15 October 2010
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Under the Indian Income Tax Act, the following provisions relate to the Tax Deduction at Source from payments to Contractors and Subcontractors under section 194C. • Person responsible for paying any sum for carrying any work to any resident contractor should deduct tax at source. • Tax should be deducted at source only if the contract is between the contractor and the following specified persons:
1. The Central Government or any State Government. 2. Any local authority. 3. Any corporation established by or under a Central, State or Provincial Act 4. A company 5. Any Co-operative Society. 6. 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. 7. Any Society registered under the Societies Registration Act, 1960 or any law corresponding to that Act in any part of India. 8. Any Trust. 9. Any University established by or under any Central, State or Provincial Act or any institution declared to be a University under the University Grants Commission Act. 10. Any firm. 11. Any individual or Hindu Undivided Family whose books are required to be audited under section 44AB during the immediately preceding financial year. [The turnover from business/profession exceeds the limits specified u/s 44AB during the immediately preceding financial year].
Note: Budget 2008 introduced the burden of deduction of tax under this section to Association of Persons and Body of Individuals also, whether they are incorporated or not. • Individual or HUF need not deduct tax if the contract is exclusively for personal purposes.
• Income Tax should be deducted at the time of payment or credit to the account of the contractor whichever is earlier.
• Income Tax is to be deducted at source @ 1% on Advertising contracts and @2% on any other contracts on the amount paid/credited. In the case of sub-contracts, the main contractor should deduct tax at source @1% on the amount paid/credited to the subcontractor.
• Provisions of Section 194C are applicable only where the contract is either a “contract for carrying out any work” or a “contract for supply of labor for works contract”. Hence, these provisions are not applicable for payments made under the contract of sale of goods.
For the purpose of this section, the following contracts are also included in the scope of “Work”:
1. Advertising. 2. Broadcasting and telecasting including production of programs for broadcasting and telecasting. 3. Carriage of goods and passengers by any mode of transport other than Railways. 4. Catering.
• No deduction of tax at source shall be made under this section in the following circumstances:
1. If the amount paid/payable or credited/likely to be credited to the contractor/sub-contractor does not exceed Rs.20,000/- in a single instance. However, the total of amounts paid or credited during the financial year should not exceed Rs.50,000/-. If the said amount exceeds Rs.50,000/-, then the liability for payment arises on the whole of amount paid or credited and not on the amount in excess of Rs.50,000/- 2. In the case of a sub-contractor who is a resident individual and who owns not more than two goods carriages during the previous year, no tax shall be deducted at source during the course of business of plying, hiring or leasing goods carriages if he provides a declaration to the person responsible for payment to that effect in the prescribed form. [Form 15-I]
• Income Tax is to be deducted on the amount of payment / credit and not on the income part of the amount.
• In a case where advance payments are made in pursuance of contract to be adjusted against work to be done, tax has to be deducted at the time of the advance payments.
• The provisions of Sec 194C does not apply to payments made to Airlines or travel agents for the purpose of travel of individuals even though the payment/credit is made by the specified persons. But, if the aircraft is chartered for carriage of passengers or goods, this section shall be applicable. [Circular No.713 dt.2-8-1995 and No.715 dt.8-8-1995] In the case of advertising contracts, tax needs to be deducted only when the client makes payment to the advertising agency and not when the advertising agency makes payment to the media (includes both print and electronic media). [Circular No.715 dt.8-8-1995]
• If there is a consolidated bill given by advertising agencies which may include artwork charges etc apart from advertising charges, the rate applicable is 1% on the whole. Tax is to be deducted on the gross amount of the bill (including the portion of media bill) and not on the commission of the advertising agency. But, payments made to Doordarshan (Now Prasar Bharati) are not subject to TDS since it is a government agency and hence, not liable to income tax. [Circular No.715 dt.8-8-1995].
• The contract for putting up a hoarding is an advertising contract and hence, is covered under section 194C. [Circular No.715 dt.8-8-1995]
• But, if a particular space has been taken on rent by a person who subsequently sub lets it for putting up a hoarding, the TDS liability is not under Section 194C but under section 194-I. [Circular No.715 dt.8-8-1995]
• In the case of sponsorship for debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organisers, the agreement of sponsorship is in essence an agree¬ment for carrying out a work of advertisement. Therefore, provi¬sions of section 194C will apply. [Circular No.715 dt.8-8-1995]
• Tax is deductible at source on payments for costs of advertise¬ments issued in the souvenirs brought out by various organizations. [Circular No.715 dt.8-8-1995].
• Payments to Clearing and Forwarding agents for carriage of goods are subject to TDS. The Clearing and Forwarding agents themselves are also liable to deduct tax on payments to a carrier of goods. [Circular No.715 dt.8-8-1995]
• Payments to couriers are also covered u/s 194C because the carriage of documents, letters etc is in the nature of carriage of goods. [Circular No.715 dt.8-8-1995]
• In the case of payments to transporters, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of TDS. Even when the goods are received on ‘freight to pay’ basis, the TDS provisions would be applicable, irrespective of the actual payment. [Circular No.715 dt.8-8-1995].
• TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of business of the restaurant. [Circular No.715 dt.8-8-1995].
• Payments to recruitment agencies are in the nature of payment for services rendered and not for carrying out any work. Hence, they are not covered under section 194C. However, such payments are liable to TDS under section 194J. [Circular No.715 dt.8-8-1995].
• The provisions of Section 194C would apply in case of supply of any article or thing as per prescribed specifications only if it is not a contract for sale. [Circular No.13/2006 dt.13-12-2006].
• Electrical contracts, maintenance contracts are covered by Section 194C. If any technical services are rendered, such payments would be covered under Section 194J. [Circular No.715 dt.8-8-1995].
• Since Section 194C refers to “any sum paid”, if the bill contains reimbursement of expenses also, the TDS is applicable on the reimbursements also. [Circular No.715 dt.8-8-1995]. However, if there are separate bills for contract payments and reimbursement of expenses, then, TDS is not required to be made on reimbursement of expenditure.
• Rendering of services for procurement of orders is not covered by Section 194C. [Circular No.715 dt.8-8-1995].
• In case of payments made to cold storages, the customer is not given any right to use any demarcated space/place or the machinery of the cold store and thus does not become a tenant. Therefore, the provision of 194-I is not applicable to the cooling charges paid by the customers of the cold storage. However, since the arrangement between the customers and cold storage owners are basically contractual in nature, the provision of section 194-C will be applicable to the amounts paid as cooling charges by the customers of the cold storage. [Circular No.1/2008 dt.10-1-2008].
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