TDS u/s 34 of U.P. Vat act, VAT + CST

[AMIT BATHAM]

 A & B form a joint venture and get registered under U.P. VAT act and applied for work contract in PWD, they awarded work contract for road construction, then the joint venture awarded whole contract to B on back to back basis, B complete all work and assessed under U.P. VAT act, these are the facts of case. The problem is that the joint venture did not deduct TDS from the payment made to B, which is also a part of the joint venture, because the contractee, i.e. (PWD), deducted TDS from the payment made to JV at 4%. Now the assessing officer is saying that u/s 34(8) penalty is liable on JV just twice the amount of TDS. My first question is whether the amount of TDS can exceed the maximum amount of percentage, i.e. 4%, and the second question is whether the joint venture can treat the company in accordance with notification K.A.NI.-2-763/XI-9(12)/08-U.P. Act 5 2008 dated March 4 2008, because notification states that every person responsible for making payment to contractor for discharge of any liability on account of valuable consideration payable in pursuance of works contract shall, at the time of making payment to the contractor, either by credit or in cash or in any other manner, deduct an amount equal to 4% of such gross payment, provided that this notification shall not be applicable to works contract other than between a contractor and

1. the central government

2. any local authority

3. any corporation or undertaking established or constituted by under a central act or state act

4. any company

5. any co-operative society or other society, club, firm or other association of person, whether incorporated or unincorporated;

6. any university

Posts / Replies

[YAGAY andSUN]

You're raising two important legal questions under the U.P. VAT Act in the context of works contracts, TDS liability, and a joint venture (JV) structure. Let’s address both questions separately and clearly, based on the law, the notification, and principles of VAT law in Uttar Pradesh.

Brief Recap of Facts

• A & B form a JV registered under U.P. VAT for road construction work awarded by PWD.

• PWD deducts TDS @4% under the UP VAT Act while making payments to the JV.

• The JV subcontracts entire work to B (who is also a party in JV), on a back-to-back basis.

• JV did not deduct TDS when making payment to B.

• The Assessing Officer (AO) now proposes penalty under Section 34(8) for failure to deduct TDS.

Question 1: Can TDS be Levied More than Once (i.e. Exceed 4%)?

Answer: No, TDS cannot exceed the prescribed rate of 4%.

As per Section 34(1) of the U.P. VAT Act and the relevant notification dated 4 March 2008, TDS is to be deducted at 4% of the gross payment.

• This rate is maximum and absolute for a particular payment.

• Once TDS has already been deducted by PWD (the principal/employer), there is no double liability intended under the law.

• TDS under VAT is not like income tax TDS (where the credit follows the deductee). Here, it is collection of tax at source for works contracts — to ensure tax compliance by the executing party.

So if PWD has deducted 4%, the State exchequer has already received the TDS, and there is no loss of revenue.

Therefore, no further 4% TDS is warranted between JV and B, especially as B is a constituent of the JV and already assessed under the Act.

Question 2: Can JV be Exempt from TDS Obligation Under the Notification?

Yes, this argument is legally sustainable.

The notification dated 4 March 2008 (No. K.A.NI.-2-763/XI-9(12)/08) explicitly states that:

“... this notification shall not be applicable to works contracts other than between a contractor and:

1. Central Government

2. Local authority

3. Corporation/Undertaking under Central or State Act

4. Company

5. Firm, Society, AOP, etc.

6. University

Now consider:

• JV is registered under the Act, and is either an AOP (Association of Persons) or a partnership-type arrangement (based on agreement).

• B is a constituent of the JV.

• Hence, this is a case of payment by AOP (JV) to one of its constituents.

• Under the notification, deduction is applicable only where the relationship is between a contractor and the entities listed.

But JV paying its own constituent (B) is arguably not an independent works contract in the sense contemplated by the law — because B is already jointly executing the contract under the same registration.

Important Judicial Support:

There are judicial precedents under VAT regimes (like Rajasthan, Madhya Pradesh) where courts have held that no TDS is needed on intra-JV transactions or subcontract to a JV partner, especially where main contractor has already deducted TDS and tax liability is discharged.

Section 34(8) – Penalty Provisions

Section 34(8) prescribes penalty for failure to deduct or deposit TDS, which can be twice the amount of TDS.

However, penalty under this section is not automatic. It requires:

• Non-deduction without reasonable cause, and

• Intention to evade tax or cause loss to the revenue

Since:

• TDS was already deducted by PWD,

• The same amount has already been credited to government account,

• B is assessed and has paid tax under the same Act,

There is no revenue loss nor any intention to evade.

Therefore, the penalty is challengeable, and your explanation has legal merit.

Suggested Legal Defence:

1. No double deduction intended under U.P. VAT scheme once 4% has been deducted by PWD.

2. Intra-JV payment or payment to a JV partner is not a typical contractor-subcontractor arrangement.

3. As per Notification dated 4 March 2008, the TDS provision does not apply to all types of contracts — only between certain entities and contractors.

4. No revenue loss occurred, as B was already assessed and tax was paid.

5. If penalty is imposed, file an appeal before the appellate authority citing above grounds.

(This reply is just for your kind information, knowledge enrichment and for understanding the matter in a better way).