Hi Joji,
The current practice of deducting TDS on the Gross amount including Service Tax is correct.
The reason for the same is that Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
The point to be noted is that the TDS is deductible on "ANY SUM" paid and not only on the income component. The word "ANY SUM" shall mean to include the service tax component also.
Please refer the attached file which confirms the above position.
You can further rely on the following judgement
"Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC)."
thanks,
Murtuza Munim
98336 55123