Circular No. 433-Income Tax dated 25-9-1985

Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry – Whether munshis are contractors

1. Under section 194C, a liability is cast on any person respon­sible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—

(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

to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.

2. In the bidi manufacturing industry, generally there are three parties, the manufacturer, the munshis and the workers. The manu­facturer provides the raw material, i.e., leaves, tobacco, thread, etc., to the munshis who distribute the same to the workers who work at home. At regular intervals, the munshis collect the bidies prepared by the workers and hand over the same to the manufacturer. For this work, the manufacturer pays to the mun­shis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.

3. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. The Board are advised that in view of the position that the definition of the expression “contractor” in the Bidi and Cigar Workers (Condition of Employment) Act, 1966, includes sub-contractor, agent, munshi, thekedar or satte­dar, the provisions of section 194C would apply in respect of payments made to munshis. It may be clarified that the provisions of section 194C are wide enough to cover oral contracts also. By the very nature of the functions performed by the munshis, there is an implied contract between the manufacturer and the munshis and consequently the munshis are contractors even though there is no written contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.

Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.