Amended Section 194C-TDS on Contractors from FY 2020-21: Section 194C deals with TDS on payments to contractors/subcontractors. It provides the details of the nature of payments to contractors covered for withholding tax (TDS) and payments which are outside the scope of the provisions of section 194C. This section 194C basically relates to ‘works contract’ and also covers TDS on payments made to transporters. Hence, the provisions of section 194C related to TDS also extends to transport contractors. Circumstances, when there cannot be tax deduction in case of payments to transporters, are also provided in section 194C.
Bare provision of section 194C
Before discussing the details of section 194C related to TDS on payment to contractors, at the outset, it is pertinent to read the bare provision of section 194C.
Payments to contractors.
194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,
of such sum as income-tax on income comprised therein.
(2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, 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.
(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.
(5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds one lakh rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.
(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where 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, to the person paying or crediting such sum.
(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.
Explanation.—For the purposes of this section,—
(i) "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 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
(h) any trust; or
(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
(j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
(k) any firm; or
(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) is liable to audit of accounts under clause (a) or clause (b) of section 44AB has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees 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;
(ii) "goods carriage" shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;
(iii) "contract" shall include sub-contract;
(iv) "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 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 clause (b) of sub-section (2) of section 40A,
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.
(As amended by Finance Act, 2020)
The amendment: Clause (iv) of the Explanation of the section 194C defines “work”. Sub-clause (e) of this definition includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer within the definition. However, it excludes 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.
It has been noted that some assessees are 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 escapes the tax net.
Therefore, to bring clarity in the section and plug the leakage, it is proposed to amend the definition of “work” under section 194C 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. 'Associate' is proposed to be defined to mean a person who is placed similarly in relation to the customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A of the Act.
This amendment has come into effect from 1st April, 2020.
As per the above provision, section 194C provides for deduction of income tax from payment made to any resident contractor for carrying out any work in pursuance to a contract including a labour contract between the contractor and the specified persons.
Who are liable to deduct TDS from payment to contractors under section 194C
As per section 194C, the following specified persons are liable to deduct income tax from the payments it make to contractors-
(a) Central Government or any State Government; or
(b) any local authority; or
(c) any statutory corporation; or
(d) any company; or
(e) any co-operative society; or
(f) any housing or town development authority like CIDCO, HUDCO; or
(g) any registered society; or
(h) any trust; or
(i) any university ; or
(j) any foreign Government or a foreign enterprise or any foreign association or body; or
(k) any firm; or
(l) an individual or a Hindu undivided family or an association of persons or a body of individuals whose total sales, gross receipts or turnover from business or profession carried on by him exceeds Rs. 1 crore in case of business or Rs. 50 lakh in case of profession during the preceding financial year.
State Bank of India and Life Insurance Corporation of India are two examples of corporations established by “a Central Act”. [CIT(TDS), Kanpur vs Canara Bank (Civil Appeal No. 6020 of 2018), Supreme Court]
A Resident Welfare Association registered as a co-operative society or society is liable to deduct TDS from various contractual payments if the threshold limit is exceeded. It includes payments to plumbers, mansons, electrical works, etc.
The Finance Act, 1973 has amended section 194C so as to include "co-operative societies" in the categories of persons who are required to deduct tax at source from payments made by them to contractors. Accordingly, income-tax will be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts under section 194C.
[Circular No. 114 dated 21-6-1973]
A trust whose income is otherwise exempt from income-tax is also required to deduct TDS under section 194C.
When or at what point of time tax is required to be deducted from payment to contractors under section 194C
Any specified person responsible for making a payment to any resident contractor or a sub-contractor should deduct tax at the time of payment to the contractor. However, if the books are kept on accrual basis then tax shall be deducted at the time of credit of the amount to the accounts of the contractor.
Where the amount is credited to a suspense or any other account instead of the contractor’s account then tax shall be deducted at that point of time.
TDS on Advance Payment: Since tax is required to be deducted at the time of payment or credit, whichever is earlier, it follows that whenever any advance amount is paid to the contractor for carrying out the contract, then tax should be deducted by the person responsible for making the payment at that point of time. [Circular No. 681 dated 8-3-94]
No TDS for personal payments: Where the payer is an Individual or HUF and makes any payment to a contractor which is exclusively for personal purposes then the individual or HUF shall not be required to deduct TDS from such payment. Hence, an Individual or HUF who is covered as ‘specified persons’ shall be required to deduct TDS only if the payment is made for the business purposes. In case of payment to contractors for personal purposes, TDS shall be required to be deducted under section 194M.
What is the threshold limit of TDS under section 194C
Any person (specified person) shall be liable to deduct tax from payment to contractors under section 194C when the threshold limit of Rs. 30,000 is exceeded or is likely to exceed.
In other words, no deduction of tax shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed Rs. 30,000.
This limit of Rs. 30,000 is per invoice or single-bill basis. If the value of a single-bill is more than Rs. 30,000, say Rs. 40,000, tax is deductible.
However, there is one exception to this rule. Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds Rs. 1 Lakh, then tax is deductible under this section.
Hence, the threshold limit for section 194C is Rs. 30,000 in case of a single-bill or Rs. 1,00,000 in aggregate for a financial year.
If tax is not deducted in one bill since the bill or invoice is below the threshold limit but at a later date the aggregate amount exceeds Rs. 1,00,000 then tax is deductible in earlier amount also.
Tax is deductible under section 194C if at one point of time the payment to a contractor does not exceed Rs. 30,000 but is expected to exceed Rs. 1,00,000 at any time in the financial year.
What is the rate of TDS under section 194C
Every person responsible for making a payment to contractors shall deduct income tax at the following rate-
(i) where the payee or contractor is an individual or a Hindu undivided family - 1 per cent
(ii) where the payee or contractor is any other person (other than an individual or HUF) - 2 per cent.
The rate of TDS for section 194C is specified in the Income Tax itself.
There is no need to add ‘Surcharge’ and ‘Health and Education Cess’ to the rate of TDS as provided.
If the payee fails to furnish his valid PAN to the deductor, then the rate of TDS shall be 20 per cent instead of 1% or 2%, as the case may be, as per the provisions of section 206AA.
On what value tax is required to be deducted under section 194C
Tax shall be deducted by the person making the payment to a contractor for carrying out any work. If the contractor specifies the value of materials seapartely in the invoice, then value of such materials shall be excluded from the invoice value and tax is deductible on the remaining amount.
If the value of material is not mentioned separately in the invoice, then tax is deductible on the whole of the invoice value.
No TDS on GST: Further, CBDT had earlier issued a 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.
After the Government had brought in force a new Goods and Services Tax regime with effect from 01.07.2017 replacing, amongst others, the Service Tax which was being charged prior to this date as per the provisions of Finance Act, 1994. Therefore, there is a need to harmonize the contents of Circular No. 1/2014 of the Board with the new system for taxation of services under the GST regime.
CBDT has vide Circular No. 23/2017 dated 19-07-2017 clarified that wherever in terms of the agreement or contract between the payer and the payee, the component of 'GST on services' comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid or payable without including such 'GST on services' component. GST for these purposes shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and Services Tax and Union Territory Goods and Services Tax.
The said circular further clarifies that in respect of contracts was entered into during service tax regime, the same is applicable to GST on services on or after 01.07.2017.
Hence, there is no requirement to deduct TDS on the GST component indicated on the invoice.
When tax is not deductible under section 194C
In the following two situations, no tax is required to be deducted from payment to contractors under section 194C-
(i) If the amount paid or credited to a contractor does not exceed Rs. 30,000 against single-bill or Rs. 1,00,000 in aggregate during the financial year.
(ii) 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 -
(a) such contractor owns ten or less goods carriages at any time during the previous year and
(b) furnishes a declaration to that effect along with his Permanent Account Number (PAN), to the payer.
Notes:
1. There is no prescribed form or format of declaration. It can be given simply on the letter-head of the transporter with his seal and signature.
2. 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 206AA.
3. This benefit of non-deduction of tax is only applicable for a transporter engaged in the business of plying, hiring or leasing goods carriages.
4. 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 i.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.)
5. The capacity of goods carriages have been made irrelevant.
6. 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)]
7. 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.
TDS on transporter
Under section 194C, transport contract are of two types-
1. Passenger Transport
2. Goods Carriage Transport
The benefit of no tax deduction as stated in section 194C(6) is given only to Goods Carriage Transport contracts and not to the Passenger Transport contracts.
The provisions related to transporters are summarized below-
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).
On what contracts tax is deductible under section 194C
Section 194C applies on payment to contractors for carrying out any work under a contract between the contractor and contractee.
Therefore, TDS under section 194C applies to work contract. A contract includes sub-contract. Thus payment to sub-contractors are also exigible for deduction of TDS under section 194C.
Distinction between a contractor and a sub-contractor: Mumbai Tribunal in the case of HCC-L&T Purulia Joint Venture v JCIT (ITA Nos. 1644, 3041/MUM/2010), wherein it was held as follows:
"The provisions of section 194C as substituted by the Finance (No. 2) Act, 2009 w.e.f. 1.10.2009 has now not made any distinction between a payment to a contractor or sub-contractor and all payments for carrying out any work in pursuance of contract are covered within the fold o f section 194C (1) of the Act. Further Explanation (iii) also provides that a contract includes sub- contract. Thus on and from 1.10.2009 payments made by a sub-contractor to a sub sub-contractor would also be covered under section 194C of the Act".
“That by virtue of the Amendment introduced by Finance Act (No.2) 2009, the distinction between a contractor and a sub-contractor has been done away with and Clause (iii) of Explanation under 194C(7) now clarifies that "contract" shall include sub-contract”. [Soma Rani Ghosh vs DCIT ( ITA No. 1420 /KOL/ 2015), ITAT Kolkata]
The term "work" includes the following contracts-
(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,
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.
Apart from the above definition, supply of labour for carrying out any work also comes under the purview of ‘works contract’.
What is the time limit for payment of tax deducted from payments to contractors
As per section 200(1) and 200(2A), any tax deducted under section 194C from the payments made to a contractor shall be required to be deposited to the credit of the central government within the prescribed time limit.
Section 200(2A) applies to a government office whereas section 200(1) is applicable to other deductors.
Rule 30 of Income Tax Rules, 1962 prescribes the following time limit to deposit the tax deducted under section 194C-
The facility to deposit the TDS quarterly in special cases with the prior permission of the Assessing Officer is not available for tax deducted under section 194C.
The TDS is required to be deposited by income-tax Challan No. ITNS 281. In case where the TDS is deposited electronically by online method, the same may be deposited by internet banking and Debit Card. Payment by Credit Card is not allowed, though specified in Rule 125.
As per Rule 125 of the Income Tax Rules, 1962 (as amended by Notification No. 34/2008 dated 13.03.2008), the following persons are mandatorily required to pay tax electronically on or after the 1st day of April, 2008-
(a) a company; and
(b) any other person to whom the provisions of section 44AB (Compulsory tax audit) are applicable.
Further, it is clarified by CBDT Circular No. 5/2008 dated 14.07.2008 that a taxpayer can make electronic payment of taxes from the account of any other person. However, the challan for making such payment must clearly indicate the PAN/TAN of the taxpayer/deductor on whose behalf the payment is to be made. It will not be necessary for the assessee to make payment of taxes from his own account in an authorized bank.
What is the time-limit for furnishing the TDS statements
According to section 200(3), every deductor is required to furnish a statement of tax deduction and deposit of TDS in the prescribed form and within the prescribed time limit after paying the tax deducted to the credit of the Central Government within the prescribed time as detailed above.
Therefore every person deducting tax under section 194C, is required to furnish a TDS statement under section 200(3).
As per Rule 31A of Income Tax Rules, 1962, the TDS statement is required to be filed electronically with the Income Tax department.
Rule 31A(1)(b)(ii) and 31A(2) prescribes filing of quarterly TDS statements u/s 200(3) in Form No. 26Q within the following time limits-
Manners of filing TDS statements
As per Rule 31A(3), the TDS statements may be furnished in any of the following manners, namely:—
(a) furnishing the statement in paper form;
(b) furnishing the statement electronically under digital signature in accordance,
(c) furnishing the statement electronically along with the verification of the statement in Form 27A.
Though there exists a rule for filing TDS statements in paper form, practically, it has become redundant.
Processing of statements [Section 200A]
Finance (No. 2) Act, 2009, has introduced the system of computerized electronic processing of TDS statements filed under section 200(3) by the deductor on the same lines as processing of Income-tax returns. Such processing of return shall be made within one year from the end of the financial year in which the statement is filed to make the following adjustments -
(i) any arithmetical error in the statement; or
(ii) an incorrect claim, if such incorrect claim is apparent from any information in the statement, for example, in respect of rate of deduction of tax at source where such rate is not in accordance with the provisions of the Act
After making adjustments, tax and interest [e.g. u/s 201(1A)] would be calculated and sum payable by the deductor or refund due to the deductor will be determined. An intimation will be sent to the deductor informing him of his tax liability or granting him the refund due.
Late fees for filing of TDS statements (Section 234E): As per section 234E, where a person fails to file the TDS return on or before the due date prescribed in this regard, then he shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure continues. The amount of late fees shall not exceed the amount of TDS. The late filing fees shall be deposited before filing the TDS return. It should be noted that Rs. 200 per day is not penalty but it is a late filing fee.
Penalty for no or delayed filing of TDS statement: Apart from late filing fees a deductor shall be liable to pay penalty under section 271H. As per section 271H, where a person fails to file the statement of tax deducted at source on or before the due dates prescribed in this regard, then assessing officer may direct such person to pay penalty under section 271H. The minimum amount of penalty that can be levied is Rs. 10,000 which can go upto Rs. 1,00,000. Penalty under section 271H will be in addition to late filing fees prescribed under section 234E.
Apart from delay in filing of TDS statements, section 271H also covers cases of filing incorrect TDS statements. Penalty under section 271H can also be levied if the deductor files an incorrect TDS return. In other words, minimum penalty of Rs. 10,000 and maximum penalty of upto Rs. 1,00,000 can be levied if the deductor files an incorrect TDS return.
However, no penalty under section 271H will be levied in case of delay in filing the TDS statements if following conditions are satisfied:
(i) The tax deducted at source is paid to the credit of the Government.
(ii) Late filing fees and interest (if any) is paid to the credit of the Government.
(ii) The TDS statement is filed before the expiry of a period of one year from the due date specified on this behalf.
It should be noted that the above relaxation is applicable only in case of penalty levied under section 271H for delay in filing the TDS statement and not in case of filing incorrect TDS statement.
Apart from above relaxation, in the following two cases the taxpayer can get relief from penalty under section 271H:
Under section 273A(4) the Principal Commissioner of Income-tax or Commissioner of Income-tax has power to waive or reduce the penalty levied under the Income-tax Act. Penalty can be waived or reduced by the Commissioner of Income-tax if the conditions specified in section 273A(4) in this regard are satisfied.
Apart from shelter of section 273A(4), section 273B also provides immunity from penalty in genuine cases. As per section 273B, penalty under section 271H will not be levied if the taxpayer proves that there was a reasonable cause for failure.
No requirement to file TDS Returns (Section 206): From April1, 2005, the requirement of filing of TDS returns have been dispensed with. As per new requirement, a deduction is required to file quarterly TDS statements as mentioned above from April 1, 2005.
What is the time-limit to issue the TDS Certificates
Every deductor deducting TDS under section 194C is duty bound to furnish a TDS certificate to the deductees or payees in the prescribed time and in the prescribed form verified in the prescribed manner. [Section 203]
Rule 31(3) of Income Tax Rules, 1962 provides for issuance of TDS certificates for payment to contractors under section 194C in Form 16A and the same is required to be issued quarterly within 15 (fifteen) days from the due date for furnishing the statement of tax deducted at source under Rule 31A.
The due dates for issue of TDS certificates in Form 16A are thus as given below-
The TDS certificates shall be issued after generating and downloading the same from the TRACES portal and can be issued with manual seal and signature or with digital signature. [Refer Circular No. 03/2011 dated 13.05.2011]
Penalty for delay in issuance of TDS certificates
Under section 272A, a penalty of Rs. 100 per day for each day of default shall be payable in case there is any delay in the issue of TDS certificates. The penalty shall begin from the expiry of the due date of furnishing the TDS certificates and shall continue till the date of actual issue of the TDS certificates.
Interest for Non-deduction of TDS or delay in payment of TDS
There can be two situations where interest is payable under the provisions of TDS.
One is for non-deduction of TDS from the payments made to the contractors.
The other one is for non payment of tax deducted from the payment made to contractors to the credit of the central government.
As per section 201, if any person who is liable to deduct tax at source does not deduct it or after so deducting fails to pay, the whole or any part of the tax to the credit of the central government, then, such person, shall be liable to pay simple interest as given below:
(i) Interest shall be levied at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax was deducted.
(ii) Interest shall be levied at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax was actually deposited to the credit of the Government.
In other words, interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.
Interest in case no tax is deducted by the deductor but deductee pays the tax
As per section 201, a deductor who fails to deduct the whole or any part of the tax at source is treated as an assessee-in-default. However, the payer who fails to deduct the whole or any part of the tax on the payment made to a deductee (whether resident or non-resident) shall not be deemed to be an assessee-in-default in respect of tax not deducted by him, if the following conditions are satisfied:
(i) The recipient has furnished his return of income under section 139.
(ii) The recipient has taken into account the above income in its return of income.
(iii) The recipient has paid the taxes due on the income declared in such return of income.
(iv) The recipient furnishes a certificate to this effect from a Chartered Accountant in Form No. 26A.
In other words, in case of non deduction of tax at source or short deduction of tax, in case of a deductee, if all the conditions are satisfied, then the deductor will not be treated as an assessee-in-default. However, in such a case, even if the deductor is not treated as an assessee-in-default, he will be liable to pay interest under section 201(1A). In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such deductee. Interest in such a case will be levied at 1% for every month or part of the month.
Filing of TDS statement after payment of interest
As stated above, every deductor has to furnish quarterly statements in respect of tax deducted by him. As per section 201(1A), interest for delay in payment of TDS to the credit of the government should be paid before filing the TDS statement.
Interest for non-payment of tax amount as per demand notice
As per section 220(1), when a demand notice under section 156(1) has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax), then such amount shall be paid within a period of 30 days of the service of the notice. In certain cases, the above period of 30 days can be reduced by the tax authorities with the approval of designated authorities.
Section 220(2) deals with payment of interest in case of failure to pay tax within the time specified in the demand notice. As per section 220(2), if the taxpayer fails to pay the amount specified in any notice of demand issued under section 156(1) within the period as allowed in this regard, then he shall be liable to pay simple interest at 1% for every month or part of a month. Interest shall be levied for the period commencing from the day immediately following the end of the period mentioned in the notice and ending with the day on which the amount is paid.
After processing of TDS statements (as per section 200A) an intimation is generated specifying the amount payable or refundable. Such intimation shall be deemed as notice of demand under Section 156. Failure to pay such tax specified in intimation shall attract interest under Section 220(2).
It is provided that where interest is charged under sub-section (1A) of section 201 on the amount of tax specified in the intimation issued under sub-section (1) of section 200A for any period, then, no interest shall be charged under Section 220(2) on the same amount for the same period.
Disallowance of expenditure on failure to deduct tax or deposit the tax after deduction
Apart from interest and penalty for non-deduction of TDS from the payments made to contractors or sub-contractors, there is one more consequence that the deductor will face under the Income Tax Act, 1961.
Section 40(a)(ia) provides for disallowance of business expenditure in respect of payments made to the residents on which no tax is deducted or after deduction of tax, the same is not paid to the government.
From AY 2015-16 and onwards, section 40(a)(ia) of the Income Tax Act has been amended to provide that in case of non-deduction of tax at source or non-payment of tax so deducted on payments made to residents, the disallowance shall be restricted to 30% of the amount of expenditure claimed.
Prior to AY 2015-16, whole of the amount of such expenditure claimed was disallowed for the purposes of computing income under the head "Profits and gains of business or profession".
Under section 40(a)(ia) of the Act, in case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act. Hence, the deduction of 30% of the amount of disallowed expenditure shall be allowed in the previous year in which the tax so deducted has been paid on or before the due date specified for filing of return of income under section 139(1).
Section 40(a)(ia) covers all expenditure on which tax is deductible from the payments made to residents including section 194C under Chapter XVII-B of the Income Tax Act.
No disallowance u/s 40(a)(ia) for short deduction: In the case of DCIT vs. M/s. S. K. Tekriwal (I.T.A No. 1135/Kol/2010), ITAT Kolkata has held section 40(a)(ia) provides for a disallowance if amounts towards rent etc. have been paid without deducting tax at source. It does not apply to a case of short-deduction of tax at source. As the assessee had deducted u/s 194C, it was not a case of “non-deduction” of TDS. If there is a shortfall due to difference of opinion as to which TDS provision would apply, the assessee may be treated as a defaulter u/s 201 but no disallowance can be made u/s 40(a)(ia). [Chandabhoy & Jassobhoy (ITA No. 20/Mum/2010) (ITAT Mumbai) followed]. The decision of the Tribunal was affirmed by Calcutta High Court in ITAT No. 183 of 2012 [CIT vs. S.K. Tekriwal reported in 361 ITR 432 (Cal)]
The position of allowability of expenditure claimed which is subject to TDS can be summarized as below-
Can tax be deducted at a lower rate of TDS than specified in section 194C for payment to contractors?
Section 197 of the Income Tax Act, 1961 provides for lower or nil rate of TDS certificates for certain provisions of Chapter XVII-B. Section 194C finds mentions in the list of various TDS sections in section 197 and hence eligible for lower or nil rate of TDS.
The deductee shall file an application in Form 13 to the Assessing Officer with relevant details and documents. Once the AO issues the lower or nil TDS certificates, the deductor shall deduct TDS at the rate mentioned in the certificate so issued u/s 197 from payment to contractors under section 194C instead of the prescribed rate of TDS of 1%/2%.
Proper information about the lower TDS certificate in respect of the deductee is required to be mentioned in the quarterly TDS statements to be filed u/s 200(3) by the deductor. Even if the rate of TDS as per the certificate is ‘Nil’, the information about the deductee is required to be furnished in the quarterly TDS statements.
Payment to non-resident contractors: Section 194C is applicable when the payment is made to resident contractors. In case of payment to non-resident contractors, the same will be covered by section 195.
Some issues in respect of deduction of tax from payments to contractors or sub-contractors under section 194C are discussed below.
Section 194C was introduced with effect from 1st April, 1972 and since then it has undergone many changes.
Meaning of Contract/Works Contract: Explanation (iii) and (iv) to section 194C defines ‘contract’ and ‘work’ in an inclusive manner and therefore is subject to wider interpretation ans extensive coverage. The word `includes' when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include.
According to it, "contract" shall include sub-contract. The ‘work’ shall include advertising, broadcasting and telecasting, carriage of goods or passengers by transport except Railways, catering, manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, 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.
Since these definitions are inclusive definitions, it implies that these terms do not restrict itself to those items that are being mentioned in there. Those items mentioned there are just indicative to much broader concepts of similar standing. As a result, it led to many litigations between the assessee and the income tax department. In order to clarify the position, CBDT from time to time issued several clarifications by circulars to define the meaning of the term ‘work’ and ‘contract’.
In this context, CBDT has issued Circular No. 681 dated 08.03.1994 clarified that the conclusion flowing from the judgments of the Supreme Court (in the case of Associated Cement Co. Ltd. vs. CIT [1993] 201 ITR 435) and the Patna High Court (Associated Cement Co. Ltd. vs. CIT [1979] 120 ITR 444) is that the provisions of section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc. It further issued the following guidelines in regard to the applicability of the provisions of section 194C:–
(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.
(ii) Service contracts are covered by the provisions of section 194C since service means doing any work.
(iii) Since contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts.
(iv) Similarly, contracts granted for processing of goods supplied by any of the ‘specified person’, where the ownership of such goods remains at all times with such person, falls within the purview of section 194C.
(v) The position will remain same in respect of contracts for fabrication of any article or thing where materials are supplied by the specified person and the fabrication work is done by a contractor.
(vi) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(vii) In State of Himachal Pradesh vs. Associated Hotels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour.
(viii) The term “transport contracts” would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.).
Reference in this regard is also invited to Board’s Circular No. 558, dated 28th March, 1990.
(ix) The term “materials contracts” in the context of section 194C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.
The provisions of section 194C would not apply in the following cases:
(i) In relation to payments made for hiring or renting of equipments, etc.
(ii) In relation to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating letters of credit and transactions in negotiable instruments.
(iii) Contracts for sale of goods.
(iv) Where the contractor undertakes to supply any article or thing fabricated according to the specifications given by any specified person and the property (title) in such article or thing passes to the such person only after such article or thing is delivered, the contract will be a contract for sale and as such outside the purview of this section.
(v) The term “service contracts” would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc.
Note:
The CBDT Circular No. 681 dated 8.3.1994 covers the above mentioned professional services under section 194C (at that time section 194J was not in statute). However, Bombay High Court in the case of Chamber of Income-tax Consultants vs. CBDT [1994] 209 ITR 660 held this CBDT’s circular as illegal which was based on an erroneous reading of the observations of the Supreme Court in Associated Cement Co. Ltd. (supra) and it is without jurisdiction in so far as it requires deduction of tax at source under s. 194C of the Act in respect of the payments of fees for professional services. Similar decision is rendered in the case Rakesh Raj and Associates vs CBDT (1997) 223 ITR 282 (P&H).
These professional services are now covered under the provisions of section 194J. In the light of the aforesaid decisions, the Parliament deemed it fit to insert section 194J into the Act by Finance Act, 1995 with effect from 01.07.1995 so as to bring the fees for professional or technical services within the purview of deduction of tax at source.
(vi) However, services rendered for which payment is in the nature of salaries which is chargeable under the head of ‘Income from Salaries’ in Chapter IV of the Income-tax Act, 1961, shall not be covered by section 194C.
Other important principles for deduction of tax under section 194C enumerated in the Circular No. 681 of 1994 are as follows-
(i) The percentage deduction prescribed in law is with reference to the amount of payment and not “income comprised in the payment”. The person responsible for making payment, therefore, is not required to estimate the income comprised in the payment.
(ii) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed the threshold limit.
(iii) The provisions are wide enough to cover not only written contracts but also oral contracts.
With this Circular, Board’s Circular No. 86, dated 29th May, 1972, and No. 93, dated 26th September, 1972, and para 11 of Circular No. 108, dated 20th March, 1973, were withdrawn. Board’s Circular No. 558, dated 28th March, 1990, was reiterated.
Meaning of ‘Any Work’: It is clarified that the term ‘any work’ in section 194C has to be understood, in its natural meaning i.e., any work means any and not only a ‘works contract’ which has a special connotation in the tax law. This has been clearly enunciated by the Supreme Court of India in its judgment dated 23-3-1993 in Civil Appeal No. 2860 (NT) of 1979. Associated Cement Co. Ltd. vs. CIT [1993] 201 ITR 435. Thus, the provisions of section 194C are applicable to all types of contracts for carrying out any work, such as transport contracts, service contracts, labour contracts, material contracts, as well as works contracts, etc.
Once there is a specific provision introduced by way of an Explanation to Section 194C, to bring within its ambit the contractual work concerning broadcasting and telecasting, the Revenue cannot resort to Section 194J which is in more general terms. [CIT vs. Prasar Bharti (Broadcasting Corpn. of India) (2007) 292 ITR 580 (Del)]. It was held that payment to contractors for broadcasting and telecasting although also included in section 194J but being a general provision, the specific provision of the section 194C read with the Explanation was to be applied.
Similarly, payments by Cable operators to TV Channel are also covered. [Kurukshetra Darpans (P) Ltd. vs. CIT 217 CTR 326 (P&H)]
The supply of printed labels by the printer amounts to sale and not a works contract and hence section 194C is not attracted. [BDA Limited vs. Income-Tax Officer (TDS) (2006) 281 ITR 99 / 201 CTR Bom 413 (Bom.)]. In this case, the contractor is supplying the printed labels by using its own raw materials, labour, and machineries at his own premises as per the specification of the required labels of the assessee. The assessee was not supplying the raw materials viz. labels, ink, papers, screen-printing, screens, etc..
If a manufacturer purchases material on his own and manufactures a product as per the requirement of a specific customer, it is a case of sale and not a contract for carrying out any work. The fact that the goods manufactured are according to the requirement of the customer does not mean or imply that any work was carried out on behalf of that customer. [Wadilal Dairy International Limited vs. Asst. CIT [2002] 81 ITD 238 (Pune) (I. T. A. Nos. 642 and 643 of 1999)]
The payment made to the labourers engaged by the contractor for loading the cement bags for transportation fall within the ambit of the term "any work", and therefore, TDS is deductible under Section 194C. [Associated Cement Co. Ltd. vs. CIT [1993] 201 ITR 435 (SC)]
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 is not included in the definition of the “Work” as described in the Sub-clause (iv) of the Explanation to Section 194C of the Income Tax Act, 1961 [DCIT vs. Shalimar Chemical Works Ltd. (I.T.A No. 892/Kol/2011) ITAT Kolkata].
Similar judgments are:-
Hon’ble Kolkata ITAT in the case of ITO vs. S.T. Printing Works and Hon’ble Delhi High Court in the case of CIT vs. Dabur India Ltd. 283 ITR 197 (Delhi).
Where raw material is supplied by the customer: Assessee an Indian Company markets a product which it got manufactured from M/s Torrent Pharmaceuticals Ltd. Raw material for manufacture of this product was supplied to Torrent Pharmaceuticals Ltd. by a foreign company namely Nova Dordisk, Denmark. Product produced by the use of raw material for manufacture of the product was stipulated to be exclusively sold to assessee. Assessee company was to pay Torrent Pharmaceuticals Ltd. 19% of the landing cost of raw material. Held this payment is liable for TDS u/s 194-C [CIT vs. Nova Nordisk Pharma India Ltd. (2012) 341 ITR 451 (Kar)]
Payment for Gas Transportation Charges: Assessee manufacturer of fertilizer, purchased natural gas supplied by various agencies. Seller laid down pipeline and other equipment for supply of gas to assessee and other customers also. Ownership of gas passed on to the assessee only at point of delivery. The agreement is for purchase of gas and transportation charges only part of the entire sale consideration. Transportation charges are fixed monthly charges and not on consumption of quantity of gas. TDS u/s 194C not applicable. [CIT vs. Krishank Bharati Cooperative Ltd. (2012) 349 ITR 68 (Guj)]
Payment to daily wage workers: It was held that payments made to daily wage workers could not be considered as contractual payments under section 194C. [CIT vs. Dewan Chand (2009) 178 Taxman 173 (Del.)]
Services provided by hotels apart from boarding and lodging like trained / experienced multi-lingual staff, 24-hour service for reception, information and telephones, house-keeping of the highest standard, select restaurants, bank counter, beauty saloon, barber shop, car rental, shopping centre, laundry / valet, health club, business centre services etc does not constitute 'carrying out any work' under section 194C of the Act.
It distinguished the decision of Apex Court in Associated Cement’s case (supra) and observed that it is clear that the word 'carrying out any work' in section 194C is limited to any work which on being carried out culminates into a product or result. In other words, the word 'work' in section 194C is limited to doing something with a view to achieving the task undertaken or carry out an operation which produces some result.
The services rendered by a hotel to its customers by providing certain facilities/amenities do not constitute 'work' within the meaning of section 194C, the impugned circular No. 681 issued by the CBDT to the extent it applies to a customer availing the services rendered by the hotel must be held to be contrary to section 194C of the Act. Consequently, the Circular No. 681 dated 8.3.1994 to the extent it holds that the services made available by a hotel to its customers are covered under section 194C of the Act must be held to be bad in law.
The word "work" is to be understood in the limited sense as a product or result. The carrying out of work indicates doing something to conduct the work to completion or an operation which produces a result. [Birla Cements Works vs. CBDT reported in 248 ITR 216 (SC)]
No TDS from payment to transporters by any person: The immunity from non-deduction of TDS from payment to transporters is applicable to any person making the payment to the transporter subject to the fulfilment of conditions specified in section 194C(6) of obtaining PAN and a declaration from the transporter. Hence, subject to compliance with the provisions of Section 194C(6), immunity from TDS under sec. 194C(1) in relation to payments to transporters, applies transporter and non-transporter contractees alike. [Soma Rani Ghosh vs. DCIT ( ITA No. 1420 /KOL/ 2015), ITAT Kolkata]
Similar verdict is given in the case of DCIT vs. Murugarajendra Oil Industry (P) Ltd. (ITA No. 2094/Bang/2017) by ITAT Bangalore.
If the transporter gives false declaration of number of trucks owned by the transporter then the assessee cannot be held guilty for non deduction of TDS u/s 194C as his liability ceased when the declaration under section 194C(6) is furnished or taken by the assessee from the transporter. [Shri Anil Khandelwal vs. ITO ( ITA No.299/Ind/2016) ITAT Indore]
TDS on hiring of trucks: TDS as per section 194C is required to be deducted when the payments are made to the contractor for carriage of goods subject to other conditions prescribed under section 194C but whenever the lorries and trucks are hired by the assessee to be used in his business under its own supervision and control, then TDS is not required to be deducted on payment made to the lorries/truck owners. [Kranti Road Transport Private Limited vs. ACIT, (2012) 50 SOT 15 ( ITAT, Visakhapatnam) followed in the case of DCIT vs. Chennupati Kutumbavathi (ITA No. 45/Vizag/2013) ITAT Visakhapatnam.]
Where assessee merely facilitates transportation of goods by hiring lorries, the assessee is not liable to deduct tax at source under section 194C on lorry charges paid to the truck owners because there is no direct contract of any kind between the truck owners and the assessee for transportation. [ITO vs. Bajaj Roadways (ITA No. 2023/Kol/2016), ITAT, Kolkata]
Also see Chandrakant Thackar vs. ACIT (ITA No. 247/Ctk/2009), ITAT Cuttack
No TDS by lorry booking agent: Where the assessee actually engaged himself not in the transportation business, but only facilitating or arranging transportation for various parties and he is a mere lorry booking agent then he cannot be held as the “person responsible” for deduction of tax at source under section 194C. [Sunil Kumar Prop. M/s. Bhawat Golden Carrier vs. ITO (ITA No 956/Del/2016) ITAT Delhi]
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]
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]
Also see CIT (TDS) vs. Bharat Electronics Ltd. (Income Tax Appeal No. 642 of 2012 and 643 of 2012), Allahabad High Court and CIT vs. Apeejay School (Income Tax Appeal No. 314 of 2011), Allahabad High Court.
It follows that if an assessee takes a car on hire and the assessee uses the car as per his own choice then it can be said that the assessee has taken the possession of the car and section 194-I will apply. If the assessee enters into a contract with the car agency for ferrying passengers say, employees then it is a case of tax deduction under section 194C.
Payment made to contractors for hiring dumpers: payment made to contractors for hiring dumpers is not rent for machinery or equipment but payment for works contract of shifting of goods from one place to another, hence section 194C is applicable and not section 194-I. [D.P.Vekariya vs. ITO (ITA No. 2864/Ahd/2011), ITAT Ahmedabad]
TDS on Ship hiring charges: Hire charges for hiring ships do not attract section 194C. [CIT vs. Poompuhar Shipping Corp. Ltd. (2006) 282 ITR 3 (Mad)]
TDS on Crane hiring charges: Assessee firm was engaged in business of civil construction and paid hiring charges for use of cranes. It was held that simpliciter payment of hiring charges of cranes could not be brought within sweep of definition of term 'work' hence it was not obligatory on part of assessee to deduct tax at source. [Bhangal Construction Co. vs. ITO (2019) 176 ITD 419 (Asr- Trib.)]
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)]
Where there is no written or oral agreement between assessee and transport for carriage of goods nor it is proved that any freight charges were paid to them in pursuance of a contract, there is no liability to deduct tax at source u/s 194C.
[CIT vs. United Rice Law Ltd. (2008) 217 ITR 332 (P&H)
CIT vs. Asst. Manager (Accounts) Food Corporation of India (2010) 326 ITR 106 (P&H)]
Contract need not be in writing: To invoke section 194C, a contract need not be in writing. Even an oral contract is good enough to invoke the provisions of section 194C. The Karnataka High Court in the case of Smt. J. Rama vs. CIT [2010] 194 Taxman 37 (Karnataka) held that Law does not stipulate the existence of a written contract as a condition precedent for invoking the provisions of section 194C with respect to payment of TDS. [Sri Balaji Prasanna Travels vs. ACIT - [2021] 123 taxmann.com 210 (Bangalore - Trib.): ITA No. 2078/Bang/2019 decided on 25.11.2020]
TDS on Gas Transportation Charges: TDS under section 194C does not apply to fixed gas transmission or transportation charges periodically to Gas Authority of India Ltd. (GAIL) for the supply of gas through the pipeline allocated to the assessee. The contract for the supply of gas is held as a contract for sale and a contract for works. [Shyam Industries Ltd. vs. DCIT (ITA No. 3323/Ahd/2010) (ITAT Ahmedabad)] Decision of ITAT Ahemdabad in the case of Krishak Bharati Cooperative Ltd. vs. ITO in ITA Nos. 1702,1703,2473,2474,4573 and 4574/Ahd/2007 wherein this type of contract is held as a contract for sale of goods and not a works contract followed.
Composite payment for lounging and catering services: Where the assessee paid consideration to a contractor for lounging, so as to provide a relaxed and separate space within the airport premises for its premium customers while waiting for their flights and also to provide food and drinks to the waiting customers free of cost, it is a case of composite services for a single consideration so that the same would fall under the generalized contractual category u/s 194C and not u/s 194-I. (However, pure lounging facilities reserved through a contractual arrangement by an airlines for a class of its passengers would attract TDS provision for rent.) [ACIT (TDS) vs. Qantas Airways Ltd (ITA Nos. 4601, 4604, 4605 & 4606/Mum/2012), ITAT Mumbai]
Landing and parking charges paid by airlines to the airport authority: Landing and parking charges paid by the assessee to Airport Authority of India do not amount to rent within the meaning of section 194-I and thus such payments shall be treated as payment of contractors under Section 194 C. Charges levied are in the nature of fee for the services offered rather than in the nature of rent for the use of the land. [CIT vs. Singapore Airlines Ltd. [2012] 252 CTR 429 (Mad.)]
Channel placement fees charges paid to MSO: Channel placement fees charges (known as " carriage fee" or "placement fee") paid by the broadcasters to the Multi System Operator (MSO) for placing their channel on a particular frequency/bandwidth to put the channel in prime band so that viewership, as well as quality of the channel, can be increased falls under clause (iv) of the explanation to Section 194C (which incorporates inclusive definition of "work" to include broadcasting and telecasting including production of programmes for such broadcasting and telecasting) and not under section 194J. [Star India (P.) Ltd vs. ACIT (ITA No. 30/Mum/2018) (Mum-Trib.)]
Contrary views taken in the case of United Airlines vs. CIT [2006] 287 ITR 281 (Del) and CIT vs. Japan Airlines Co. Ltd. [2010] 325 ITR 298 (Del) by the Delhi High Court which confirmed the said payment of landing and parking charges to the airport authority by airlines as 'rent' u/s 194-I.
Payment to C&F agents: The activities carried out by Clearing and Forwarding Agent (C&F Agent) form one Composite “Work”, and any Payments to such agents will attract deduction of tax at source only under section 194C of the Act. [Glaxo Smithkline Consumer Healthcare Ltd. Vs. ITO (2007) 12 SOT 221 (Delhi – Trib.)] Also refer Circular No. 715 Dated 08-08-1995 issued by CBDT.
Where there is a contract between the exporter and the airline, and the assessee was acting as a clearing and forwarding agent/intermediary, the assessee would not be responsible for deduction of tax at source in terms of section 194C. [Sima Agencies vs. ITO (2021) 126 taxmann.com 109 (Madras)/W.P. NO. 19565/2008]
Payment to contract manufacturers: Section 194C has been amended by the Finance (No.2) Act, 2009, w.e.f. 1.10.2009 to provide that “work” includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer. It is clarified that the definition of the word “work” will 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. [CIT vs Silver Oak Laboratories Pvt. Ltd. (S.L.P. (C) No.18012 of 2009), Supreme Court]
Also see ACIT Vs Tube Investments of India Ltd. (ITA No. 1560/Mds/2007), ITAT Chennai
Also see ACIT Vs Seagram Distilleries (P) Ltd., (ITA No. 2148/Del/2012), ITAT Delhi
Payment for maintenance contracts: The assessee company was in the business of providing telecommunication network and services has entered into comprehensive maintenance contracts with various parties for various equipment and installations.
It was held that the word ‘work’ stood defined under Explanation III to section 194C in an inclusive manner to include provision of certain specified services. The maintenance work would, therefore, clearly fall within the ambit of ‘work’ as defined under section 194C of the Act.
Payment for maintenance contract was for normal work and hence liable for deduction of tax under section 194C of the Act. Maintenance contracts that involve services that are fairly simple would attract deduction of tax under section 194C and not as technical services under section 194J. [ITO v. Bharat Sanchar Nigam Limited (2014) 64 SOT 138/ITA No. 6952 to 6954 of 2011 (Mum-Trib.)] Also See similar decision in CIT v. Saifee Hospital. (2019) 262 Taxman 343 (Bom) (HC) and CIT v. Asian Heart Institute and Research Centre (P.) Ltd. (2019) 262 Taxman 395 (Bom)(HC)
Also see Question No. 29 of CBDT’s Circular No. 715 dated 08-08-1995
Note: It should be remembered that Finance Act, 2020 has amended the provisions of section 194J to provide for lower 2 per cent of TDS on Fees for technical services against the 10 per cent as envisaged in section 194J.
Payment for printed materials: Purchase of printed packing material for which raw material was not supplied by assessee is a contract for sale not liable for TDS under section 194C. [CIT vs. Hindustan Lever Ltd. (2008) 306 ITR 25 (Guj)]
Payment to artists but as guests in reality shows: 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 under section 194C and not under section 194J. [Malayalam Communications Ltd. v. ITO (2019) 175 ITD 433/177 DTR 85 (Cochin) (Trib.)]
Payment for Catering Services: It was held that tax is deductible under section 194C and not section 194J. [CIT v. Saifee Hospital Trust. (2019) 262 Taxman 461 (Bom)(HC)]
Payment of placement fees/carriage fees paid to cable operators/MSO/DTH Operators: It was held that these are payments for work contract covered u/s 194C and not fees for technical service u/s 194J. [CIT v. Times Global Broadcasting Co. Ltd. (2019) 263 Taxman 466 (Bom-HC)] CIT v. UTV Entertainment Television Ltd ( 2017) 399 ITR 443 (Bom-HC) followed.
Payment for clerical services: It was held that payment made to services which are clerical in nature, provisions of section 194C is applicable and not provision of section 194J. The services cannot be held to be of technical or managerial services.[CIT v. Reliance Life Insurance Co. Ltd. (2019) 414 ITR 551 (Bom-HC)]
Payment to a franchisee of a newspaper: Payment made towards advertisement charges to a franchisee of a newspaper comes within the purview of Explanation (iv) to Section 194C which defines the term 'work' to include 'advertising'. [Mehra Eyetech Pvt. Ltd. vs. ACIT (ITA No. 1760/Mum/2019) (ITAT-Mum)]
Analysis of various issues on section 194C and Clarifications issued by CBDT
Payment made to munshis: In the bidi manufacturing industry, generally there are three parties, the manufacturer, the munshis and the workers. The manufacturer provides the raw material, i.e., leaves, tobacco, thread, etc., to the munshis who distribute the same to the workers who work at home. At regular intervals, the munshis collect the bidies prepared by the workers and hand over the same to the manufacturer. For this work, the manufacturer pays to the mun shis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
[Circular No. 433 dated 25-9-1985]
However, deductions under section 194C to be made from the payments to munshis need not include payments to such home workers employed through the medium of agency such as munshis but the workers bring bidi to the factory for quality check and for getting their payments.
[Circular No. 487 dated 8-6-1987]
Work executed under NREP and RLEGP: The provisions of section 194C are not attracted in the case of payments made in respect of works executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
[Circular No. 502 dated 27-1-1988]
Payments to travel agents for tickets sold to customers: 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 of goods.
[Circular No. 713, dated 2-8-1995]
Payment for advertising contract and payment to advertising professionals: 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 u/s 194C on the payment made for advertising including production of programmes for such broadcasting and telecasting to be used in such advertising including all other cases of work of broadcasting and telecasting including production of programmes for such broadcasting and telecasting.
However, 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 u/s 194J.
[Circular No. 714, dated 3-8-1995 reiterated in Circular No. 5/2002 dated 30-7-2002]
Payments made by a State Road Transport Corporation to private bus owners: The provisions of section 194C are applicable to the payments made by a State Road Transport Corporation to private bus owners from whom buses are hired for plying on specified routes.
[Circular No. 558, dated 28-3-1990]
TDS on Gas Transportation Charges: The main stakeholders in this Industry are the - Owners/Sellers of the gas (which could be a Gas Distribution Company); Transporters of gas (which could be the Owners/Sellers of the gas or a third party/parties) and the purchasers/ end-users of the gas. The Owner/Seller of the gas may transfer the ownership of the gas to the purchaser either at the point of delivery at the premises of the purchaser or at any intermediate point.
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.
It is needless to mention that 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.
[Circular No. 9/2012, dated 17-10-2012]
‘Contract for sale’ and ‘contract for work’: 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.
[Circular No. 13/2006, dated 13-12-2006]
TDS on payments to cold storage owners: The provisions of section 194C will be applicable to the amounts paid as cooling charges by the customers of the cold storage. [Circular No. 1/2008, Dated 10-1-2008]
CBDT has issued the following two detailed Circulars containing 34 FAQs to clarify various positions on TDS under section 194C:
Circular No. 715 of 1995 dated 08/08/1995
Circular No. 5 of 2002 dated 30/07/2002
Summary of FAQs of CBDT’s Circular No. 715 of 1995 dated 08/08/1995
Full text of the Circulars mentioned above can be accessed here.
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