Section 194C - TDS on payment to contractors - Income Tax - Ready Reckoner - Income Tax

TDS on payment to contractors Applicability Any person responsible for paying any sum to any resident (i.e. contractor ) for carrying out any work (including supply of labour for carrying out any work) under a contract in pursuance of a contract between the contractor and a specified person , shall deduct income tax at the time of such payment in cash or by cheque or by any other mode whichever is earlier. Rate of TDS :- When PAN No. is Quoted (i) 1% in case payee is individual or HUF (ii) 2% in case of any person other than an individual or a Hindu undivided family, When PAN is not quoted The rate of TDS will be 20% in case of any person. Threshold Limit Single payment Does not exceeds Rs. 30,000/- Where the payment made in aggregate Rs. 1,00,000/- during the financial year Exception of Section 194C In case if any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,- (A) does not fall under any of the preceding sub-clauses (i.e. any firm ) ; and (B) has total sales, gross receipts or turnover from business or profession carried on by him exceeding Rs. 1 crore in case of business or Rs. 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 contractor; [ w.e.f. 01.04.2020 ] TDS deduction is not required if recipient is engaged in the business of transport i.e. plying, hiring or leasing good carriages goods carriage shall have the meaning assigned to it in the Explanation to section 44AE(7) ; Recipient owns 10 or less goods carriages at any time during the financial year. Recipient furnishes a declaration to this effect along with PAN. [ Section 194C(6) ] 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; or any sum referred to in section 194J(1). TDS Deduction in case manufacturing or supplying a product according to the requirement or specification of a customer Where any 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 under the provisions contained in section 40A(2)(b) , tax shall be deducted at source- Where any sum is paid or credited for carrying out any work, tax shall be deducted at source- (i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice. Important meaning of term (a) Meaning of specified person shall mean (a) the Central Government or any State Government; or (b) any local authority; or (c) any corporation established by or under a Central, State or Provincial Act; or (d) any company; or (e) any co-operative society; or (f) 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 (g) 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 (h) any trust; or (i) any university or deemed university (j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or (k) any firm (l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,- (A) does not fall under any of the preceding sub-clauses; and (B) has total sales, gross receipts or turnover from business or profession carried on by him exceeding Rs. 1 crore in case of business or Rs. 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 contractor; (b) Meaning work shall Include- (a) advertising; (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; (d) catering; (e) 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 under the provisions contained in section 40A(2)(b) ; Where any sum is paid or credited for carrying out any work, tax shall be deducted at source- (i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice. but does not include (A) 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; or (B) any sum referred to in section 194J(1). (c) Meaning of Contract - contract shall include sub-contract; Provision of payment and tax deducted at source to transporters No deduction shall be made from the sum credited to the account of a contractor who satisfies the following 3 conditions: Recipient is engaged in the business of transport i.e. plying, hiring or leasing good carriages goods carriage shall have the meaning assigned to it in the Explanation to section 44AE(7) ; Recipient owns 10 or less goods carriages at any time during the financial year. Recipient furnishes a declaration to this effect along with PAN. Payment or credit to transport operators - If recipient person is a transport contractor (who is in the business of plying, hiring or leasing goods carriage) and satisfies the following condition, Tax is not deductible - From 01.10.2009 to 31.05.2015 - recipient furnishes his PAN to the deductor From 01.06.2015 - Recipient owns 10 (or More than 10) goods carriage at any time during the financial year. He give declaration to this effect to the deductor, he furnishes the his PAN to the deductor. Declaration format has been specified under the Para 43.7 under circular no. 19/2015 dated 27.11.2015 For the purposes of ensuring uniformity in the format of declaration to be furnished by the payee under section 194C(6) of the Income-tax Act for receiving the payment without deduction of tax, the following format for furnishing of declaration is specified: DECLARATION UNDER SECTION 194C(6) OF THE INCOME-TAX ACT, 1961 Date .. No (To be provided by payee) From : (Name address of the payee) To : (Name address of the payer) The freight/transport charges amounting to Rs .... for transportation of goods by goods carriages having Registration Number .... may be paid or credited to my account without deduction of tax under section 194C of the Income-tax Act, 1961. I/We, ..... .. in the capacity of hereby declare that I/We do not own more than ten goods carriage and also did not own more than ten goods carriage at any time during the period from 1st April ...........to ..My Permanent Account Number (PAN) is .I hereby enclose a self-attested photocopy of my PAN Card. . .. Signature of the person making declaration Place: 43.8 It may be mentioned here that the person responsible for paying to transporter is required to report the particulars of payment made to transporters without deduction of tax in compliance to the provision of section 194C(6) of the Income-tax Act in the statement of deduction of tax (Form 26Q) as per the provision of rule 31A(4)(vi) of the Income-tax Rules, 1962. Non-furnishing or incomplete furnishing of this information shall make the deductor liable for penalty as per the provision of section 271H of the Income-tax Act. Important case laws whether outsourcing the manufacture of goods, is a contract or purchase of goods transaction? [ DCIT Vs Reebok India Company, 2005 (11) TMI 202 - ITAT DELHI ] Applicability of TDS provisions on payments by the transporter to truck operator or owners for hiring the vehicles. [ Shree Choudhary Transport Co. Vs ITO 2020 (8) TMI 23 - SC ] Important Circulars and notifications TDS on Goods and services Tax (GST) component comprised in payments made to resident. [ Circular No. 23/2017 date 19.07.2017 ] The CBDT (the Board) had earlier issued Circular No. 1/2014 dated 13.01.2014 clarifying that wherever in terms of the agreement or contract between the payer and the payee, the Service Tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Income-tax Act, 1961 on the amount paid or payable without including such Service Tax component. For the purposes of this Circular, any reference to service tax in an existing agreement or contract which was entered prior to 01.07.2017 shall be treated as GST on services with respect to the period from 01.07.2017 onward till the expiry of such agreement or contract. Tax Deduction at Source (TDS) on payments by broadcasters or television channels to production houses for production of content or programme for telecasting. [ Circular no. 04/2016 dated 29.02.2016 ] (i) In case, a payment for production of content/ programme as per the specifications of the broadcaster/ telecaster and the copyright of the content/ programme also gets transferred to the telecaster/ broadcaster It is hereby clarified that such contract is covered by the definition of the term `work in section 194C of the Act and, therefore, subject to TDS under that section. This position clearly flows from the definition of `work given in clause (iv)(b) of the Explanation to section 194C and the same has also been clarified vide Qn. No. 3 of Circular No. 715 dated 8.8.1995 . (ii) In case, a payment for acquisition of broadcasting/ telecasting rights of the content already produced by the production house. there is no contract for `carrying out any work, as required in section 194C(1) . Therefore, such payments are not liable for TDS under section 194C . However, payments of this nature may be liable for TDS under other sections under Chapter XVII-C of the Act. Deduction at Source on Gas Transportation Charges paid by the purchasers of Natural gas to the sellers of gas [ Circular No. 9/2012 dated 17.102012 ] It is clarified that in case the Owner/Seller of the gas sells as well as transports the gas to the purchaser till the point of delivery, where the ownership of gas to the purchaser is simultaneously transferred, the manner of raising the sale bill (whether the transportation charges are embedded in the cost of gas or shown separately) does not alter the basic nature of such contract which remains essentially a contract for sale and not a works contract as envisaged in section 194C of the Act. Hence in such circumstances, provisions of Chapter XVII-B of the Act are not applicable on the component of Gas Transportation Charges paid by the purchaser to the Owner/Seller of the gas. The use of different modes of transportation of gas by Owner/Seller will not alter the position. However, transportation charges paid to a third party transporter of gas, either by the Owner/Seller of the gas or purchaser of the gas or any other person, shall continue to be governed by the appropriate provisions of the Act and TDS shall be deductible on such payment to the third party at the applicable rates. Clarification on applicability of provisions of Section 194C or 194I to payments made by the customers on account of cooling charges to the cold storage owners. [ Circular no. 01/2008 dated 10.01.2008 ] The arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194C will be applicable to the amounts paid as cooling charges by the customers of the cold storage. Applicability of TDS provisions of section 194C on Contract for Fabrication of Article or Thing as per Specifications given by the Assessee - Contradiction between two Circulars of CBDT. [ Circular No. 13/2006 dated 13.12.2006 ] 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. It is 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. Whether the applicability of the provisions of section 194C and 195, in connection with tax deduction at source from payments made to foreign shipping companies or their agents. [ Circular no. 723 Dated 19.09.1995 ] Section 194C deals with works contracts including carriage of goods and passengers by any mode of transport other than the Railways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any resident (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any resident . On the other hand, section 172 operates in the area of computation of profits from shipping business of non-residents. Thus, there is no overlapping in the areas of operation of these sections. where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers, etc., shipped at a port in India. Since the agent acts on behalf of the non-resident ship-owner or charterer, he steps into the shoes of the principal. Accordingly, the provisions of section 172 shall apply and those of sections 194C and 195 will not apply. It has been pointed out that the sums paid for carrying out work of advertising are being subjected to deduction of tax at source under section 194C as payment for work contract as also under section 194J as payments of fees for professional services. [ Circular no. 720 dated 30.08.1995 ] It is hereby clarified that each section, regarding TDS under Chapter XVII, deals with a particular kind of payment to the exclusion of all other sections in this Chapter. Thus, payment of any sum shall be liable for deduction of tax only under one section. Therefore, a payment is liable for tax deduction only under one section. Clarification on various provisions relating to tax deduction at source such doubts clarify by issuing a public circular in the form of question answer. [ Circular no. 715 dated 08.08.1995 ] The expression work has been defined, inter alia, to also include (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting and telecasting. According to the amended provisions, tax is to be deducted at the rate of 1% in cases of advertising and at the rate of 2% in other cases, of the sum as income-tax on income comprised therein. [ Circular no. 714 Dated 03.08.1995 ] It is clarified that advertising may be in print or electronic media, i.e., in newspapers, periodicals, radio, television, etc. In such cases the tax will be deducted at the rate of 1% of the payment made for advertising including production of programmes for such broadcasting and telecasting to be used in such advertising. In all other cases of work of broadcasting and telecasting including production of programmes for such broadcasting and telecasting, where advertising is not involved, tax will be deducted at the rate of 2% of the sum. It is also clarified that the tax will be deducted at source under section 194J from payments made for professional services. Thus, when an advertising agency makes payments for professional services to a film artiste such as an actor, a cameraman, a director, etc., tax will be deducted at the rate of 5%. Whether the applicability of the provisions of section 194C in respect to payment made made from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways. [ Circular no. 713 dated 02.08.1995 ] It is clarified that the provisions of section 194C do not apply to the payments made to the airlines or the travel agents for purchase of tickets for air travel of individuals. The provisions shall, however, apply when payments are made for chartering an aircraft for carriage of passengers or goods. such clarification shall also apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also. Whether the applicability of the provisions of section 194C in respect of the hire charges paid to the bus owners for the hire of buses. [ Circular no. 558 dated 28.03.1990 ] In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payment made to the private bus owners. If may, therefore, be kept in mind that the applicability of the provisions of section 194C in such cases may be considered on merits in the light of the aforesaid observations, and to this extent the clarification given in question No.5 in Board s Circular No.98, dated September 26, 1972, stand modified. Deduction from payments to contractors and sub-contractors in bidi manufacturing industry. [ Circular no. 487 dated 08.06.1987 ] Provisions of section 194C would apply in respect of payments made to Munshis and that would apply to payments under oral contracts also. The payments to Munshis which would be hit by the provisions of section 194C covered not only the payments to them for raw material but also the payments to the workers. Whether the provisions of section 194C of the Income-tax Act, 1961, to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP). [ Circular No. 502 dated 27.01.1988 ] The programmes under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP) are implemented with active participation from local communities and Panchayati Raj institutions, under the direct supervision of the State Governments, in accordance with the guidelines set by the Central Government. There is no contractual relationship between the village committees/voluntary agencies and the State Governments, which is essential for triggering the provisions of Section 194C. Additionally, these schemes explicitly prohibit the use of contractors or middlemen for carrying out the work. Therefore, the provisions of Section 194C do not apply to payments made for works executed under these programmes. Whether the provisions of section 194C whether a munshi engaged by the bidi manufacturers is a contractor or an agent. [ Circular No. 433 dated 25.09.1985 ] The Board are advised that in view of the position that the definition of the expression contractor in the Bidi and Cigar Workers (Condition of Employment) Act, 1966, includes sub-contractor, agent, munshi, thekedar or sattedar, the provisions of section 194C would apply in respect of payments made to munshis. It may be clarified that the provisions of section 194C are wide enough to cover oral contracts also. By the very nature of the functions performed by the munshis, there is an implied contract between the manufacturer and the munshis and, consequently, the munshis are contractors even though there is no written contractor agreement.