbursement" of payment actually made by the company. they are just paying Mr x on ur behalf....

 

The chain works as under:

 

Payment by company to agency:

 1.  Payment for Fees Rs. 10,000 + ST @ 10.3% : revenue for the consulting comapny (Rs. 10,000 is gross revenue to be shown)

Salary payment Rs. 1 lakh + ST @ 10.3% : Indirect Income to be shown net of expenses in the nature of reimbursements to epmloyee. (rs. 1lakh gross indirect income- reimbursed to employee, may or may not be different)

Payment by Agency to Mr. X

1. Salary payment Rs. 1lakh , if received from the comapny - to be deducted from indirect income and shown as net.... : Nature : reimbursement.

 

If in any month company doesnt make a payment of Rs. 1,00,000 + ST @ 10.3% to the agency, the agency is not bound to pat Rs. 1 lakh to Mr. X...

10. Two different Acts may have different meaning for the same word...so there is nothing "common" in two different Acts....

 

Conclusion- U R REQUIRED TO DEDUCT TDS @ 10%......

REFERENCE -

Circular : No. 715, dated 8-8-1995.

Question No. 12.


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