TDS on Payment to Contractors

Lunawat & Co.Chartered Accountants

in TDS Sec 194C -Payments to Contractors

3rd April, 2015

Controversies

Monday, May 1, 2023 2

•Overview

•Applicability

•Scope

•Issues

•Judicial Analysis

AGENDALUNAWAT & CO.


• Any person responsible for paying any sum to any resident (i.e.

Contractor)

• for carrying out any work

• in pursuance of the contract between the contractor and the

specified person

• Deduct TDS at the time of payment at the time of credit and payment

which ever is earlier.

o 1% - If amount is paid or credit is made to individual and HUF.

o 2% - If amount is paid or credit to others.

on such sum as income tax on income comprised therein

APPLICABILITY LUNAWAT & CO.


LUNAWAT & CO. WHAT IS ANY WORK?• The Bombay High Court in Bombay Goods Transport Association

held that any work means “work contracts” and “contracts for work” i.e. Labour contracts.

• Manpower is the sine qua non and without manpower, it cannot be said that work has been carried out.

• Whether assessee is required to deduct TDS of cab company u/s 194C or 194I?

The assessee is required to deduct the TDS u/s 194C. The same was also affirmed by ahmedabad Bench of ITAT in ahmedabad urban development authority.

ASSESSEE CABSHIRES


What Work Includes?LUNAWAT & CO.

Work Shall Includes:

• Advertising

• broadcasting and telecasting including production of programees for such

broadcasting or telecasting.

• carriage of goods and passengers by any mode of transport other than

railways

• catering

• Manufacturing or supplying a product according to the requirement or

specification of a customer by using the 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 the

material purchased from a person, other than such customer. i.e. Job Work.


What Advertising Includes?LUNAWAT & CO.

Advertising: Advertising shall include the payment for the following and

also the payment made to the advertising agency:

1. Space in Print Media or electronic media

2. Online Venues

3. Broadcast Time

4. Hoarding

5. Calendar Dairies

6. Direct Mail Advertising.

7. Sponsorship of debates, seminars or other functions.


What covers carriage of goods and passengers by any mode of transport? LUNAWAT & CO.

It shall include:

1. Payment made to foreign ships or Indian Ships.

2. Payment made by the assessee for wholly chartering a plane or a bus or any other

mode of transport.

3. Payment made to the Clearing and Forwarding Agents. (Glaxo Smithkline

Consumer Healthcare Ltd v. ITO 12 SOT 221 (Del))

4. Payment made to Couriers for carrying documents and letters as these are in the

nature of carriage of goods.

It shall not include:

5. Payment made to travel agent or airlines for the purchase of ticket for travel.

6. Payment made to railways.



Payments to Clearing and forwarding agents:

1. Port dues

2. Customs duties

3. Stamp charges

4. Freight Charges

5. Commission, handling or other charges.

SC in Transmission Corporation of AP Ltd. v. CIT (1999) 239 ITR 587 held that:

“It was held that since the deduction of tax at source must be in relation to an

income or trading receipt only, the actual cost reimbursements and other statutory

charges do not come within the purview of section 194C.”

The Kolkata Tribunal in DCIT vs Maruti Freight Movers Ltd [2013] 40

taxmann.com 120 also held the same.


WHO IS PERSON RESPONSIBLE?LUNAWAT & CO.

EXPOTER

CLEARING AND

FORWARDING AGENT

(C&F AGENTS)

AIRLINES

• Whether the Exporter or C&F agents is liable to deduct TDS u/s 194C?

The Delhi High Court in the case of CIT v. Cargo Linkers [2009] 179 TAXMAN

151 (DELHI) held that the C&F Agents was not a ‘person responsible’ for

deduction of tax at source in terms of section 194C, since contract was actually

between exporter and airline and C&F Agents was only an intermediary.

Also in CIT v. Hardarshan Singh [2013] 30 taxmann.com 245 (Delhi).



• Issue: Whether TDS u/s 194 C attracts on payments made by school to transporters

for picking and dropping the students to and from school to their homes by their

buses.

Same is covered u/s 194C and not u/s 194I. The same was confirmed by Delhi

High court in Lotus Valley Education Society V. CIT[2011] 10 taxmann.com

46.

• Issue: whether TDS is liable to be deducted on reimbursement to clearing and

forwarding agents, the amount of freight charges paid by them on behalf of

assessee by raising a separate bill.

No, TDS liability u/s 194C as these are reimbursement of expenses mere

reimbursement of charges would not require deduction of taxes at source. Held

by the Delhi HC in CIT v. Opera Global (P.) Ltd. 52 taxmann.com 299.


What Job Work Covers?LUNAWAT & CO.

Job Work Covers:

1. A Contract between the customer and Manufacturer or Supplier for supply of goods.

2. The manufacture of goods by the manufacturer or Supplier is as per the

specification provided by the customer.

3. The customer provide the raw material used for the manufacture of the of the

product. i.e. it doesn’t cover when raw material is purchased independently by the

manufacturer from a person other than the customer.

Analysis:

The rationale behind this was that where a customer provides the material, what the

manufacturer does is to convert the material in to a product desired by the customer,

the contract essentially involves work of labour and not a sale.



A & Co.Manufacture of

Chocolates, Noodles or coffee etc.

Basic Feature of Contract:

1. A & Co. will be provided with the

Raw material, basic flavor and Know

how of manufacturing, from Nestle.

2. A & Co. will also of the labeling of

the Product for the name of Nestle.

3. Nestle will receive the final product

from the A & Co.

4. Nestle Will then market such products

manufacture by A & Co.

• Whether such manufacturing agreement

will the Job Work and Liable for TDS u/s

194C?

Yes, since the ownerships of such

goods remains at all times remains

with the Nestle.

CONTRACT



A & Co.Supply uniform.

Basic Feature and Facts of the Contract:

1. B & Co. wants to purchase uniform

for its employees and for that it enter

into contract with A & Co. for such

supply of uniform.

2. A & Co. purchases the material from

the market and prepares the uniforms

as per the specification and delivers

the same to B & co. against payment.

• Whether such manufacturing

agreement will the Job Work and

Liable for TDS u/s 194C?

No, the dominant object is

purchase of uniform irrespective

of the fact that supply is to be

made as per the specification of

the customer.

B & Co.CONTRACT



A & Co.Manufacture of

Shoes etc.

Basic Feature of Contract:

1. A & Co. will manufacture the shoes

for the Rebook India and the raw

material used for the manufacturing of

the shoes will be purchased by A &Co.

from the third party.

2. A & Co. will do manufacturing of the

product, as per the specification given

by the Rebook and also do the labeling

on shoes for the name of rebook.

3. Rebook will receive the final product from

the A & Co. and will do the marketing of

the same.

• Whether such manufacturing agreement

will the Job Work and Liable for TDS u/s

194C?

No, since the ownership in such

goods is transferred only when goods

are delivered and are in the nature of

sale.

CONTRACT


TDS Obligation on Divisible ContractsLUNAWAT & CO.

1. If the assessee has entered into two separate contracts, one for the

material i.e. for supply of material and one for labour.

2. The transaction would not be one and indivisible, but would fall

into two separate agreements, one for work/ service and the other

for sale.

3. In the said case the provisions of Sec- 194C could apply only to

labour contract and not to material contracts.

4. The same view is supported by Karnataka Power Transmission

Corporation Ltd v ACIT, 2011],10 taxmann.com 237 (Bang. ITAT).


Other Payments Covered u/s 194C!LUNAWAT & CO.

Sec- 194C also covers the payments made to the following:

1. Routine repair and maintenance contracts would be covered u/s

194C. It also covers payment of annual maintenance charges. i.e.

(AMC Charges)

2. Payments made to electrician or a contractor who provides service of

the electrician.

3. Payments made for freight charges.

4. Payments made to sub contractors for sub contracting.

5. Payments made to hotel under the yearly contract for providing hotel

rooms at less rent.


Other Payments Covered u/s 194C!LUNAWAT & CO.

Sec- 194C doesn’t covers the following payments made:

1. No TDS is required to be made by an individual or a HUF where payment is

required to be made for the work carried out for the personal purpose.

2. No TDS is to be made where sum credited or paid does not exceed Rs.30000/‐ or

aggregate of payment of Rs. 75000/- during the whole of the year.

3. Payments made to daily wage workers could not be considered as contractual

payments u/s 194C.(CIT vs DewanChand178 Taxman 173 (Delhi High Court)).

4. Payment was made for purchase of goods (inclusive of freight charged separately)

for which there was no separate contract for carriage of goods, the provisions of

section 194C could not be applied.

(Bhagwati Steels 326 ITR 108 (P&H High Court)).


Amendment by the Finance Act, 2015LUNAWAT & CO.

Payment to Transporter:

1. Earlier payment to transporter is exempt from the deduction of TDS, if the

transporter furnish his PAN, by the person paying or crediting such sum.

2. After amendment the Payment made to transporter is liable to TDS.

3. TDS shall not be deducted if the transporter doesn’t own more than 10 trucks at

any time during the previous year(as defined in Section 44AE of the IT Act.) and

the transporter furnishes a declaration to that effect.

4. The transporter that also furnish his PAN.

5. The said amendment will take effect from 1st June, 2015.


LUNAWAT & CO.


LUNAWAT & CO.

Presented By: Harshit AroraMobile no.: +91-95825-45933Email: [email protected] ( Article Assistant at Lunawat & Co.)