Tds on service tax under rcm

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

29 January 2013 Dear Sir,
I have come across an issue regarding TDS deduction on Service tax under RCM. The detailed quire is as below:

The contract with contractor (handling contract) was entered into before RCM came into action. as per contract, nothing has been mentioned of any additional taxes which comes into being in future. So the ST component under RCM payable by Service receiver becomes expense for the service receiver , i.e. unrecoverable from service provider.

EXAMPLE:
contractor monthly bill : ₹40000 (nothing mentioned about ST)

company deducts TDS on ₹40000 : ₹40000*2% = ₹800. And pay Contractor ₹39200

company pays ST under RCM say, ₹3708 in contractors ST registration no. and charge it to expense GL.

Now, my quire is about TDS to be deducted.

1. (40000 + 3708)*2%

OR

2. 40000*2%

which of the above is correct.