Deepak Gupta
(CA Student)
(15922 Points)
Replied 05 February 2015
As per clause (iv)(e) of the explanation to section 194C
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‘Work’ includes manufacturing or supplying a product according to the requirement or specification of a customer:
- by using material purchased from such customer
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but does not include
- by using material purchased from a person, other than such customer
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Hence, if material is provided by you, then deduct TDS on the labour portion only, if value of material is separately mentioned on the invoice. Otherwise, deduct on the whole invoice value [Sec. 194(3)].
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If material is not provided by you, TDS shall not be deducted as it would be a contract for sale and not a contract for work [Refer Circular No. 13/2006, dated 13-12-2006].
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[Note: Due to ambiguity, I have modified my original reply.]
CIRCULAR NO. 13/2006, DATED 13-12-2006
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1. Representations have been received in the Board seeking clarification on the applicability of section 194C on such transactions, where the assessee has outsourced certain work relating to fabrication or manufacturing of article or thing in accordance with the specifications given by the assessee. Circular No. 681, dated 8-3-1994 of the Board clarifies in para 7(vi) that the provisions of section 194C would not apply to contracts for sale of goods and further clarifies that where the property in the article or thing so fabricated passes from the fabricator-contractor to the assessee only after such article or thing is delivered to the assessee, such contract would be a contract for sale and so outside the purview of section 194C. However, in reply to question No. 15 in Circular No. 715, dated 8-8-1995 on the subject of applicability of section 194C, in respect of contract for supply printed material as per prescribed specifications, it has been said that such contracts would also be covered under section 194C. It has been represented that the views expressed in these two circulars, to the extent as pointed out above, are in contradiction to each other.
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2. The matter has been examined by the Board and it is considered that exclusive reliance on Question/Answer No. 15 of Circular No. 715, without taking into account the principles laid down in Circular No. 681 is not justified. Before taking a decision on the applicability of TDS under section 194C on a contract, it would have to be examined whether the contract in question is a ‘contract for work’ or a ‘contract for sale’ and TDS shall be applicable only where it is a ‘contract for work’.
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3. 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.
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