Section 194C amendments & important judgements on section 40(a)(ia)

Section 194C of the Income tax Act 1961 with amendments and some important court judgements on section 40(a)(ia)

What is the nature of contract and who is the contractor and whether liability to deduct TDS under section 194C arises or not etc. This has been explained as under with circulars issued by the CBDT from time to time and certain court judgments. From which date this section is applicable and what is the latest amendment has been provided in this article as under :

Substituted by the Finance (No.2) Act , 2009, wef 1.10.2009

Payment to Contractor

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 labor for carrying out any work) in pursuance of a contract between the contractor and a specified person ( See below who is specified person in the Explanation) 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-

Meaning thereby

Any person responsible means the specified person who makes the payment to a contractor or credits his account. The specified person shall deduct tax at source of 1% or 2% as the case may be at the time of making payment to a contractor or crediting his account in the books of account whichever is earlier .

(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.

Meaning thereby that Other than an individual and Hindu undivided family are the persons like a Partnership Firm , A company  and others . if the deductee is individual or Hindu undivided family the rate shall be 1% and if others than rate shall be 2%.

(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-

Clause (e) of clause (iv) of Explanation is as under wef 1.4.2020 ( AY 2020-21) is as under

[(e)  manufacturing or supplying a product according to the requirement or specification of a customer by using materials 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,]

(i) on the invoice value excluding the value of materials, if such value is mentioned separately in the invoice; or

(ii) on the whole of the invoice value, if the value of materials 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](W.e.f 1.7.2010) 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](wef 1.6.2016) rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income tax under this section.

TDS in the case of transporters owing 10 or less than 10 trucks wef 1.06.2015

(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 authorized 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

Wef 1.4.2020 (AY 2020-21)

(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 materials 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,]

Wef 1.4.2020 (AY 2020-21)

But does not include manufacturing or supplying a product according to the requirement or specification of a customer by using materials purchased from a person, other than such customer {or associate of such customer].

List of Circulars issued from Central Board of Direct Taxes regarding TDS issued from time to time .

1. Circular No. 681 dated 8-3-1994

2. Circular No. 433 dated 25-9-1985

3. Circular No. 487 dated 8-6-1987

4. Circular No. 502 dated 27-1-1988

5. Circular No. 558 dated 28-3-1990

6. Circular No. 713 dated 2-8-1995

7. Circular No. 714 dated 3-8-1995

8. Circular No. 715 dated 8-8-1995

9. Circular No. 723 dated 19-9-1995

10. Circular No. 13/2006 dated 13-12-06

11. Circular No. 9 of 2012 dated 17/10/2012

12. Circular No. 4 of 2016 dated 29/02/2016

Some important judgement on section 194 C of the Act , 1961

Shree Choudhary Transport Co vs. ITO (Supreme Court)  (i) Disallowance u/s 40(a)(ia), 40A(3) etc are intended to enforce due compliance of the requirement of other provisions of the Act and to ensure proper collection of tax as also transparency in dealings. The interest of a bonafide assessee who had made the deduction as required and had paid the same to the revenue is safeguarded. No question about prejudice or hardship arises (ii) Payment made for hiring vehicles for the business of transportation of goods attracts TDS u/s 194C, (iii) Disallowance u/s 40(a)(ia) is not limited to the amount outstanding (“payable”) but also to expenses that had already been incurred and “paid” by the assessee, (iv) Disallowance u/s 40(a)(ia) as introduced by the Finance (No.2) Act, 2004 w.e.f. 01.04.2005 is applicable to AY 2005-2006, (v) Benefit of amendment made in the year 2014 to s. 40(a)(ia) is not available . 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid.

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ITO (TDS) vs. The Distt. Manager, Punjab State Warehousing Corporation (ITAT Chandigarh) S. 194C TDS: Law on whether the by-product allowed to be retained by the miller can be regarded as consideration ‘paid’ in kind by the procurement agency so as to create an obligation to deduct TDS thereon explained in the light of Kanchanganga Sea Foods Ltd. vs CIT 325 ITR 549 (SC) & other judgements

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Uber India Systems Pvt. Ltd vs. JCIT (ITAT Mumbai) S. 271C & 206AA Penalty: The assessee has made out a prima facie case that the outcome of the appeal before the ITAT will directly impact the penalty proceedings which are hurriedly being finalized by the authorities which may entail huge liability by way of penalty on the assessee. The Revenue authorities are accordingly restrained from passing any order imposing penalty on the assessee so long as the appeal is pending before the Tribunal (Wander 44 Taxman.com 103 (Bom) & GE India Technology 46 Taxmann.com 374 (Guj) followed)

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ACIT vs. St. Mary’s Rubbers Private Ltd (ITAT Cochin) S. 40(a)(ia): Amounts paid by way of reimbursement of expenses do not constitute income in the hands of the recipient. Consequently, the payer is under no obligation to deduct TDS u/s 194C and no disallowance of the expenditure can be made u/s 40(a)(ia). CBDT Circular No.715 dated 08.08.1995 distinguished

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Palam Gas Service vs. CIT (Supreme Court) S. 40(a)(ia): S. 194C read with s. 200 are mandatory provisions. The disallowance stipulated in s. 40(a)(ia) for failure to deduct TDS u/s 194C is one of the consequences for the default. Accordingly, though there is a difference between “paid” and “payable”, s. 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. The contrary interpretation that s. 40(a)(ia) applies only to cases where amounts are “payable” will result in defaulters going scot free

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Pr. CIT vs. Bharat Heavy Electricals Ltd (P&H High Court) S. 194C vs. 194J: Law on whether payments for construction, erection & commissioning etc of plants involving inputs from technical personnel constitutes “payments for technical services” and attracts TDS obligations u/s 194J in the light of Bharti Cellular 330 ITR 239 (SC) explained

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CIT vs. Executive Engineer, GESCOM (Karnataka High Court) S. 194C/ 194J TDS: Even if the supply contract is an integral part of a composite contract on single sale responsible basis, there is no obligation to deduct TDS. Service contracts, not being professional services, are not covered by s. 194J

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CIT vs. PVS Memorial Hospital Ltd (Kerala High Court) S. 40(a)(ia)/ 194C/ 194J: Deduction u/s 194C instead of u/s 194J renders the shortfall liable for disallowance u/s 40(a)(ia)

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Dishnet Wireless Limited vs. DCIT (ITAT Chennai) S. 194C/ 194J: No obligation to deduct TDS at stage of making provision for expenditure if payee cannot be identified. No obligation to deduct TDS if services (roaming charges) are rendered without human intervention and are not “technical services”

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ITO (TDS) vs. The Distt. Manager, Punjab State Warehousing Corporation (ITAT Chandigarh) S. 194C TDS: Law on whether the by-product allowed to be retained by the miller can be regarded as consideration ‘paid’ in kind by the procurement agency so as to create an obligation to deduct TDS thereon explained in the light of Kanchanganga Sea Foods Ltd. vs CIT 325 ITR 549 (SC) & other judgements

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Uber India Systems Pvt. Ltd vs. JCIT (ITAT Mumbai) S. 271C & 206AA Penalty: The assessee has made out a prima facie case that the outcome of the appeal before the ITAT will directly impact the penalty proceedings which are hurriedly being finalized by the authorities which may entail huge liability by way of penalty on the assessee. The Revenue authorities are accordingly restrained from passing any order imposing penalty on the assessee so long as the appeal is pending before the Tribunal (Wander 44 Taxman.com 103 (Bom) & GE India Technology 46 Taxmann.com 374(Guj)followed)

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ACIT vs. St. Mary’s Rubbers Private Ltd (ITAT Cochin) S. 40(a)(ia): Amounts paid by way of reimbursement of expenses do not constitute income in the hands of the recipient. Consequently, the payer is under no obligation to deduct TDS u/s 194C and no disallowance of the expenditure can be made u/s 40(a)(ia). CBDT Circular No.715 dated 08.08.1995 distinguished

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Palam Gas Service vs. CIT (Supreme Court) S. 40(a)(ia): S. 194C read with s. 200 are mandatory provisions. The disallowance stipulated in s. 40(a)(ia) for failure to deduct TDS u/s 194C is one of the consequences for the default. Accordingly, though there is a difference between “paid” and “payable”, s. 40(a)(ia) covers not only those cases where the amount is payable but also when it is paid. The contrary interpretation that s. 40(a)(ia) applies only to cases where amounts are “payable” will result in defaulters going scot free

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Pr. CIT vs. Bharat Heavy Electricals Ltd (P&H High Court) S. 194C vs. 194J: Law on whether payments for construction, erection & commissioning etc of plants involving inputs from technical personnel constitutes “payments for technical services” and attracts TDS obligations u/s 194J in the light of Bharti Cellular 330 ITR 239 (SC) explained

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