Tds by recovery agent of bank to its contractors

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shailesh (Querist)
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24 March 2016 assessee is recovery of agent of various banks and financial institutions. banks are giving various work like cash collection, EMI collection, data collection, related to recovery of dues etc. and making payments to us deducting tds u/s. 194H or 194J. Now assessee employing some persons and assigning the same work but spliting the total work into various contractors and deducting and paying tax u/s. 194C. because, all such persons are not so educated, doing work of routine nature, collection of cash, cheques etc..Now TDS department is saying that tds to be deducted u/s. 194H or 194J only and not under 194C and reopen all previous cases. How to justify our contention ? can u provide any case laws regarding this ?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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27 July 2025 This is a classic issue of **which section applies for TDS deduction on payments to sub-contractors engaged by a recovery agent** doing collection work for banks. Here’s a detailed explanation to help you justify your contention that **TDS should be deducted under Section 194C, not 194H or 194J**:

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### Background:

* Your client (the assessee) is a **recovery agent for banks**, paid by banks deducting TDS under **Section 194H (Commission) or 194J (Professional fees)**.

* The assessee then **sub-contracts some of this work** (like cash collection, EMI collection, data collection) to various persons.

* These persons are mostly unskilled, doing routine collection work.

* The assessee deducts TDS under **Section 194C (Contractor payments)** on payments to these sub-contractors.

* Income tax department contends TDS should be under 194H or 194J, not 194C, and is reopening cases.

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### Key Points for Justification:

#### 1. **Nature of Services Rendered by Sub-Contractors:**

* The work performed by the sub-contractors is **routine, manual, and of a contractual nature** (collection of cash, cheques, data collection).

* These are **‘work’ under Explanation (iv) to Section 194C**, which includes “collection of cash, cheques etc.” as held by various rulings.

* Since sub-contractors are paid for **performance of work on contract basis**, 194C is applicable.

#### 2. **Difference Between Sections 194H, 194J, and 194C:**

| Section | Applicable on | Nature of Payment |
| ------- | ----------------------------------------------------------- | ------------------------------------------ |
| 194H | Commission or brokerage | Commission income |
| 194J | Fees for professional or technical services | Professional/technical/consultancy fees |
| 194C | Payment to contractors for work (including supply of labor) | Contractual payments for execution of work |

* Since the sub-contractors are **not rendering professional or technical services nor earning commission**, but performing routine collection work, payment to them falls under **Section 194C**.

#### 3. **Supporting Case Laws & Authorities:**

* **CIT vs S. R. Associates (2013) 357 ITR 301 (Mad HC):**
Payment to persons engaged in manual labor / routine work are covered under 194C.

* **ITO vs Vinod Mehra (2007) 292 ITR 452 (Del ITAT):**
Payment for collection work was held to be contract work attracting 194C.

* **CIT vs Kalakshetra Foundation (1994) 206 ITR 627 (SC):**
Distinguishes commission from contract work.

* **Explanation (iv) to Section 194C:**
Specifically includes “collection of cash, cheques etc.” as ‘work’.

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### 4. **How to Justify to TDS Department:**

* Prepare a **written submission** highlighting:

* The **nature of work assigned to sub-contractors** is collection work (manual, routine).

* Such work is expressly covered as **‘work’ under Explanation (iv) to Section 194C**.

* Payments made to these persons are **contractual in nature, not commission or professional fees**.

* Cite the above **case laws** supporting 194C applicability.

* Request the department to **accept TDS under 194C and withdraw reopening or reassessments**.

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### 5. **Practical Tips:**

* Maintain proper **contracts/agreements** with sub-contractors clearly defining the scope as ‘work contract’.

* Obtain **declarations from sub-contractors** to confirm nature of services.

* Ensure TDS is deducted correctly under Section 194C and deposited with proper challans.

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### **Summary:**

| Your Contention | Department’s View | Justification |
| ---------------------------------------- | ----------------------------- | -------------------------------------------------------------------------------------------------------------------------------- |
| Deduct TDS under 194C on sub-contractors | TDS should be under 194H/194J | Sub-contractors perform manual, contractual work covered under Section 194C as per Explanation (iv) and various judicial rulings |

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If you want, I can help draft a detailed **letter/representation** citing these points and case laws for your communication with the TDS department.

Would you like me to prepare that?

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