1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :
(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.
Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.
2. A question has arisen whether the provisions of section 194C are applicable to the payments made by a State Road Transport Corporation to private bus owners from whom buses are hired for plying on specified routes. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—
(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.
(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.
(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.
(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.
(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.
(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.
(vii) The corporation shall pay the owner at the rate of Rs. …..as fixed cost per day in addition to Rs. …..per km. operated as variable cost, etc., etc.
On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of provisions of section 194C in such cases may be considered on merits in the light of the aforesaid observations, and to this extent the clarification given in question No. 5 in Board’s Circular No. 98, dated 26-9-1972 stand modified.
Circular : No. 558, dated 28-3-1990.