Query for balance sheet
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
10 June 2014
Sir/Mam,
how to we have to make personal balance sheet for salaried person.
how to we have to make personal balance sheet for salaried person.
Guest
Guest
(Expert)
10 June 2014
what tough in that.... like a simplest balance sheet.....
capital a/c banao then transfer that to b/s and make it simply
capital a/c banao then transfer that to b/s and make it simply
Guest
Guest
(Expert)
10 June 2014
what tough in that.... like a simplest balance sheet.....
capital a/c banao then transfer that to b/s and make it simply
write all assets and liabilities...
capital a/c banao then transfer that to b/s and make it simply
write all assets and liabilities...
Guest
Guest
(Expert)
10 June 2014
what is this 194 c of it act @ priyanka
10 June 2014
I think u r asking about TDS deduction under 194 contractor & sub contractor.
The limit is 30K single bill and 75K annually
Rate is :-
Individual/HUF - 1%
Other - 2%
The limit is 30K single bill and 75K annually
Rate is :-
Individual/HUF - 1%
Other - 2%
11 June 2014
for 194c analysis, please refer http://www.topcafirms.com/index.php/white-paper/featured-white-paper/4348-detailed-analysis-of-tds-for-contractor-194c-by-kc-singhal-advocate
14 June 2014
SECTION 194C l PAYMENTS TO CONTRACTORS
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
14 June 2014
SECTION 194C l PAYMENTS TO CONTRACTORS
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
14 June 2014
SECTION 194C l PAYMENTS TO CONTRACTORS
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
14 June 2014
SECTION 194C l PAYMENTS TO CONTRACTORS
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
14 June 2014
SECTION 194C l PAYMENTS TO CONTRACTORS
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
AND SUB-CONTRACTORS
1114. Applicability of section 194C to service contracts - Clarification regarding Supreme Court judgment in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 4351
1. Sub-section (1) of section 194C of the Income-tax Act, 1961 lays down that any person responsible for paying any sum to any resident (hereafter referred to as contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash or by issue of a cheque or draft by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum as income-tax on the income comprised therein.
2. Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1% of such sum as income-tax on the income comprised therein.
3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circular No. 86, dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-3-1973 in this regard.
4. Some of the issues raised in the above mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860 (NT) of 1979 - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.
5. The Supreme Court has held that “...there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘works contract’....” . Their Lordships have further held that “‘Any work’ means any work and not a ‘works contract’, which has a special connotation in the tax law.... ‘Work’ envisaged in the sub-section, therefore, has a wide import and covers ‘any work’ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘work’ but for its specific inclusion in the sub-section.”
6. It may be pointed out that this appeal before the Supreme Court was by virtue of a Special Leave Petition against the judgment in Writ Petition No. 2909/1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that “In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘service’ is work.”
7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts, including transport contracts, labour contracts, service contracts etc. In the light of these judgments, the Board have decided to withdraw their above-mentioned Circular Nos. 86 and 93 and para 11 of Circular No. 108 and issue 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, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).
(iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.
(iv) The provisions of section 194C would not apply 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.
(v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.
(vi) The provisions of this section will not cover contracts for sale of goods—
(a) 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. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of this section. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.
(b) Where, however, the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or 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.
(c) In State of Himachal Pradesh v. Associated Hostels 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. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land where the intention plainly is not to sell the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.
(vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.
(viii) The provisions are wide enough to cover not only written contracts but also oral contracts.
(ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.
(x) 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.
(xi) 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 Rs. 10,000.
(xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.
(xiii) Every contractor, other than an individual or HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1% of such sum.
8. It may be noted that—
(i) The term ‘service contracts’ would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income “A. Salaries” in Chapter IV of the Income-tax Act, 1961 shall not be covered by section 194C.
(ii) 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 the 28th March, 1990.
(iii) 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.
9. Board’s Circular No. 86, dated 29-5-1972 and No. 93, dated 26-9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are hereby withdrawn. Board’s Circular No. 558, dated 28-3-1990 is reiterated.
10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st of April, 1994. Tax deductions made in accordance with Circular Nos. 86, 93 and 108 up to 31st March, 1994 will be regarded as compliance of the provisions of section 194C.
Circular : No. 681, dated 8-3-1994.
JUDICIAL ANALYSIS
n ‘Any work’ occurring in section 194C means any work and not a ‘works contract’ and, therefore, a person who credits to account of or pays to a contractor any sum payable by any of organisations specified in section 194C(1) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between contractor and specified organisation, is liable to deduct two per cent of such sum as income-tax as required under that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/207 ITR 435 (SC).
n Expression ‘any work’ used in section 194C means ‘works contracts’ and ‘contracts for work’ i.e., ‘labour contracts’, but not ‘service contracts’ or ‘transport contracts’ - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of carrying out ‘works contracts’ only, but apply to contract of carrying out other work also - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of section 194C, his status must have nexus in its characteristic as carrying out work for another person as a contractor in the ordinary sense and not merely carrying on activities of his own business or profession in the ordinary course - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n Section 194C is applicable only to payments made to any person for ‘any work’ and not the payments made as fee for services rendered or the commission paid to commission agents or brokers, and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-3-1994, respectively, directing the authorities under the Act to give effect to the provisions of section 194C as against commission agents, brokers, lawyers, chartered accountants, etc., are not within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT [1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993 and No. 681, dated 8-3-1994 were quashed to the extent the said circulars govern the payments to the commission agents and brokers for the services rendered by them; further, it was declared that section 194C does not operate on such payments and the respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his judgment would be focussing his attention on the immediate problem before him. The Court is concerned with the particular facts of the case. The law to be applied to these facts has to be identified and in some cases elaborated. Court may not envisage the possible constructions that are likely to be placed in future, on each and every sentence found in the judgment. Each sentence, normally, has a connection to the sentence preceding it and that idea contained in it normally emanates from the earlier process of consideration which leads to the next step. A sentence may reflect a particular reasoning. Every reason is a link to the ultimate conclusion, linking the thought process to each other, from its commencement to the end. Therefore, to lift a sentence from a judgment, as if it is an independent provision in a statute and emphasise it as declaring the law, will result in unanticipated and unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the interpretation of ancient statutes. There are several instances in which the Supreme Court applied the doctrine to interpret the recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional services, thus Circular No. 681 issued by CBDT on 8-3-1994 requiring deduction of tax at source under section 194C in respect of payments of fees for professional services is illegal, based on an erroneous reading of observations of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true meaning and import of word ‘work’ appearing in section 194C(1) - Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to govern profession of advocates, architects and chartered accountants is ultra vires the provisions of section 194C - High Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being violative of articles 14 and 265 of the Constitution of India and opposed to section 194C of the Act, insofar as it requires deduction at source from payments made by way of professional fees to advocates, solicitors, chartered accountants, tax practitioners, etc., for the services rendered by them - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of advocate and client is not one of contract falling within ambit of section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994] 118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which do not involve contract for carrying out any work itself, or contract for labour for carrying out such services, are not within the purview of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it purports to rope in profession of architects within the ambit of section 194C, is invalid - Indian Institute of Architects v. CBDT [1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend provisions of section 194C to activities of persons conducting tours and arranging hotel accommodation for tourists, is ultra vires and unenforceable - Indian Association of Tour Operators v. CBDT [1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without jurisdiction insofar as it purports to make provisions of section 194C applicable to payments made to advertising agencies for professional services rendered by them; therefore, requirements of section 194C would not apply to payments made to advertising agents rendering professional services - Advertising Agency Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152 (Bom.).
n Payment made to advertising agencies or agents for rendering professional services are not covered by section 194C - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Contracts for advertising, contract of goods, transport simpliciter, persons engaged in the business of broker as commission agent without carrying out any work for their principal, or professionals redering professional services by charging fees in the course of their profession, are not emenable to the provisions of section 194C - All Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous reading of decision of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations made therein and, therefore, it is illegal and without jurisdiction insofar as it requires deduction of tax at source under section 194C from payments made under contracts for mere carriage of goods which do not include any other services like loading and unloading and are not in any way connected with any work to be performed by carrier - Bombay Goods Transport Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of section 194C insofar as it purports to cover cases of actual carriage of goods on hire in case of truck-owners/transporters - Delhi Goods Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR 240 (Mad.).
n Amount of two per cent required to be deducted by payer out of sum credited to account of or paid to contractor is not to be confined to his income component out of that sum, but it has to be deducted on sum credited to account of or paid to contractor in pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that the “transport contracts’ fall within the mischief of section 194C, is legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996] 219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at source from payments to professionals, i.e., lawyers, chartered accountants, doctors, engineers, architects etc., is beyond the scope of Board’s powers under section 119 and, therefore, liable to be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR 282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994, making section 194C applicable to transport contracts. It was issued under the authority of law and within the jurisdiction and competence of the Board - Birla Cement Works v. CBDT [1997] 95 Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that transport contracts in general come within the purview of section 194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226 ITR 274 (Ori.).
n CBDT’s Circular No. 681 extending purview of section 194C to transport contracts for mere carriage of goods is based on a misreading and misconstruction of judgment of Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and therefore, said circular to that extent is erroneous and illegal - Inter State Transporters’ Association v. CBDT [1997] 93 Taxman 227 (Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable to professionals is not valid in respect of period up to 30-6-1995 - Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657 (Raj.).
n Question of deduction of tax at 2 per cent from payment made to contractor has to be decided independent of CBDT Circular No. 681, dated 8-3-1994 which is issued only as guideline in regard to applicability of section 194C - All Gujarat Federation of Tax Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216 (SC), in following words :
“It is evident that Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC), was not in respect of transport contracts. The controversy therein was deduction of tax at source from payments made for loading and unloading of goods. The question whether the expression “carrying out any work” would include therein carrying of the goods or not, was not in issue in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). That is precisely the question in the present case. The decision in Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC) has not been correctly understood by the Central Board of Direct Taxes. It would not be correct to come to the conclusion, as the Central Board of Direct Taxes did, that the question involved is covered by the decision in the case of Associated Cement Co. Ltd.’s case [1993] 201 ITR 435 (SC). ” (pp. 229, 230)
“... If the only view of section 194C had been the one reflected in the impugned circular, then the issue of earlier circulars and acceptance and acting thereupon by the Revenue reflecting the contrary view would have been of no consequence. That, however, is not the position. Further, there are no compelling reasons to hold that Explanation III inserted in section 194C with effect from July 1, 1995, is clarificatory or retrospective in operation. We hold that section 194C before insertion of Explanation III is not applicable to transport contracts, i.e., contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned circular to the extent it relates to transport contracts is quashed.” (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439 (Chd.) in following words:
“The contents of para 7(vi)(b) and (c) of Circular No. 681 which are still valid and binding on the departmental authorities cannot be ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of para 7 that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the Govt. or any other specified person and the property in such article or thing passes to the Govt. or such person only after such article or thing is delivered, the contract will be a contract for sale and outside the purview of section 194C.” (p. 455)
1115. Clarification regarding applicability of section 194C in view of Supreme Court’s decision in Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman 346/201 ITR 435
1. Reference is invited to the Board’s Circular No. 632, dated the 20th August, 1992 on the above subject.
2. According to the provisions of section 194C of the Income-tax Act, 1961 any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor, or, 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 2 per cent of such sum as income-tax on income comprised therein. It is clarified that carrying out any work includes service contracts and transport contracts. The said bodies are :
(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 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 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. Similarly, when a contractor makes payment of a sum to a resident sub-contractor, in pursuance of a contract with the sub-contractor, for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
4. The amount of income-tax to be deducted at the aforesaid rates is to be further increased by a surcharge at the following rates :
(i) in a case where the payee is a non-corporate resident person, 12 per cent
(ii) in a case where the payee is a domestic company. 15 per cent
5.1 No deduction of tax is, however, required to be made from any sum credited or paid in pursuance of a contract, referred to in the foregoing paragraphs, if the consideration for the contract does not exceed Rs. 10,000.
5.2 Further, sub-section (4) of section 194C lays down that where the Assessing Officer is satisfied that the total income of a contractor or a sub-contractor justifies the deduction of income-tax at a lower rate or no deduction of income-tax, the Assessing Officer can give to him such certificate as may be appropriate. For this, an application has to be made to the Assessing Officer on Form No. 13C. During the validity of this certificate, deduction of tax at source will be made in accordance with the direction given in the certificate.
5.3 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. v. 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.
6. The responsibilities, obligations, etc., under the Income-tax Act, of the persons deducting the tax at source under section 194C are briefly as follows:
(a) According to the provisions of section 200, any person deducting any sum in accordance with the provisions of section 194C is required to pay, within the prescribed time, the sum so deducted to the credit of the Central Government in the prescribed manner vide rule 30 of the Income-tax Rules, 1962. In the case of deduction by or on behalf of the Government, the sum has to be paid on the day of the deduction itself. In other cases, normally, the sum has to be paid within one week from the last day of the month in which the deduction is made. If a person fails to deduct tax at source, or, after deducting, fails to pay the tax to the credit of the Government, he shall be liable in accordance with the provisions of section 201(1A) to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Further, section 271C lays down that if a person fails to deduct tax at source, he shall be liable to pay, by way of penalty, a sum equal to the amount of tax not deducted by him. In this regard, attention is also invited to the provisions of section 276B, which lays down that if a person fails to pay to the credit of the Central Government within the prescribed time the tax deducted at source by him, he shall be punishable with rigorous imprisonment for a term which shall not be less than 3 months but which may extend to 7 years, and with fine.
(b) According to the provisions of section 203, read with rule 31, every person deducting tax at source is required to furnish a certificate to the effect that the tax has been deducted and to specify therein the amount so deducted and certain other particulars. In the case of deduction of tax under section 194C, the certificate has to be furnished in Form No. 16A w.e.f. 1-7-1993 within the prescribed period of one month and fourteen days to the person to whose account credit is given or to whom payment is made, by any mode, as the case may be. Prior to 1-7-1993 this certificate was required to be given in Form No. 16B which was printed by the Central Government and was to be procured from the Income-tax Department on payment of a nominal consideration. If a person fails to furnish this certificate as required under section 203, he shall be liable to pay by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues.
(c) According to the provisions of section 203A, it is obligatory for all persons responsible for deducting tax at source to obtain and quote the Tax-deduction Account Number (TAN) in the challans, TDS certificates, returns, etc. Detailed instructions in this regard are contained in Board’s Circular No. 497 [F. No. 275/118/87-IT(B)], dated 9-10-1987. If a person fails to comply with the provisions of section 203A, he shall be liable to pay, by way of penalty under section 272BB, a sum upto Rs. 5,000.
(d) According to the provisions of section 206, read with rules 36A and 37 of the Income-tax Rules, the prescribed person in the case of every office of Government, the principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer and every other person responsible for deducting tax at source under the various provisions of the Act, shall, prepare and deliver by the prescribed date, the annual return of tax deducted at source under those provisions. In the case of deduction of tax under section 194C, this return is to be furnished in Form No. 26C to the designated/concerned Assessing Officer by 30th June following the financial year in which deduction is made. It may be noted that a copy of each TDS certificate issued during the financial year should be enclosed with the annual return. If a person fails to furnish in due time the annual return, he shall be liable to pay, by way of penalty, under section 272A(2), a sum which shall not be less than Rs. 100 but which may extend to Rs. 200 for every day during which the failure continues. The maximum penalty will, however, not exceed the amount of tax which was deductible at source.
7. These instructions are not exhaustive and are issued only with a view to helping the persons responsible for making deduction of tax at source under section 194C. For further details, the relevant provisions of the Income-tax Act, 1961, and the Income-tax Rules, 1962, should be referred to. In case, any assistance is required, the Assessing Officer concerned or the local Public Relations Officer of the Income-tax Department may be contacted.
Circular : No. 666, dated 8-10-1993.
1116. Decision of the Supreme Court in Brij Bhushan’s case - Whether permits, in respect of composite works contract, deduction of tax at source at 2 per cent on net payment (after excluding cost of materials supplied by Government) - Whether para 1(5) of Circular No. 86, dated 29-5-19721 requires modification
1. Pursuant to the decision of the Supreme Court in Brij Bhushan Lal Parduman Kumar v. CIT [1978] 115 ITR 524, several representations were received seeking modification of para 1(5) of Board’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-19721 to permit, in respect of composite works contract, e.g., work and labour, tax deduction at 2 per cent under section 194C on the net payment, i.e., after excluding the cost of materials supplied by the Government or any other specified person.
2. In para 1(5) of the Board’s said circular, it was inter alia, explained that the question of the tax deduction under section 194C with reference to the gross payment due to the contractor or the net payment was essentially to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. It was also stated that where the contractor had undertaken to construct a building or a dam, e.g., a composite works contract, and the Government or the other specified person had undertaken to supply all or any of the materials necessary for the work at stipulated price, the deduction would have to be related to the gross payment without excluding the cost of the materials.
3. The decision of the Supreme Court in Brij Bhushan Lal’s case (supra) is on the manner of computing the income and is not on the interpretation of section 194C. The point at issue has been dealt with by the Patna High Court in Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. On page 449 of the report, while referring to Brij Bhushan Lal’s case (supra), their Lordships of the Patna High Court observed as under :
“...In this case [Brij Bhushan Lal’s case] the question that fell for consideration was whether in the execution of a work the cost of materials supplied by the Government for executing the work, could be taken into consideration, while estimating the profits of a contractor. In the facts of that case, it was held that in cases of ‘lump sum contracts’ where in substance and in reality stores and materials supplied to the contractor by the department were fixed or incorporated into the work, the cost of such stores and materials could not be included in the turnover of the contractor as there was not even a theoretical possibility of any profit being made by the contractor from such stores or materials. This case has no bearing on the facts of the case before us, because under section 194C(1) deduction has not to be made from profits made by the contractor, but from the total payment made to the contractor for doing any work.”
4. In view of the foregoing para 1(5) of the Board’s circular referred to in para 1 above, does not require any modification and tax would continue to be deducted at source at 2 per cent on gross payments, i.e., including cost of material supplied by the Government or any other specified person.
Circular : No. 295 [F.No. 275/56/79-IT (B)], dated 6-3-1981.
1117. Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
CLARIFICATION 1
1. Under section 194C, a liability is cast on any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
(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
to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
2. 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 munshis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. 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 contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.
CLARIFICATION 2
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the 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.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) 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;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
1118. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP).
2. According to the provisions of section 194C, any person responsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. Similarly, when a contractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of any contract the consideration of which does not exceed Rs. 10,000.
3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitoring of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contractors for the execution of the work under the programme.
4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institutions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Panchayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government. There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of contractors/middlemen for the execution of the work undertaken under these schemes.
6. In view of the foregoing, the provisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.
1119. Rules and forms prescribed for the purposes of deduction of tax at source from payments to contractors and sub-contractors under the section
1. Reference is invited to this Ministry’s Circular No. 86, dated 29-5-1972, on the subject mentioned above.
2. Rules relating to the provisions for deduction of tax at source from payments made to contractors and sub-contractors have since been made. The following instructions may please be noted for general guidance :
1. Application for certificate for deduction of tax at lower rates - Under section 194C(4), it is open to a contractor or sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the certificate is to be made in the newly prescribed Form No. 13C.
2. Obligations and liabilities of persons deducting tax at source under section 194C - to pay tax to the credit of the central government - As per rule 30 any tax deducted by or on behalf of the Government has to be paid to the credit of the Central Government on the same day by book adjustment. In other cases, the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
(a) where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
(b) in any other case, within one week from the last day of the month in which the deduction is made.
l TO ISSUE CERTIFICATE OF DEDUCTION - The person responsible for deducting tax is required to give to the person receiving the payment a certificate in Form No. 19C.
l TO FURNISH QUARTERLY RETURNS OF DEDUCTION OF TAX - The person responsible for deducting tax is required to furnish to the Income-tax Officer having jurisdiction to assess him a return in Form No. 26C quarterly on July 15, October 15, January 15 and April 15 in respect of the deduction made by him during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of the Government.
Circular : No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972.
1120. Co-operative societies included in the categories of persons who are to deduct tax at source from payments to contractors and sub-contractors under the section with effect from 1-4-1973
1. Reference is invited to this Ministry’s Circular No. 86 [F.No. 275/9/72-ITJ], dated 29-5-1972, No. 93 [F.No. 275/100/72-ITJ], dated 26-9-1972 and No. 95 [F.No. 275/9/72-ITJ], dated 15-11-1972 on the subject mentioned above.
2. Under section 194C, inserted in the 1961 Act, by the Finance Act, 1972, income-tax is deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work, at the rate of 2 per cent of such payments. Similarly, income-tax is deductible from payments made by contractors, other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. Such deduction is to be made in all cases where the consideration for the contract or the sub-contract, as the case may be, exceeds Rs. 5,000.
3. 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 now be deductible from payments made by co-operative societies to contractors in respect of works and labour contracts, at the rate of 2 per cent of the payment; and the contractors, not being individuals or Hindu undivided families, obtaining contracts from co-operative societies will, in turn, be required to deduct tax at source from payments made by them to sub-contractors, at the rate of 1 per cent of the payment. These provisions will not apply to sums paid or credited by co-operative societies or by contractors to sub-contractors before June 1, 1973.
Circular : No. 114 [F.No. 275/61/73-ITJ], dated 21-6-1973.
1121. Deduction of tax at source, as per the rates specified in the section, to be increased by a surcharge at the rate of 5 per cent - Effective from 16-12-1987
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein.
However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration for which does not exceed Rs. 10,000.
2. By the Finance (Amendment) Act, 1987, sub-section (4A) has been inserted after sub-section (4) in section 2 of the Finance Act, 1987. According to the said amendment, in cases in which tax has to be deducted under section 194C the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for the purpose of the Union calculated at the rate of 5 per cent of such deduction. The surcharge so worked out shall be deductible only in respect of payments made after 16-12-1987.
Circular : No. 505 [F.No. 275/20/88-IT(B)], dated 19-2-1988.1
1122. Payments to contractors and sub-contractors - Levy of surcharge
1. According to the provisions of section 194C any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The agencies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made for any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. In this connection attention is invited to Board’s Circular No. 505, dated 19-2-1988. Wherein the levy of surcharge at the rate of 5 per cent as introduced by the Finance (Amendment) Act, 1987 was communicated to you. According to the provisions of the Finance Act, 1989, in cases in which tax has to be deducted under section 194C of the Income-tax Act, the deduction shall be made at the rates specified in that section and shall be increased by a surcharge for purposes of the Union calculated at the rate of eight per cent of such deduction.
Circular : No. 539, dated 13-7-1989.
1123. Clarification regarding hire charges paid to bus owners from the hire of buses
1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether 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. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of 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 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.
1124. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194C of the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
3. The matter has been examined by the Board. 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 of goods.
4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.
Circular : No. 713, dated 2-8-1995.
1125. Clarification regarding applicability of section 194C/194J in case of advertising agency
1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, 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 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.
2. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in the Explanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
3. Representations have been received regarding the scope and meaning of the term “advertising” used in section 194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. 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 per cent 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 per cent of the sum.
4. 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 per cent.
Circular : No. 714, dated 3-8-1995.
1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995
The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :
Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.
Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?
Answer : No. The position has been clarified in the answer to question No. 1 above.
Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?
Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?
Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.
Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?
Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.
Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?
Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.
Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?
Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.
Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?
Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.
Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?
Answer : Normally, 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 the TDS.
Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?
Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.
Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?
Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.
Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?
Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.
Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?
Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.
Question 14 : Whether FD commission and brokerage can be covered under section 194C ?
Answer : No
1Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?
Answer : Yes.
Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?
Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.
Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?
Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.
Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of 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 ?
Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.
Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?
Answer : Yes.
Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?
Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.
Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?
Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.
Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?
Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.
Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?
Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.
Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?
Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.
Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?
Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.
Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?
Answer : Yes.
Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?
Answer : Yes.
Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?
Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.
Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?
Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.
Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?
Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.
Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?
Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.
Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?
Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.
Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?
Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.
Circular : No. 715, dated 8-8-1995.
Clarification regarding question No. 20
1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—
“. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]
In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.
2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.
Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.
3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.
Circular : No. 5/2002, dated 30-7-2002.
1127. Payment of any sum shall be liable for deduction of tax only under one section
It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, 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.
2. 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 is 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.
Circular : No. 720, dated 30-8-1995.
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