Section 194C: Is TDS applicable on Scrap value retained by the job worker? & Scrap value considered as deemed consideration for the purpose of TDS?
In this article, we will explore the applicability of TDS (Tax Deducted at Source) on the scrap value retained by a job worker and whether the scrap value can be considered as deemed consideration for the purpose of TDS. We will analyze different perspectives on this matter and provide a conclusion based on a detailed examination of the relevant provisions.
Let’s form the content of question in points:
Q. Job worker enters contract with Principal to carry out some job work activity as below:
1. Principal will send Tin Ignot (metal) to Job worker to cut the metal into small pieces,
2. During cutting process some scrap will be generated,
3. After processing, job worker will send only Metal pieces to Principal,
4. Job worker will retain the scrap with him,
5. Job worker will give invoice to principal for cutting charges
Now, while making remittance for cutting charges by principal, whether he has to deduct TDS under 194C on:
1. Invoice value?
(Or)
2. Invoice value + Scarp value retained by Job worker?
For the above, two school of peoples will give us two different suggestions regarding deduction of TDS.
Both looks correct, it’s difficult to conclude which one is correct.
First school take conservative approach and will gives us decision which is favourable to Department
Second school will take other side which is favourable to Assessee
School-1 (favourable to Department):
This school taught us that, above example job worker getting income from Job work service in two streams:
1. one is in the form of cash
and
2. another in the form of Kind (i.e. scrap which is retained by him)
Usually TDS has to be deducted on one-persons source of income. Here, job worker has two sources of incomes one is cash & other is kind.
So, we have to deduct TDS on Cash + kind ( Kind value has to be measured in Cash terms)
Otherwise Department put stamp as a Assessee in default U/s.201 of Income Tax Act.
To avoid the same, it is better to pay the TDS.
School-2 (favourable to Assessee):
This school taught us that, TDS has to be deducted on “amount paid or payable”, given case Principal will pay only on invoice value and also payable in book of accounts will be Equivalent to invoice value only.
So, there is no question of TDS on “Kind ( ie. Kind value measured in Cash terms) Value
Because Principal is more concerned with job work and he will not worry about the scrap which is generated in job work.
Conclusion
If we do plain reading of both schools, one think that they are the correct while reading the particular school finding.
My view School 2 taught is more reasonable. Let us decode 194C of Income Tax Act in more detailed manner.
Text: 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.
Sec 194C(1) says :
Any person responsible for paying
+
any sum
+
to any resident
+
for carrying out any work
+
in pursuance of a contract
+
deduct an amount equal to— (i) one per cent where individual or a HUF; (ii) two per cent other cases
Given case:
Any person responsible for paying: Principal is responsible for paying
+
any sum: Here any sum means job work charges, Principal is not worried about Scrap which will be generated (here contract terms plays major Role) & he will make payment only equivalent to invoice value
+
to any resident: here remittance to Job worker who is resident
+
for carrying out any work: here work is only conversion of material into pieces not generation scrap
+
in pursuance of a contract: there is a contact between principal and agent to carryout work
+
deduct an amount equal to— (i) one per cent where individual or a HUF; (ii) two per cent other cases : This will be depends on the outcome of above.
So, based on the above analysis we conclude TDS has to be deducted only on Invoice portion of value, because work involved is cutting of material into small pieces and also Payable (or) Payment is only invoice value
Conclusion: Upon analyzing the provisions of Section 194C of the Income Tax Act and considering both perspectives, it is reasonable to conclude that TDS should be deducted only on the invoice portion of the value. The job work involves the conversion of material into pieces, and the payment is made or payable based on the invoice value. Therefore, TDS is not applicable to the scrap value retained by the job worker.
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EXTRACT OF SECTION 194C OF INCOME TAX ACT, 1961
Payments to contractors.
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 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 one lakh rupees, the person responsible for paying such sums referred to in sub-section (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, 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) 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;
(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 or associate of such customer.
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Disclaimer: This article provides a perspective on the applicability of TDS on scrap value retained by job workers and is not a substitute for professional advice. It is recommended to consult a tax expert or chartered accountant for specific cases or further clarification.
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