The section deals with the deduction of tax at source from the payment made to contractor. However, I am not dealing with the whole provision of the section but only with the contract for printing job or rather say manufacturing or supplying a product according to the requirement or specification of the customer. Since it is always confusing that TDS to be deducted or not or under which circumstances TDS to be deducted in those cases.
Hope my article will help the CCIans to understand the situation under which, Section 194C will be applicable in those cases.
As per section 194C TDS should be deducted "by any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (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"
As per above there should be a work to be carried out and the work is defined by way of an explanation given in the same section which is reproduced as below:
"(iv)“Work” shall include—
(b)broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c)carriage of goods or passengers by any mode of transport other than by railways;
(e)manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.]
It is now very much clear from the clause (e) of explanation that if the job worker is working on the material supplied by you or purchased from you then it amounts to work else it will not be covered within the definition of work.
Take an example: Suppose you awarded a contract for civil construction to a contractor for certain sum of money. Now in this case the contractor shall work on the land provided by you and same will cover under clause (e) and tax is to be deducted duly on payment or credit (if exceeds the threshold limit of deduction), Since the same is considered as “work contract”
Now take another example: Suppose you awarded a contract for supply of Furniture for your office as per your requirement and specification. You are not supplying anything like ply wood, hardware item etc to the carpenter and he procures all the necessary inputs from his own source then the same is covered under the exclusion clause of the explanation and TDS is not required to be deducted. Since the same is “contract for sale”
The Answer to the Question no 15 of circular 715 issued dated 08-08-1995 specifically states that section 194C would apply in respect of supply of printed material as per prescribed specifications.
However, The clause 7(vi) of the Circular No.681 issued dated 08-03-1994 states that the
“Provisions of this section will not cover contracts for sale of goods—
(a)Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b)Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.”
Now the content of these two circulars contradicts each other and creating confusions related to the issue of applicability of section 194C in case of manufacturing or supply of the product according the specification of the customer.
CBDT came with another circular no 13/2006 dated 13-12-2006 clarifying the conditions under which the section 194C will be applicable. I am reproducing the clause no 3 of the circular as:
"It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular No. 681, dated 8-3-1994."
From the above it is clear that printing work or a manufacturing or supply of the product according to the specification and requirement of the customer is not a contract for work if the material is not supplied by the customer since the ownership of the product will be of customer only when the same is delivered to the customer as the manufacturer or supplier does not work on any material provided by the customer. So in the light of circular no 681 and 13/2006 it is the contract for sale. Hence section 194C is not applicable.
Also it is not covered in the definition of work as given in the explanation of the section 194C as I produced above.
Hope this article helped you to understand the applicability of section 194C.
With Best Regards
CA Yogesh Kr. Agarwal