Agreement not to affect TDS u/s 194-C

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K V Subba Rao (Querist)
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05 April 2008 In a Contract between “Payer” (a small Company registered under the Companies Act, 1956) and “Payee” (a large PSU established under a Central Act), the nature of work is such that payment has to be made after affecting TDS u/s 194-C in the normal course. The Agreement entered into between the two parties, contained a specific Clause requiring the “Payer” Company not to affect TDS. This Clause did not adversely affect the interest of the “Payer” Company so far because the “Payee” Corporation has been every year obtaining Certificate u/s 197 from its (Payee) Assessing Officer not to deduct tax since the objective of “Payee” Corporation was held long ago to be of charitable nature and hence exempted from Income Tax.

In the Finance Bill 2008, it is proposed to restrict the scope of charitable purpose (Refer Pages 1634 and 1646 of Apr 08 issue of the Chartered Accountant). So the “Payee” Corporation would henceforth lose the Tax Exemption status hitherto being enjoyed and become liable to pay Income Tax like any other Company involved in commercial activity.

Now that the “Payee” Corporation has become liable to pay Income Tax from FY 2008-09 onwards, it would not obviously be able to hereafter obtain Certificate u/s 197 from its (Payee) Assessing Officer not to deduct tax. So the “Payer” Company has to affect TDS u/s 194-C before making payments to the “Payee” Corporation; else the entire expenditure becomes inadmissible in its (“Payer” Company) assessment.

Please provide references to any Case Law or Departmental Circulars on this point to enable the “Payer” Company to convince the “Payee” Corporation that it is not fair to impose such condition.

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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05 April 2008 How can you have a condition not to effect TDS without giving reference to the reasons therefor? Unless the contrct terms are clear, answer to your query is difficult.

K V Subba Rao

K V Subba Rao (Querist)
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05 April 2008 Condition imposed by the Payee Coporation (a large size PSU being in a position to dictate terms) to avoid any payment by the Payee Corporation from out of its receipt.

I have since traced one Circular No: 785 dt 24/11/1999. This will not, however, help the Payer Company in any way because Credit for TDS actually paid by the Payer Company goes to the Payee Corporation.

Besides this, if any other material is available, please provide.