Guidelines pursuant to Supreme Court decision - In view of the Supreme Court decision in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435, the CBDT has issued the following guidelines in regard to the applicability of the provisions of section 194C :—
(i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including, transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and works contracts.
(ii) No deduction at source under section 194C shall be required to be made in the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000.
(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.
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(vi) The provisions of this section will not cover contracts for sale of goods:
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(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 Hotels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labour. 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 (now Rs. 20,000) 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 a 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 per cent of such sum.
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, ser-vices 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.
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.
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 upto 31st March, 1994 will be regarded as compliance of the provisions of section 194C—Circular : No. 681, dated 8-3-1994.
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