TDS from payments to contractors & Sub-Contractors [Section 194C]

Section 194C was introduced long back in 1972 by the Finance Act, 1972 with effect from 01.04.1972 and subsequently amended from time to time.

Under section 194C, deduction of tax at source is required to be made from payments of any sums to resident contractors or sub-contractors. Thus, following two situations are covered under section 194C:—

(i) Deduction of tax at source from payment to resident contractors;

(ii) Deduction of tax at source from payment to resident subcontractors.

Text of section 194C

Payments to contractors

^[1][194C (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—

(i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;

(ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

(i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

(5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed ^[2][thirty] thousand rupees:

PROVIDED that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds ^[3][one lakh] rupees, the person responsible for paying such sums referred to in subsection (1) shall be liable to deduct income-tax under this section.

(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, ^[4][where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with] his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

Explanation : For the purposes of this section,—

(i) “specified person” shall mean,—

(a) the Central Government or any State Government; or

(b) any local authority; or

(c) any corporation established by or under a Central, State or Provincial Act; or

(d) any company; or

(e) any co-operative society; or

(f) any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or

(g) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or

(h) any trust; or

(i) any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or

(j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or

(k) any firm; or

(l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—

(A) does not fall under any of the preceding sub-clauses; and

(B) ^[5][has total sales, gross receipts or turnover from business or profession carried on by him exceeding one crore rupees in case of business or fifty lakh rupees in case of profession] during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;

(ii) “goods carriage” shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE;

(iii) “contract” shall include sub-contract;

(iv) “work” shall include—

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(c) carriage of goods or passengers by any mode of transport

other than by railways;

(d) catering;

^[6][(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person placed similarly in relation to such customer as is the person placed in relation to the assessee under the provisions contained in clause (b) of sub-section (2) of section 40A,] but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer[7][or associate of such customer.]

KEY NOTE

1. Substituted by the Finance (No. 2) Act, 2009, with effect from 01.10.2009.

2. Substituted for “twenty” by the Finance Act, 2010, with effect from 01.07.2010.

3. Substituted for “seventy-five thousand” by the Finance Act, 2016, with effect from 01.06.2016. Earlier, the quoted words were substituted for “fifty thousand” by the Finance Act, 2010, with effect from 01.07.2010.

4. Substituted for “on furnishing of” by the Finance Act, 2015, with effect from 01.06.2015.

5. Substituted for the words, brackets, letters and figures “is liable to audit of accounts under clause (a) or clause (b) of section 44AB” by the Finance Act, 2020, w.e.f. 1- 4-2020.

6. Substituted for the words “manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer” by the Finance Act, 2020, w.e.f. 1-4-2020.

7. Inserted, ibid.

Applicability of section 194C

Provisions of section 194C relating to tax deduction from payment to contractors/sub-contractors are applicable only where contract is either a “work contract” or a contract for supply of labour for “works contract”, but not applicable for payments made under contract for sale of goods or mere supply of goods.

One of the criteria to differentiate between “contract for sale” and “works contract” is to determine the ownership regarding goods in question. In case of works contract, even though a part or whole of the materials used belongs to the contractor, yet the property in the thing produced will be the performance whereas in the case of contract for sale the things produced generally are the sole property of the party who has performed the work before its delivery and such person and the property therein passes only under the contract relating thereto to other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient. To constitute a sale there must be an agreement expressed or implied relating to sale of goods and completion of the agreement by passing of title in the very goods constructed to be sold.

Specified persons under section 194C who are required to deduct TDS

The section 194C(1) provides that any person responsible for paying any sum to resident contractor for carrying out any work (including supply of labour) in pursuance of a contract between the contractor or sub-contractor shall be required to deduct at source in case the payment is made by them:—

(i) The Central Government or any State Government; or

(ii) Any local authority; or

(iii) Any corporation established by or under a Central, State or “Provincial” Act; or

(iv) Any company; or

(v) Any co-operative society; or

(vi) Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both (e.g., CIDCO, HUDCO, etc.); or

(vii) Any society registered under the Societies Registration Act, 1860 or under any such corresponding law to the Act in any Part of India; or

(viii) Any trust; or

(ix) Any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or

(x) Any firm; or

(xi) Any individual or an HUF (Hindu undivided family) whose books of accounts are required to be audited under section 44AB(a)/(b) during the immediately preceding financial year and sum credited/ paid to the account of the contractor is not exclusively for personal purposes; or

In other words, only assessees who are liable to audit due to turnover or receipts greater than Rs. 1 crore or Rs. 50 lakh, as the case may be.

With effect from 01.06.2008 – AOP/BOI whose books of accounts are required to be audited under section 44AB(a)/(b) during the immediately preceding financial year.

(xii) Any Government of a foreign State or a foreign enterprise or any association or body established outside India (applicable from 01.10.2009).

“CONTRACTOR”

A “Contractor” for the purpose of the provisions of this section would be any person who enters into a contract with the Central Government or any State Government, any local authority, any corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labour for carrying out any work.

Sub-Contractor as per Section 194C

A “sub-contractor” would mean any person:

·         who enters into a contract with the contractor for carrying out, or

·         for the supply of labour for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities, or

·         for the supply of, whether wholly or partly, any labour which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.

Condition precedent for deduction of tax at source from payment to contractors [Section 194C(1)]

The following conditions must be satisfied for applicability of this section:—

(i) The payee, i.e., contractor must be resident in India within meaning of section 6 of the Income Tax Act.

(ii) Payment should be made by any person specified above.

(iii) Payment should be made for carrying out any work including supply of labour for carrying out any work.

(iv) The payment should be made pursuant to a contract whether oral or written between payer and payee.

(v) The consideration of a contract in respect of which payment is made should exceed Rs. 30,000 at a time.

(vi) If aggregate of the amount of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.1,00,000 (Rs. 75,000 - up to 31.05.2016) TDS is required to be deducted.

(vii) Where advance payments are made, tax will have to be deducted if the total payment is likely to exceed Rs. 30,000.

(viii) Where it was expected that the total consideration would not exceed Rs. 30,000 but later on, it was found that consideration would exceed Rs. 30,000, tax will have to be deducted in respect of earlier payments also.

Non-applicability of Section 194C in the following cases

PAYMENT TO TRAVEL AGENT/AN AIRLINE

Payment made to Travel agency or an airline for purchase of a ticket for travel is not liable for TDS under section 194C. However, if any plane/ bus/any other mode of transport is chartered, TDS is applicable.—CBDT’s Circular No. 713, dated 02.08.1995.

HIRE CHARGES

Section 194C is not applicable in case of payments made for hiring/renting of equipments etc.—[CBDT’s Circular No. 681, dated 08.03.1994]

FIXED DEPOSIT COMMISSION/BROKERAGE

Fixed Deposit Commission/Brokerage is not covered under section 194C.—[CBDT’s Circular No. 715, dated 08.08.1995]

PROCUREMENT OF ORDERS

Rendering services for procurement of orders is not covered by Section 194C (But covered by section 194J).—[CBDT’s Circular No. 715, dated 08.08.1995]

Applicability of TDS provisions on payments by broadcasters or Television Channels to production houses for production of content or programme for telecasting [Circular No. 04/2016, dated 29.02.2016]

The issue under consideration is whether payments made by the broadcaster/telecaster to production houses for production of content/ programme are payments under a ‘work contract’ liable for tax deduction at source under section 194C or a contract for ‘professional or technical services’ liable for tax deduction at source under section 194J.

In this regard, the CBDT has clarified that while applying the relevant provisions of TDS on a contract for content production, a distinction is required to be made between:

(i) a payment for production of content/programme as per the specifications of the broadcaster/telecaster; and

(ii) a payment for acquisition of broadcasting/telecasting rights of the content already produced by the production house.

In the first situation where the content is produced as per the specifications provided by the broadcaster/telecaster and the copyright of the content/ programme also gets transferred to the telecaster/ broadcaster, such contract is covered by the definition of the term ‘work’ in section 194C and, therefore, subject to TDS under that section.

However, in a case where the telecaster/broadcaster acquires only the telecasting/broadcasting rights of the content already produced by the production house, there is no contract for ‘’carrying out any work”, as required in section 194C(1).

Therefore, such payments are not liable for TDS under section 194C. However, payments of this nature may be liable for TDS under other sections of Chapter XVII-B of the Act.

Deduction of tax at source from payment to sub-contractors [Section 194C(2)]

Any person (being a contractor and not being an individual or a Hindu Undivided Family) responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of  the sub-contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct amount equal to one per cent of sum as income-tax on income comprised therein.

Conditions precedent for deduction of tax at source from payment to subcontractors [Section 194C(2)]

The following conditions must be satisfied for applicability of section 194C(2), i.e., where the payment is made to sub-contractors:—

(i) Payment is made to a sub-contractor who is resident within the meaning of section 6 of the Income Tax Act, 1961.

(ii) Payment is made by a resident contractor, not being an individual or an HUF.

(iii) Payment is made to carry out any work, including supply of labour to carry out any work.

(iv) The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000.

(v) The amount is paid or credited after 31.05.1972.

(vi) A contractor who is an individual or Hindu Undivided Family is exempt from the obligation of tax deduction while making payment to sub-contractors.

(vii) The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies.

Exemption from deduction of tax at source in certain cases [Section 194C(3)]

No tax is required to be deducted at source under section 194C(1) and 194C(2) in the following cases:—

(i) Where the sum is credited or paid in pursuance of any contract, the consideration for which does not exceed Rs. 30,000, or where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 1,00,000, the person responsible for paying such sums will not deduct TDS under this section.

(ii) Where the sum is credited or paid before the 1st June, 1972.

(iii) Where the sum is credited or paid before 1st June, 1973 in pursuance of a contract between the contractor and the co-operative society or in pursuance of a contract between such contractor and the subcontractor in relation to any work (including supply of labour) undertaken by the contractor for the co-operative society.

(iv) Individual or HUF not to deduct tax if the payment or amount credited to contractor is for personal use. No individual or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purpose of such individual or any member of HUF.

Individual or HUF not to deduct tax if the payment or amount credited to contractor is for personal use [Section 194C(4)]

No individual or Hindu Undivided Family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purpose of such individual or any member of Hindu Undivided Family.

Where no tax is to be deducted at source [Section 194C(5)]

In the following cases, tax is not required to be deducted at source:—

·         No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, the contractor, if such sum does not exceed Rs. 30,000 (Rs. 20,000 upto 30.06.2010).

·         However, where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds Rs. 1,00,000 (Rs. 75,000 from 01.07.2010 to 31.05.2016 - and Rs. 50,000 upto 30.06.2010), the person responsible for paying such sums shall deduct income-tax under this section.

·         Thus, the tax will be required to be deducted at source where the amount credited or paid to a contractor exceeds Rs. 30,000 at one time or Rs. 1,00,000 in the aggregate during a financial year in spite of the fact that separate contracts are entered into with that person.

In other words, the person responsible for making payment to resident contractor/sub-contractor should deduct TDS either at the time of crediting such sum to the account to the payee or at the time of payment thereof in cash or by issue of a cheque or by any other mode, whichever is earlier, when the amount of a particular contract exceeds Rs. 30,000/- or the total amount of contract during the whole year exceeds Rs. 1,00,000/-.

Monetary limit for deduction

Period	Monetary limit
	Each payment (in Rs.)	Aggregate payments during the financial year (in Rs.)
Payments/Credits made on or before 31.05.2016	30,000	75,000
Payments/Credits made on or after 01.06.2016	30,000	1,00,000

Provisions for payments and tax deducted at source to transporters [Section 194C(6)]

No deduction shall be made from any sum credited or paid or likely to be credited or paid during previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number, to the person paying or crediting such [Section 194C(6)].

TDS on account of a contractor during the course of plying, hiring and leasing goods carriage

UPTO 31.05.2015

The earlier provision (upto 31.05.2015) provides that no deduction of tax is required from payments made to the contractor during the course of plying, hiring and leasing goods carriage if the contractor furnishes his PAN to the payer.

FROM 01.06.2015 [Section 194C(6)]

No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

No deduction is required to be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of acontractor, during the course of the business of plying, hiring or leasing goods carriages, if the following conditions are fulfilled:-

(i) He owns ten or less goods carriages at any time during the previous year.

(ii) He is engaged in the business of plying, hiring or leasing goods carriages;

(iii) He has furnished a declaration to this effect along with his PAN.

Goods carriage means—

(i) any motor vehicle constructed or adapted for use solely for the carriage of goods; or

(ii) any motor vehicle not so constructed or adapted, when used for the carriage of goods. The term “motor vehicle” does not include vehicles having less than four wheels and with engine capacity not exceeding 25cc as well as vehicles running on rails or vehicles adapted for use in a factory or in enclosed premises.

KEY NOTE

(i) If transporter is not owning more than 10 goods carriage at any time during the previous year, then payers (Tax deductors) have to obtain a declaration from transporter along with his copy of PAN before credit or payment to transporter, whichever is earlier.

(ii) If the transporter is owning more than 10 goods carriage at any time during the year, then payers are liable to deduct TDS at the time of paying charges to goods transporter at the rate of 1% or 2%, as the case may be; based on the transport contractor’s status which can be identified from the 4th alphabet of the PAN.

No TDS on transportation of gas if it is carried out in furtherance of contract for sale of gas [Circular No. 9/2012, dated 17.10.2012]

In case the Owner/Seller of the natural gas sells as well as transports the gas to the purchaser till the point of delivery, where the ownership of gas to the purchaser is simultaneously transferred, the manner of raising the sale bill (whether the transportation charges are embedded in the cost of gas or shown separately) does not alter the basic nature of such contract which remains essentially a ‘contract for sale’ and not a ‘works contract’ as envisaged in section 194C. Therefore, in such circumstances, the provisions of Chapter XVIIB are not applicable on the component of Gas Transportation Charges paid by the purchaser to the Owner/ Seller of the gas. Further, the use of different modes of transportation of gas by Owner/Seller will not alter the position.

However, transportation charges paid to a third party transporter of gas, either by the Owner/Seller of the gas or purchaser of the gas or any other person, shall continue to be governed by the appropriate provisions of the Act and tax shall be deductible at source on such payment to the third party at the applicable rates.

Payment or aggregate of payments up to Rs. 35,000 in a day can be made to a transport operator without attracting disallowance under section 40A(3)

Section 40A(3) provides for disallowance of expenditure incurred in respect of which payment or aggregate of payments made to a person in a day exceeds Rs. 10,000, and such payment or payments are made otherwise than by account payee cheque or account payee bank draft or use of electronic system through bank account. However, in case of payment made to transport operators for plying, hiring or leasing goods carriages, the disallowance will be attracted only if the payments made to a person in a day exceeds Rs. 35,000. Therefore, payment or aggregate of payments up to Rs. 35,000 in a day can be made to a transport operator otherwise than by way of account payee cheque or account payee bank draft or use of electronic system through bank account, without attracting disallowance under section 40A(3).

Person responsible shall furnish such particulars [Section 194C(7)]

The person responsible for paying or crediting any sum to the person referred to in Section 194C(6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

DECLARATION UNDER SECTION 194C(6) OF THE INCOME TAX ACT, 1961

No. ....................... (To be provided by payee)      Date : .............................

From: (Name and address of the payee)

.....................................................................

.....................................................................

To : (Name and address of the payer)

.....................................................................

.....................................................................

The freight/transport charges amounting to Rs. ....................................... for transportation of goods by goods carriages having registration Number ................................. may be paid or credited to my account without deducting of tax under section 194C of the Income Tax Act, 1961.

I/We ................................................................................................... in the capacity of individual/ proprietor hereby declare that I/We do not own more than ten goods carriage and also did not own more than ten goods carriages at any time during the period 1st April, 2015 to 31st March, 2016.

My Permanent Account Number (PAN) is .................................................. . I hereby enclose a self-attested photo-copy of my PAN Card.

Place : ......................       (Signature of person making declaration)

Meaning of work as defined in section 194C [Explanation to Section 194C]

The expression “Work” shall include—

(a) advertising;

(b) broadcasting and telecasting, including production of programmes for such broadcasting or telecasting;

(c) carriage of goods or passengers by any mode of transport other than by railways;

(d) catering;

(e) with effect from 01.10.2009, manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person , other than such customer.

KEY NOTE

Supplying of labour for carrying out any work but excludes Contracts for rendering of professional services by lawyers, Doctors, Engineers, Chartered Accountants, Architects, Consultants, etc., as these are covered under section 194J.

Meaning of Advertisement Contract – Scope of an advertising contract for the purpose of section 194C of the Act

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 TDS 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. It was further clarified that when an advertising agency makes payment to their models, artists, photographs, etc., the tax shall be deducted at the rate of 5% as applicable to fees for professional & technical services under section 194J.

With effect from 01.10.2009, there is no separate rate for advertisement contract. The tax is required to be deducted as on other contract @1% where payee is individual or HUF and @2% in other cases.

When a client makes payment to an Advertising agency, TDS is applicable

·         If an Advertising agency gives a Consolidated bill (including charges for art work and other related jobs as well as payment to media), tax to be deducted.

·         Payments made for Production of programmes for the purpose of broadcasting/telecasting, TDS applicable.

·         Payments in the nature of advertising made directly to Doordarshan may not be subjected to TDS, as DD being a Government agency, not liable to income-tax.

·         The agreement of sponsorship of debates, seminars & other functions in schools/colleges/associations is in the nature of advertising and section 194C would apply.

·         TDS is applicable on the payments towards cost of advertisements in the souvenirs brought out by various organizations.

·         The Contract for putting up a Hoarding is in the nature of advertisement. Hence section 194C would be applicable. However, if a person has taken a particular space on rent and thereafter sublets the same fully or partly for putting up a Hoarding, the person would be liable under section 194-I.

Payment by an Advertising agency to Print/electronic media is not subjected to TDS

[Circular No.717, dated 14.08.1995]

As per Circular No. 717, dated 14.08.1995 - Enlarging the scope of provision regarding deduction of tax at source from payments to contractors and subcontractors

47.1 Sub-section (1) of section 194C provides for deduction of income-tax at source from any sum payable for carrying out any work in pursuance of a contract between the contractor and the Government, local authorities, statutory corporations, companies, co-operative societies, statutory authorities engaged in provision of housing accommodation, etc., registered societies, trusts and universities. There is no requirement for deduction of income-tax at source where the contract is between a contractor and a firm. The payments under such contracts also need to be subjected to the requirement of deduction of income-tax at source. The Act, therefore, amends section 194C, in order to apply its provisions to the payments made in pursuance of a contract between a contractor and any firm.

47.2 In order to subject payments in respect of advertising contracts, broadcasting contracts, telecasting contracts, transport contracts and catering contracts to the requirement of deduction of income-tax at source, the Act amends section 194C by providing that the expression “work”, used therein, shall also include : (a) advertising, (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting, (c) carriage of goods and passengers by any mode of transport other than by railways, and (d) catering. While the deduction of tax shall be at the rate of two per cent. of the amount in regard to items (b), (c) and (d) above, it shall be at the rate of one per cent. in the case of an advertising contract. The deduction in regard to item at (a) above shall apply when a client (i.e., an advertiser) makes payment to an advertising agent. When an advertising agency makes payments to their models, artists, photographers, etc., tax shall be deducted by it under section 194J of the Income-tax Act at the rate of Ten per cent. as applicable to fees for professional and technical services. There will, however, be no tax deduction at source when an advertising agent makes payment to the print or electronic media.

Rate of TDS under section 194C

Rates of tax deduction at source from payment or credit to a resident contractor/sub-contractor are as under:—

Payment To	PAN furnished	Rate of TDS if recipient does not furnish his PAN to the deductor (with effect from 01.04.2010)
Payment/credit to an Individual or Hindu Undivided Family (HUF)	1%	20%
Payment/credit to any person other than an Individual or Hindu Undivided Family (HUF)	2%	20%
Transporters (Less than 10 Vehicles)	NIL	20%
Transporters (More than 10 Vehicles)	1% or 2% according to recipient status as above	20%

KEY NOTE

Surcharge or Health & Education Cess is not applicable. Hence, TDS shall be deductible at basic rates.

Deduction of TDS in case of composite contract

(i) WHERE MATERIALS ARE SUPPLIED BY THE GOVERNMENT The question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any.

(ii) On account of materials supplied by the government, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto.

(iii) WHERE THE CONTRACTOR HAS UNDERTAKEN TO CONSTRUCT A BUILDING OR A DAM, and the government or other specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of the cost of materials.

(iv) WHERE THE CONTRACTOR HAS UNDERTAKEN ONLY TO PROVIDE THE LABOUR FOR THE WORK, the ownership of the materials supplied remaining at all times with the government or another specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will, thus, not include the price of the materials supplied by the government or other specified persons.

Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract.

Deduction, when the party supplies materials to the contractor

When materials are supplied no deduction is possible. Consequently, no TDS is required to be made. However, when payment is made either in cash or in kind to contractor/sub-contractor, tax is required to be deducted.

Time of deduction

Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the account of the contractor, whichever is earlier. Where any such sum is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source. The account to which such sum is credited may be called “Suspense account” or by any other name.

However, relief has been provided in respect of payments made by individuals/ HUFs to a contractor exclusively for personal purposes.

Time limit within which tax is to be deposited [Rule 30]

The time limit prescribed by rule 30 is as under:—

S. No.	Particulars	Due date for payment
1	Where the payment is made by or on  behalf of the Government	On the same day(without using any challan form)
2	Where the payment is made by any person other than Government—
	(a) If the amount is credited or paid in  the month of March	On or before 30th day of April
	(b) In any other case	On or before 7 days from the end of the month in which the deduction is mad

 

Where tax is either not to be deducted or is to be deducted at lower rate [Section 197, Rules 28 and 28AA]

As per section 197, any person to whom the interest is payable may make an application in Form No. 13 to the Assessing Officer and obtain such certificate from him, as may be appropriate, authorizing the payer not to deduct tax or to deduct tax at a lower rate.

Assessee can apply to assessing officer for no TDS or TDS at lower rate under section 197. According to section 194C, where the Assessing Officer is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on application made by the contractor or sub-contractor in this behalf, give to him such certificate as may be appropriate.

As per section 206AA(4), with effect from 01.04.2010, no certificate under section 197 for deduction of tax at Nil rate or lower rate shall be granted, unless the application made under that section contains the Permanent Account Number of the applicant.

Due date of submission of quarterly TDS returns

Every deductor who has deducted tax at source the quarterly returns shall be submitted in Form No. 26Q within the time limit as per table given below:—

STATEMENT OF DEDUCTION OF TAX UNDER SECTION 200(3) [RULE 31A(2)]

For the quarter ending	Due date of submission of quarterly TDS statements (from 01.06.2016)
June 30	31st July of the financial year
September 30	31st October of the financial year
December 31	31st January of the financial year
March 31	31st May of the financial year immediately following the financial year in which the deduction is made

 

Fee for default in furnishing statements [Section 234E]

If a person fails to deliver or cause to be delivered a statement within the time prescribed in section 200(3) in respect of tax deducted at source [on or after 01.07.2012], he shall be liable to pay, by way of fee a sum of Rs. 200 for every day during which the failure continues. However, the amount of such fee shall not exceed the amount of tax which was deductible at source. This fee is mandatory in nature and to be paid before furnishing of such statement.

Penalty for failure in furnishing statements or furnishing incorrect information [Section 271H]

If a person fails to deliver or cause to be delivered a statement within the time prescribed in section 200(3) or furnishes an incorrect statement, in respect of tax deducted at source [on or after 01.07.2012], he shall be liable to pay, by way of penalty a sum which shall not be less than Rs. 10,000/- but which may extend to Rs. 1,00,000/-.

However, the penalty shall not be levied if the person proves that after paying TDS with the fee and interest, if any, to the credit of Central Government, he had delivered such statement before the expiry of one year from the time prescribed for delivering the statement.

Time limit for issue of TDS certificate

Time limit for issue of TDS certificate shall be issued in Form No. 16A within 15 days from the due date of furnishing quarterly TDS return.

For the quarter ending	TDS certificate should be given on or before
June 30	15th August of the financial year
September 30	15th November of the financial year
December 31	15th February of the financial year
March 31	15th June of the financial year immediately following the financial year in which the deduction is made

The certificate should be downloaded from http://contents.tdscpc.gov.in

Penalty for non-issuance of TDS Certificates [Section 272A(2)(g)]

If the deductor is not able to provide the certificate within due date, then a penalty of Rs. 100 per day of delay per certificate has to be paid. Remember that penalty cannot exceed the TDS amount deducted for the quarter.

Payments towards up-linking, bandwith and broadcasting charges subject to TDS under section 194C

Payments towards up-linking, bandwith and broadcasting charges subject to TDS under section 194C Payments on account of up-linking charges and broadcasting charges is purely contractual in nature and does not amount to providing technical services. The Calcutta High Court held that payments made to multi-system operators on account of uplinking charges & down-linking charges, bandwidth and air-time charges is purely contractual in nature and does not amount to providing technical services, accordingly withholding tax under section 194C and not under section 194J of the Income-tax Act, 1961 should be applicable.—[CIT(TDS)v. Media World Wide (P)Ltd. - Date of Judgement : 08.01.2020 (Cal)]

Refining crude oil and selling petroleum products – Agreement with another company for transportation of goods - Works contract – Rent - Liable to deduct tax at source under section 194C and not 194-I

Oil and selling petroleum products – Agreement with another company for transportation of goods- Works contract—Rent – Liable to deduct tax at source under section 194C and not 194-I. Court also observed that even after the amendment to the Explanation under section 194-I, the case could not fall within its scope as it was a case of a contract for transport of goods and, therefore, a contract of work within the meaning of section 194C and not one which fell within the Explanation to section 194-I, namely, use of plant by the assessee.— [State Bank of India v. ACIT (2019) 197 TTJ 989 : 174 ITD 551 (ITAT Jaipur)]

Tax was deductible from payment of outsourcing expenses such as processing charges, call centre operations and business services etc. under section 194C instead of section 194J of the Act

Assessee had hired the services for various works such as storage of data, scanning of documents, processing charges, call centre operations etc. Looking to the nature of services outsourced, it was held that the same were basically clerical services of repetative nature of work and payments were therefore, neither for managerial nor for technical services. Having perused the documents on record and looking to the nature of services described, we do not find that the Tribunal has committed any error. The work outsourced was in the nature of clerical work and TDS was rightly deducted under section 194C.—[CIT v. M/s. Reliance Life Insurance Co. Ltd. - Date of Judgement : 10.06.2019 (Bom)]

Contractors – Licence fee paid to contractor by contractee and not vice versa – Not liable to deduct tax at source

Dismissing the appeal of the revenue the Court held that since payment of licence fee was made by contractee to contractor, provision of Section194C is not applicable.—[PCIT v. Hakmichand D & Sons (2018) 258 Taxman 208 (Guj)]

TDS was not to be deducted under section 194C while making payment of licence fee by the assessee to IRCTC for granting contract of catering service

The Apex Court dismissed the SLP filed by Revenue against the High Court’s order wherein the High Court had held that TDS was not to be deducted under section 194C while making payment of licence fee by the assessee to IRCTC for granting contract of catering service since the payment of licence fee was made by the assessee-contractee to the contractor (IRCTC) whereas the said section is attracted where the payment is made by contractor to contractee.—[PCIT v Hakmichand D & Sons (2018) 97 taxmann.com 584 (SC)]

Contractors – Payment towards annual maintenance contracts for lifts and air conditioners is not technical services – Deduction of tax as contractor is justified payment cannot be treated as fees for technical services

Dismissing the appeal of the revenue, the Court held that the Tribunal had correctly held that the assessee had made payments only in respect of maintenance contracts which related to minor repairs, replacement of some spare parts, greasing of machinery, etc., which services did not require any technical expertise, and therefore, could not be categorised as “technical services” as contemplated under section 194J and that the assessee had correctly deducted the tax at source under section 194C which applied to payments made to contractors. No question of law arose. (Related Assessment years : 2000-01 to 2009-10)—[CIT v. Mumbai Metropolitan Regional Development Authority (2018) 408 ITR 111 : 304 CTR 776 : 258 Taxman 164 : 170 DTR 97 (Bom)]

KEY NOTE :

SLP of revenue is dismissed due to low tax effect, CIT v. Mumbai Metropolitan Regional Development Authority (2019) 262 Taxman 451 (SC)

Annual Maintenance Contract in respect of various specialised hospital equipments – Not be in nature of fees for technical services – Deduction of tax at source as contractor- Held to be proper

Dismissing the appeal of the revenue, the Court held that Annual Maintenance Contract in respect of various specialised hospital equipments is not to be in nature of fees for technical services hence deduction of tax at source as contractor is held to be proper. [Followed CIT v. Grant Medical Foundation (2015) 375 ITR 49 (Bom)]—[CIT v. Asian Heart Institute and Research Centre (P) Ltd. (2019) 262 Taxman 395 (Bom.)]

Casual workers – Labour payment to one or two persons on site for disbursing same among labourers – In absence of any contract to carry out any work with a specified person there is no liability to deduct tax at source

Dismissing the appeal of the revenue, the Court held that the assessee handed over labour payment to one or two persons on site for disbursing same among labourers. There was no contract between assessee and any specified person for carrying out any work. In absence of any contract to carry out any work with a specified person, provisions of Section 194C would not be attracted and, hence, there would be no liability to deduct tax at source. (Related Assessment year : 2007-08)—[PCIT v. Swastik Construction (2018) 254 Taxman 163 (Guj)]

Supplier transported goods to assessee through their own transport agency—There was no contract between assessee and transporter—Not liable to deduct tax at source

Allowing the appeal of the assessee, the Tribunal held that ; when supplier transported goods to assessee through their own transport agency, there was no contract between assessee and transporter. Accordingly, the assessee is not liable to deduct tax at source. (Related Assessment year : 2006-07)—[K.V. Satyanarayana Murthy v. ITO (2018) 172 ITD 7 (ITAT Visakha)]

Hire charges paid to truck owners fall within the purview of section 194C however labour charges paid to a person who is engaged for labour work on a daily wages basis does not attract provisions of section 194C

Payment made to truck owners for hire charges would attract provisions of section 194C. Labour charges paid to a person who was engaged for the labour work on daily wages as and when his services were required and hence tax under section 194C was not required to be deducted on the same (Related Assessment year 2007-08)—[Silver Salt Industries v. ITO (2017) 58 ITR 46 (ITAT Rajkot)]

Even if aggregate payment made in a year to parties which did not exceed Rs.50,000, but onetime payment exceeded Rs.20,000, is required to be deducted TDS on it

Assessee dealer made one time payments to parties as advertisement and publicity expenses which exceeded Rs.20,000. Assessee claimed that such aggregate payment did not exceed Rs.50,000, therefore, no TDS was to be deducted. Tribunal held that even if aggregate payment did not exceed Rs.50,000 in a year, but the onetime payment exceeded Rs.20,000, then assessee would be liable to deduct TDS. (Related Assessment year : 2009-10)—[Shimla Automobiles (P) Ltd. v. ITO (2017) 187 TTJ 206 : 164 ITD 9 : 154 DTR 305 (ITAT Chandigarh)]

It was held that payments on account of channel carriage fees, up-linking charges, and Bandwidth charges are not in the nature of payment towards Technical Fees under section 194J, but the same are contractual in nature, for which 2% of TDS is applicable under section 194C of the Income Tax Act. (Related Assessment Year: 2011-12)—[ITO v. Media Worldwide (P) Ltd. – Date of Judgement : 12.05.2017 (ITAT Kolkata)]

Assessee deducted TDS under wrong provision in earlier assessment years which was accepted by revenue without verification, principle of consistency could not be applied to continue application of such wrong provision in later years

The assessee was engaged in business of distribution of TV channels from its own DTH network. It obtained rights from TV channels to distribute their programmes to the ultimate viewers. It made payments thereto after deducting TDS u/s.194C. The Assessing Officer held that assessee paid licence fee to TV channels which was in the nature of royalty covered under Explanation 2(v) of section 9(1)(vi) and as such, TDS was to be deducted under section 194J. Applicability of correct TDS provision was in question. Assessee argued that it made payments in past also after deducting TDS under section 194C, which view had not been disturbed by revenue therefore same view should be followed for assessment year in question as well. Issue was not examined in earlier years and assessee’s contention was accepted without verification. Non-examination of issue in earlier years could not give licence to assessee to claim in later years that correctly applicable section be put under carpet and, therefore, a wrong provision could not be applied in garb of consistency. (Related Assessment year : 2009-10)—[Dish TV India Ltd. v. ACIT (2016) 157 ITD 1096 (ITAT Delhi)]

Broadband charges could not be deemed as technical services; not liable to deduct tax at source under section 194J - Deduction of tax at source under section 194C was correctly done by assessee

Where assessee, a Customs House Agent, made payment to Central Warehousing Corporation, Container Freight Station, Bombay Port Trust and Airport Authority of India for services rendered by such entities which included use of space for storage of imported/exported materials, said payment could not be construed as ‘rent’ for purposes of section 194-I.

Where assessee paid survey fees to persons or agencies for inspection of goods which was required to be done while importing/exporting goods, said payment was not in nature of fees for professional or technical services attracting provisions of section 194J

Where assessee made payment towards internet charges to concerns providing broadband facilities, internet services provided by broadband service provider could not be construed as technical service so as to require assessee to deduct tax at source under section 194J.

Where assessee made payment to contractor towards hiring of Forklift/ Cranes and in this context pleaded that said payment had been made to contractor for providing services of handling of goods and transportation of cargo and it was contractor who had in turn hired Cranes/Forklift for his use, such payment was subject to deduction of tax at source under section 194C Where assessee made payment towards fumigation charges and deducted tax at source under section 194C, since persons entrusted with job of fumigation carry out spraying of chemicals, etc. to prevent attack of pests so that cargo/ goods being handled by assessee did not get damaged, deduction of tax at source under section 194C was correctly done by assessee.—[(2016) 76 taxmann.com 289 (ITAT Mumbai)]

Deduction at Source under section 194C – Printing Material—Payments to contractor

Payment made for purchase of printed packing material to suppliers, no work involving skill or secrecy, it being sale, section 194C is not attracted.— [ITO v. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 (ITAT Delhi)]

Catering does not include Serving food in Restaurant

Catering does not include serving food in restaurant in the normal course of running of restaurant/café, hence TDS is not applicable on serving food in restaurant.—[CBDT’s Circular No.715, dated 08.08.1995]