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Who is responsible to deduct tax u/s 194C?

Any specified person responsible for paying any sum to any resident-contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract. Following are the specified persons –

  1. The Central Government or any State Government; or
  2. Any local authority; or
  3. Any corporation established by or under a Central, State or Provincial Act; or
  4. Any company; or
  5. Any co-operative society;
  6. Any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
  7. Any society registered under the Societies Registration Act, 1860 or under any law corresponding to that Act in force in any part of India; or
  8. Any trust; or
  9. Any University established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a University u/s 3 of the University Grants Commission Act, 1956; or
  10. Any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
  11. Any firm; or
  12. Individual or a HUF or an association of persons or a body of individuals (if not covered by aforesaid cases), has total sales, gross receipts or turnover from business or profession carried on by him exceeding ` 1 crore in case of business or ` 50 lakh in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the

Note: However, no individual or a HUF shall be liable to deduct income-tax where amount is credited or paid exclusively for personal purposes of such individual or any member of HUF.

Section 194C - TDS on Payment to Contractor  Updated for FY 2021-22

When tax cannot be deducted?

Case 1: When following conditions are satisfied then tax cannot be deducted

  • Any sum credited or paid in pursuance of any contract, the consideration for which does not exceed Rs 30,000; and

Tax point: The limit of Rs. 30,000 is on individual contract.

  • Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs 1,00,000

Case 2: When following conditions are satisfied then tax cannot be deducted

  1. Amount is paid or payable to a resident contractor during the course of plying, hiring or leasing goods carriage (here-in-after referred to as transport operator).
  2. Such operator furnishes his Permanent Account Number (PAN) to the
  3. Where such contractor owns 10 or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his PAN to the person paying or crediting such

Taxpoint: Tax is not required to be deducted even if amount of payment exceeds Rs.1,00,000/-

a. When tax shall be deducted

At the time of payment or crediting the party, whichever is earlier.

Amount paid or credited during the financial year

TDS Applicability

Upto Rs. 30,000

No

More than Rs. 30,000 in a single transaction

Yes

More than Rs. 1,00,000 in aggregate

Yes

 

This can be explained using the following examples:

ILLUSTRATION -

 

Situations

Whether TDS to be

deducted

1.

Single contract of Rs 30,000 in the year

No

2.

Two contracts of Rs 30,000 each in the year

No

3.

Three contracts of Rs 40,000 each in the year

Tax to be deducted on Rs 1,20,000

4.

Single contract of Rs 40,000 in the year

Yes

5.

Five contracts of Rs 14000 each in the year

No

6.

Six contracts of Rs 20000 each in the year

Tax to be deducted on Rs 1,20,000

7.

Five contracts of Rs 20,000 each in the year

No

ILLUSTRATION - AB Ltd has made following payments on various dates to CD Ltd. towards work done under different contracts

 

Contract Number

Date of Payment

Amount (Rs )

1.

05.05.2020

20000

2.

06.06.2020

15000

3.

08.08.2020

25000

4.

10.12.2020

25000

5.

29.01.2021

17000

As per section 194C(5), tax has to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds 30,000 in a single payment or 1,00,000 in aggregate during the financial year.

Therefore, in the given case, even though the value of each individual contract does not exceed 30,000, the aggregate amount exceeds 1,00,000. Hence, tax is required to be deducted at source on the whole amount of 1,02,000 from the last payment of 17,000 towards Contract No.5 on account of which the aggregate amount exceeded 1,00,000.

b. Which works contract is covered under Section 194C?

Contract shall include sub-contract.

  • “Work” shall include —
    1. advertising;
    2. broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
    3. carriage of goods and passengers by any mode of transport other than by railways;
    4. catering
    5. manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee u/s 40A(2)(b), 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 or associate of such customer.

Where any sum is paid or credited for carrying out any work mentioned in (e), tax shall be deducted at source:

  • on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or
  • on the whole of the invoice value, if the value of material is not mentioned separately in the invoice

c. Difference between Contract for Sale and Contract for Work

Contract for Sale – In case of contract for sale, the main object in contract is the transfer of property and the delivery of the possession of a movable property even though goods might have been manufactured as per the requirement and specification of the client. The article has an identifiable existence prior to its delivery to the purchaser, and the title of the property vests with the purchaser only upon delivery.

Contract for Work- The principal object of the contract is one of work and labour even though some material might have been used in the execution of the contract. In case of Contract for work, the product is brought into existence by applying work and labour and materials are consumed in execution of the work.

Amendment in the definition of “work”

  • Supply of labour for works

Current definition of “work” includes a unit Manufacturing by using material purchased from such customer but excluded if material is not purchased directly from such customer.

  • Some Assesses were using the escape clause of the section by getting the contract manufacturer to procure the raw material supplied through its related parties. As a result, a substantial amount of income was escaping the tax
  • Definition of “work” has been amendment for the purpose of TDS under Section To provide that in a contract manufacturing, the raw material provided by the assessee or its associate shall fall within the purview of the ‘work’ under Section 194C.

ILLUSTRATION - A LTD. has entered into a contract to buy shirts from B Ltd. as per the designs & specifications given to it. For this A Ltd. sold necessary raw material to B Ltd. For the previous year 2020-21, B Ltd. has raised following invoices on A ltd.

Date

Invoice no.

Qty.

Value of Raw

Material

Labour Charges

Total Bill Rs

14/10/20

1020/20-21

10,000

-

-

60,000

31/11/20

1255/20-21

20,000

80,000

45,000

1,25,000

In present case A Ltd. is required to deduct TDS on Rs 60000 for the invoice no. 1020/20-21 while in invoice no. 1255/20-21 TDS to be made on Rs 45,000 only.

Important Notes - TDS on Payments to Contractors - u/s 194C

1. The deduction of TDS from payments made to non-resident contractors will be governed by the provisions of section 195.

2. The deduction of TDS will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the section will apply only in relation to:

  • works contracts and
  • labour contracts and
  • will not cover contracts for the sale of

3. Contracts for rendering professional services professionals cannot be regarded as contracts for carrying out any "work" and, accordingly, no deduction of income-tax is to be made from payments relating to such contracts u/s 194C. Separate provisions for fees for professional services have been made u/s 194].

Case Law

Malayalam Communications Ltd vs. Income tax Officer (TDS) [2019] 175 ITD 433 (Cochin -Trib)

Where assessee made payments to various artists like singers, musicians etc. who participated in reality shows hosted by it as guests or judges, tax was required to be deducted at source u/s 194C.

Principal Commissioner of Income-tax (TDS) National Health & Education Society [2019] 103 taxmann.com 286 (Bom)

Where contract between assessee and Call Center operator was in nature of a 'works contract' and not of a technical or professional nature, payments towards call centre expenses would be covered u/s 194C and not u/s 194J

CIT (TDS) Saifee Hospital [2019] 104 taxmann.com 64 (Bom)

Where assessee-hospital made payments for services rendered towards maintenance of its medical equipments for proper and long functioning, it was required to deduction TDS u/s 194C not u/d 194J

CIT vs Dabur India [2006] 283 ITR 197 (Delhi)

Purchase of printed packing material is a ‘Contract of Sale’ and not ‘Works contract’. Thus, not liable for TDS u/s 194C.

d. When to Deduct TDS under Section 194C?

Any person responsible for making payment to resident contractor/sub-contractor should deduct tax at the time of actual payment to the payee or at the time of credit to the accounts of the payee, whichever is earlier.

Rate of TDS under Section 194C

  • 1%, if payment is made to an Individual or HUF (0.75% e.f. 14.05.2020 to 31.03.2021)
  • 2%, if payment is made to any other person (1.5% e.f. 14.05.2020 to 31.03.2021)

The tax shall be deducted at these rates without including the surcharge, Health & Education Cess @ 4%.

However, if PAN of recipient is not available, then tax shall be deducted at the rate of 20% in accordance with the provisions of Section 206AA.

  • Section 194C- Payments to Transporters

Finance Act, 2015 make an amendment in the provisions of section 194C of the Act to expressly provide that the relaxation under sub-section (6) of section 194C of the Act from Non-Deduction of TDS on Payment made to a Transporter shall only be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to a contractor who is engaged in the business of transport i.e. plying, hiring or leasing goods carriage and who is eligible to compute income as per the provisions of Section 44AE of the Act (i.e a person who is not owning more than 10 goods carriage at any time during the previous year) and who has also furnished a declaration to this effect along with his PAN.

From the above discussion, it is crystal clear that only a person who is engaged in the business of goods carriage is entitled for the benefit of no TDS under section 194C(6). To establish himself as a goods transporter he must own at least 1 truck else he will not qualify for the benefit so given under section 194C(6). When a person undertakes any transportation contract who does not own any truck or goods carriage and arranges trucks from other truck owners he cannot be said to be a person engaged in the business of transport i.e. plying, hiring or leasing goods carriage and he is also not eligible to compute income as per the provisions of section 44AE. In this case even if such a person gives a declaration of owning less than 10 trucks (zero number of trucks), he will not be given the benefit of non-deduction of TDS under section 194C(6).

Meaning of Goods Carriage

Goods carriage means-

  1. Any motor vehicle constructed or adapted for use solely for the carriage of goods; Or
  2. Any motor vehicle not so constructed or adapted, when used for the carriage of goods. The term “motor vehicle” does not include vehicles:
  • Having less than 4 wheels and
  • With engine capacity not exceeding 25cc
  • Vehicles running on rails or
  • Vehicles adapted for use in factory or in enclosed

No TDS from transporter: If the amount of payment is being made to a contractor during the course of business of plying, hiring or leasing goods carriages, then no tax is required to be deducted from such payments if -

  • such contractor owns ten or less goods carriages at any time during the previous year and
  • furnishes a declaration to that effect along with his Permanent Account Number (PAN), to the payer
  1. There is no prescribed form or format of It can be given simply on the letter-head of the transporter with his seal and signature.
  1. If the transporter does not furnish the PAN then no such declaration can be filed and tax shall be deducted at 20 per cent as per section
  1. This benefit of non-deduction of tax is only applicable for a transporter engaged in the business of plying, hiring or leasing goods carriages.
  1. The relaxation under sub-section (6) of section 194C of the Act from non-deduction of tax shall only be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to an contractor who is engaged in the business of transport e. plying, hiring or leasing goods carriage and who is eligible to compute income as per the provisions of section 44AE (i.e a person who is not owning more than 10 goods carriage at any time during the previous year) and who has also furnished a declaration to this effect along with his PAN. This is as per the amendment by Finance Act, 2015 w.e.f. 01.06.2015. (Prior to this amendment, the benefit of non-deduction of TDS is applicable to all the transporters irrespective of their size.)
  1. The capacity of goods carriages have been made irrelevant.
  1. The payer must furnish the details of payment to transporter in the quarterly statement of TDS to be filed with the income-tax department. [Sec. 194C(7). In this context following case laws are notable:

In ACIT vs. Mr. Mohammed Suhail, Kurnool in ITA No. 1536/Hyd/2014, order dated 13.02.2015, it was specifically held that the provisions of section 194C(6) are independent of section 194C(7), and just because there is violation of provisions of section 194C(7), disallowance under section 40(a)(ia) does not arise if the assessee complies with the provisions of section 194C(6). Further, in Soma Rani Ghosh vs DCIT ( ITA No. 1420 /KOL/ 2015), ITAT Kolkata it was held that if the assessee complies with the provisions of Section 194C(6), no disallowance u/s 40(a)(ia) is

permissible, even there is violation of the provisions of Section 194C(7). This is applicable even if aggregate payment in a FY exceeds Rs.1,00,000

Payment for transportation of passengers: Agreement for hiring services of contractors for rendering transportation services for goods and passengers by buses, cars, sumos, utility vans, etc., where the assessee do not take the possession of those vehicles from the contractor and the responsibility of operating and maintaining the vehicles is of the contractor comes within the meaning of work and tax is deductible under section 194C and not under section 194-I. [CIT vs. Reliance Engineering Associates (P.) Ltd. (Tax Appeal No. 2286 of 2010) Gujarat High Court]

Note- The exemption u/s 194C(6) is available only to the contractors engaged in the business of business of plying, hiring or leasing goods carriages. This exemption is not applicable for passenger transport contractors

A co-operative society was formed by the truck owners and it entered into contract with company for transportation. The company deducted TDS u/s. 194C(2). Whether the company was liable to deduct TDS on amount paid to truck-owners in terms of Sec. 194C(2) ?

Sec. 194C(2) dictates that the deduction is required only in case of a sub-contract. The relationship between company and its members was not that of a contractor and a subcontractor. The society was nothing more than a conglomeration of truck operators themselves. There was no sub- contract

Detailed Analysis of Section 194C(6)

The real intention of the Law maker has been explained vide circular no. 19/2015 dated 27.11.2015 issued by the Central Board of Direct Taxes.

Para 43.5 of the circular reads as follows

The condition of not owning more than ten goods carriages by the transporter is required to be fulfilled on the date on which the amount is credited or paid, whichever is earlier. In case a transporter does not own ten goods carriages on the date on which the amount is credited or paid but becomes owner of ten goods carriages later in the previous year, the payer shall not be required to deduct tax from the payment made to the transporter during the period of the previous year when he was not owning more than ten goods carriages. However, the tax shall be required to be deducted from the payment made during that part of the previous year during which the transporter owned more than ten goods carriages.”

Para 43.4 of the Circular reads as follows

Further, this exemption from TDS is applicable only in respect of transport charges received for plying, hiring or leasing of goods carriage (s) owned by the transporter. Therefore, if a person receives payment in respect of plying, hiring or leasing of goods carriage (s) which are not owned by him, he shall not be entitled to claim exemption from TDS in respect of these payments.”

Declaration Under Section 194C (6)

To,

Name of the Payer Address of the Payer

Declaration Under Section 194C (6) For Non–Deduction of TDS

I, Name of vehicles owner, Proprietor/ Partner/ Director of M/s Name of the company or firm and address of the company, (hereinafter “The Contractor”) do hereby make the following declaration as required by sub section (6) of section 194C of the Income Tax, 1961 for receiving payments from the payer without deduction of tax deduction at source (TDS).

  1. That name of party authorized to make this declaration in the capacity as proprietor/ partner/
  2. That the contractor is engaged by the payer for hiring or leasing of goods carriage for its
  3. That I have not own more than ten goods carriage vehicles as on date.
  4. That if the number of goods carriages owned by the contractor exceeds ten at any time during the previous year, the contractor shall forthwith, in writing intimate the prater of this
  5. That the Income Tax Permanent account number (PAN) of the contractor is PAN of Payee .A self-attested photocopy of the same is furnished to the payer along with this

Place: Sign

Dated: (Name of Declarant)

Verification

I do hereby verify that the contents of paragraphs one to five above are true to my own knowledge and belief and no part of it is false and noting material has been concealed in it.

Place: Sign

Dated: (Name of Declarant)

Payment to school bus contractors by schools

The assessee school enters into an agreement with the transport contractor for a simple activity of carrying its students and staff from their homes to the school and similarly from school to their homes. The assessee has no responsibility whatsoever regarding the buses to be utilized for that purpose which was the sole responsibility of the transport contractor. The transport contractor only was liable to keep and maintain the required number of buses for such activity at their own expenses with the specified standards. Therefore, the said contract is purely in the nature of services rendered by the transport contractor to the assessee. It was held that the provisions of Sec. 194-I could not be applied in this case and tax has to be deducted at source under the provisions of sec. 194C of the Act. [ACIT (TDS) vs. Delhi Public School (ITA Nos. 4878 & 4879/DEL/2012), ITAT Delhi]

TDS on freight charges shown separately on Invoice

The assessee had a responsibility of marketing the goods of M/s Tata Steel after purchasing the same from them. M/s Tata Steel raised invoice on the assessee as per the list price to be published by Tata Steel. The amount of freight was found to be shown separately in the invoices. It was held that it was a transaction of goods per se and cannot be segregated for the purposes of payment of expenses by way of freight. Therefore such freight amounts charged separately cannot be liable for deduction of tax at source under Section 194(C) of the Act since there is no agreement for carriage or transportation of goods between the assessee and the manufacturer. It forms a part of the cost of goods only. [CIT vs. Bhagwati Steels (Income Tax Appeal No.693 of 2009) (P&H)]

Will Tax be Deductible at Source on the GST amount charged in the bill?

No tax is to be deducted on the "GST on services" component if separately charged in the bill. GST for these purposes shall include IGST, CGST, SGST and UTGST

TDS at lower rate

According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub- contractor in this behalf give to him such certificate as may be appropriate.

ILLUSTRATION – A, an individual whose total sales in business during the year ending March 31, 2020 was Rs 1.25 crore, paid Rs 8 lakhs by cheque on February 15, 2021 to a contractor for construction of his premises in full and final settlement. No amount was credited earlier to the account of the contractor in the books of A.

An individual is required to deduct tax at source if his turnover exceeds Rs. 1 Crore in the preceding financial year. In the given case, since receipts of Mr. A exceeds Rs. 1 Crore in

Financial year 31.03.2020 (Preceding year), he is required to deduct tax at source on payment made to contractor i.e., on Rs 8 Lakhs at the applicable rate in force.

TDS on advertisement

  • If payment is made by client to Advertisement agency, it is work contract and TDS u/s 194C is
  • If payment is made by advertisement agency to TV channel/newspaper Company, no TDS u/s
  • Payment made by TV channel/ Newspaper company to advertisement agency for booking/procuring/canvassing for advertisement, payment is treated as discount & not commission so TDS u/s 194H is not
  • Payment made by TV channel/broadcassters to production house for production of content program

CASE LAWS

Case Law: Payment towards annual maintenance contracts for lifts and air conditioners is not technical services

Deduction of tax as contractor is justified payment cannot be treated as fees for technical services.[S. 194J, 260A]

Dismissing the appeal of the revenue the Court held that the assessee had made payments only in respect of maintenance contracts which related to minor repairs, replacement of some spare parts, greasing of machinery, etc. these services did not require any technical expertise, and therefore, could not be categorized as "technical services" as contemplated under section 194J and that the assessee had correctly deducted TDS u/s 194C which applied to payments made to contractors. No question of law arose.

(AY. 2000-01 to 2009-10) CIT v. Mumbai Metropolitan Regional Development Authority. (2018) 408 ITR 111/258 Taxman 164 / 304 CTR 776/ 170 DTR 97 (Bom.) (HC) Editorial: SLP of revenue is dsmssed due to low tax effect, CIT v. Mumbai Metropolitan Regional Development Authority (2019) 262 Taxman 451 (SC)

Case Law: Supply of sugar cane by farmers at the gate of the factory of the assessee was a part of the sale transaction and, therefore, the assessee was not liable to deduct TDS.

During year, assessee, a manufacturer of sugar, made payments to transporters and did not deduct TDS on said payments. Both Assessing Officer and Commissioner (Appeals) held that the assessee was liable to deduct TDS u/s 194C on the above payments.

Tribunal held that the assessee was not liable to deduct TDS on aforesaid payments

High Court held that in view of an earlier decision of Gujarat High Court made in Tax Appeal No. 211 of 2006, dated 1 12-2014, wherein it had been held that supply of sugar cane by farmers at gate of factory of assessee was a part of the sale transaction and, therefore, assessee was not liable to deduct TDS. Order of Tribunal deserved to be confirmed.

(AY. 2003-04) CIT v.Khedut Sahakari Khand Udyog Mandi Ltd. (2016) 76 taxmann.com 117 (Guj.) (HC) Editorial : SLP filed against order was dismissed, ACIT v. Khedut Sahakari Khand Udyog Mandi Ltd. (2016) 243 Taxman 522 (SC)

Case Law: Payments to Crane Trucks

The assessee hired two Diesel-hydraulic truck mounted mobile cranes on contract basis and deducted TDS on payment of hiring charges. A.O. treated crane fitted truck as plant and machinery and held provisions of Sec. 1941 were applicable. The Tribunal held since crane trucks which were

designed for special services falls within category of motor trucks and not machinery; hence provisions of Sec. 194C were applicable.

(AY.2008-09) Oil India Ltd. v. Dy. CIT (2013) 145 ITD 513/94 DTR 273 / 158 TTJ 1 (Jodh.) (Trib.)

Case Law: Specific provision would prevail over general one - Maintenance work -Provisions of section 194C is applicable and not section 194J.

Assessee-company had entered into contracts with various parties for maintenance work of its various equipment, installations, viz., air-conditioners, lifts, etc. Same being contractual maintenance work, assessee deducted TDS u/s 194C.

Revenue claimed that the above work was of technical nature and the same would be covered under section 194J and, thus, raised demand for short-falling tax deducted as well as for interest thereon u/s 207(1) and 201(1A).

Since the word 'work' is defined u/s 194C in an inclusive manner to include certain specified services, viz., advertising, catering, broadcasting and telecasting, etc. present type of maintenance work would also clearly fall within the ambit of 'work'.

Where it was clarified from bills issued by contractors that work like maintenance of equipment, cleaning, and checking of parts, etc. was of routine in nature and required less technical skills, the assessee had correctly deducted tax at source u/s 194C.

Where there are two provisions, i.e., section 194C and section 194J, the first one is general and the other is specific covering a particular transaction, the specific provision would prevail over a general one.

(AYS. 2007-08 to 2009-10) ITO .v. Bharat Sanchar Nigam Ltd. (2014) 64 SOT 138 / 45 taxmann.com 124 (Mum.) (Trib.)

Case Law: Contractors - Sub-Contractors - Society of truck owners - Members

Assessee, a cooperative society was formed by the truck owners and it entered into contracts with companies for transportation. The company deducted TDS @ 2%.

Thereafter the assessee-society paid the amount to the truck owners on the basis of work done after deducting a nominal amount for administrative expenses. The relationship between the assessee and its members was NOT that of a contractor or a sub-contractor. The assessee was formed as a matter of convenience. The society was nothing more than a conglomeration of truck operators themselves. The truck owners were virtual owners of the society even though the society was a distinct legal entity.

The society was formed only because the companies were not ready to deal with individual truck owners. The society did not even retain profits. There was no sub-contract hence, no liability to deduct tax at source.

Ambuja Darla Kashlog Mangu Transport Co-op. Society v. CIT (2010) 188 Taxman 134 / (2009) 227 CTR 299 / 31 DTR 49/188 Taxman 134 (HP) (High Court) TDS on Payments to Contractors - u/s 194C

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