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Payments To Contractors And Sub-Contractors (Section 194C)

Written by: ANKUR Posted on: 6 February, 2023

Payments to contractors and sub-contractors Section 194C

(1) Applicability of TDS under section 194C

Section 194C provides for deduction of tax at source from the payment made to resident contractors and sub-contractors. Tax has to be deducted at source under section 194C by any person responsible for paying any sum to a 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

the Central Government or any State Government or
any local authority or
any statutory corporation or
any company or
any co-operative society or
any statutory authority dealing with housing accommodation or
any society registered under the Societies Registration Act, 1860 or
any trust or
any university established under a Central, State or Provincial Act and an institution declared to be a university under the UGC Act, 1956 or
any firm or
any Government of a foreign State or foreign enterprise or any association or body established outside India or
any person, being an individual, HUF, AOP or BOI, who has total sales, gross receipts or turnover from the business or profession carried on by him exceeding 1 crore in case of business and 50 lakhs 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.

(2) 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, no tax has to be deducted at source in respect of payments made by individuals/ HUF to a contractor exclusively for personal purposes.

(3) Rate of TDS

The rate of TDS under section 194C on payments to contractors would be 1%, where the payee is an individual or HUF and in respect of other payees. The same rates of TDS would apply for both contractors and sub-contractors.
.

The applicable rates of TDS under section 194C are as follows:-

Payee	TDS rate
Individual/HUF contractor/sub-contractor	1%
Other than individual / HUF contractor/sub-contractor	2%
Contractor in transport business (if PAN is furnished)	Nil
Sub-contractor in transport business (if PAN is furnished)	Nil

(4) Threshold limit for deduction of tax at source under section 194C.

No deduction will be required to be made if the consideration for the contract does not exceed 30,000. However, to prevent the practice of composite contracts being split up into contracts valued at less than 30,000 to avoid tax deduction, it has been provided that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds 30,000 in a single payment or 1,00,000, in the aggregate during a financial year.

Therefore, even if a single payment to a contractor does not exceed 30,000, TDS provisions under section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds 1,00,000.

(5) Definition of work

Work includes -

advertising
broadcasting and telecasting including production of programmes for such broadcasting or telecasting
carriage of goods or passengers by any mode of transport other than by railways
catering
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 related to the customer in such manner as defined u/s 40A(2)(b), ( i.e., the customer would be in the place of assessee; and the associate would be the related person(s) mention in that section).

However, "work' shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material puchased from a person, other than such customer or its associate of such customer, as such a contract is a contract for 'sale'. However, this will not be applicable to a contract which does not enter manufacture or supply of an article or thing (e.g. construction contract).

It may be noted that the term "work" would include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate. in such a case, tax shall be deducted on the invoice value excluding the value of material purchased from such customer or its associate, if such value is mentioned separately in the invoice. where the material component has not been separately mentioned in the invoice, tax shall be deducted on the whole of the invoice value.

(6) Non-applicability of TDS under section 194C

No deduction is required to be made from the 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 the business of plying, hiring or leasing goods carriages, if he furnishes his PAN to the deductor.

In order to convey the true intent of law, it has been clarified that this relaxation from the requirement to deduct tax at source shall only be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to a contractor, who fulfills the following three conditions cumulatively is engaged in the business of plying, hiring or leasing goods carriages owns ten or less goods carriages at any time during the previous year has furnished a declaration to this effect along with his PAN Exemption u/s 194C(6).

Meaning of Goods carriage

Goods carriage means:-

any motor vehicle constructed or adapted for use solely for the carriage of goods or
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.

(7) Important points

The deduction of income-tax at source from payments made to non-resident con- tractors will be governed by the provisions of section 195.
The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the section will apply only in relation to ‘works contracts’ and ‘labour contracts’ and will not cover contracts for sale of goods.
Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants etc., cannot be regarded as contracts for carrying out any “work” and, accordingly, no deduction of income-tax is to be made from payments relating to such contracts under this section. Separate provisions for fees for professional services have been made under section 194J.

(8) Deduction of tax at source on payment of gas transportation charges by the purchaser of natural gas to the seller 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 XVII-B 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.

(9) 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 29-2-2016]

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

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

(10) Applicability of TDS provisions on payments by the transporter to truck operators or owners for hiring the vehicles [Shree Choudhary Transport Co. v ITO [2020] 426 ITR 0289(SC)]

The assessee-firm entered into contract with a cement company for transporting cement to various places in India. As the assessee did not have transport vehicles of its own, it engaged the services of other transporters for the said purpose. The cement company effected payments to the assessee towards transportation charges after due deduction of tax at source. In its return of income, the assessee showed the income arising out of the business of transport contracts.

While making payment to the truck operators or owners, the assessee had not deducted tax at source. The Supreme Court observed that the nature of the contract entered into by the assessee with the consignor company (cement company) makes it clear that it was the responsibility of the assessee to transport the goods (cement) of the company; and how to accomplish this task of transportation was a matter exclusively within the domain of the assessee.

There is no privity of contract between the transporters and the consignor company (cement company). Hiring the services of the transporters for this purpose could have only been under a contract between the assessee and the transporters, irrespective of whether such a contract was reduced into writing or not.

If a particular truck was not engaged, there existed no contract but when any truck got engaged for the purpose of execution of the work undertaken by the assessee and freight charges were payable to its operator or owner upon execution of the work, i. e., transportation of the goods, all the essentials of a contract existed; and the truck operator or owner became a sub-contractor.

The Supreme Court opined that the assessee was not acting as a facilitator or intermediary between the consignor company and the truck operators or owners because those two parties had no privity of contract between them. The contract of the company for transportation of its goods was only with the assessee and it was the assessee who hired the services of the trucks.

The payment made by the assessee to such transporter was clearly a payment made to a sub-contractor. The Supreme Court, thus, held that section 194C was applicable and the assessee was under obligation to deduct tax at source in relation to the payments made by it to the truck operators or owners for hiring the vehicles for the purpose of its business of transportation of goods.

ILLUSTRATION.1:-

Bharat Cements Ltd. purchased jute bags from Kumar & Co. The latter has to supply the jute bags with the logo and address of the assessee, printed on it. From 01.09.2021 to 20.03.2022, the value of jute bags supplied is ` 8,00,000, for which the invoice has been raised on 20.03.2022. While effecting the payment for the same, is the assessee bound to deduct tax at source, assuming that the value of the printing component involved is ` 1,10,000.

You are informed that the assessee has not sold any material to Kumar & Co. and that the latter has to manufacture the jute bags in its plant using raw materials purchased by it from outsiders.

SOLUTION:-

As per the definition under section 194C, "work" shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person, other than such customer or associate of such customer. This is regardless of the quantum of expenditure incurred towards printing or processing comprised in the bill amount.

The problem clearly states that Kumar & Co. has to manufacture the jute bags using raw materials purchased from outsiders and that the assessee Bharat Cements Ltd has not sold any material to them. Therefore, in this case, it is a contract of sale. Hence, the provisions of section 194C are attracted and no liability to deduct tax at source would arise.

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ANKUR

Direct Tax Expert having more than 10 years of Experience