The Central Board of Direct Taxes has clarified that tax deducted at source (TDS) will only apply to deals which are in the nature of contract for work and not those involving sale transactions.
For example, an individual who has purchased a car and subsequently given a contract to another entity for customising the vehicle for some amount would be liable to deduct 2 per cent as TDS on that particular amount.
In effect, any value addition to goods already owned by an individual by another party will attract the tax.
A revenue department official said the circular removed ambiguities that had crept up due to two different circulars - 681 and 715. The critical point is at what point the person assumes ownership of the goods, he said.
Stretching the car analogy, he said, if a person contracted a customisation agency to purchase the car on his behalf and make value additions like changing tyres, adding accessories, etc, the transaction would not attract TDS.
This is because it will be treated as a contract for sale and not a contract for work, he said. The clarification, the official added, had widespread implications.
The provisions of Section 194C would apply in respect of a contract for supply of any article or things as per prescribed specifications in this regard, he said.