Section 194C : Applicability Analysis
Main Ingredient of Section 194 C are – (A). Any Person responsible for making payment, (B) Payment has to be made to resident, (C). Payment has to be for work, (D). Payment is in pursuance of a Contract with specified person (E). At the time of credit or payment which is earlier and (F). At the rate of 1 % if payee is Individual or HUF or 2% to all other payee. Some of the ingredients need detailed discussion which are as follows :-
Payment has to be for Work :- Circular No. 715 dated 08.08.1995, 716 dated 09.08.1995 and board clarification explain that 194C applies to all type of contracts for carrying out any work. All service contracts will be covered by the provisions of this section since service means doing any work. In broader sense a work done by one person is service rendered to another and indeed one of the dictionary meaning of the term service is work. The term ‘material contract’ would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of material. The applicability of the section 194C will have to be examined with reference to the terms of each contract – in all service contracts which are for carrying out any work TDS has to be made under this section. In case of person employed in bidi manufacturing units payment made through the medium of agency such as munshis where the workers bring bidis for quality check and get their payments. Provisions of section 194C would not be applicable in view of the decision of the Supreme Court in P.M.Patel & Sons Vs. UOI [Circular No. 487 dated 8th June 1987]. In substance this section applies to each and every contract where the predominant factor ofcontract is service. When contract is for supply of water in the factory then certainly that contract is if material [ Where predominant factor is not service].This arrangement is not comparable with a contract where services of a tanker is being hired for transportation of water from one place to another. Section itself clarifies under sub section 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 and under clause iv of subsection 7 that – “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, 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.
The term advertising was differentiated with broadcasting and telecasting including production of program in circular No. 714 dated 03.08.1995 which was relevant when different tax rate was applicable for advertising contracts and other contracts. Since both program made for advertising and other broadcasting are in the nature of service this differentiation is of academic importance.
Payment is in pursuance of a Contract with specified person:- “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) is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor;
Now coming on to term Contracts – Contract, in the simplest definition, a promise enforceable by law. … The making of a contract requires the mutual assent of two or more persons, one of them ordinarily making an offer and another accepting. If one of the parties fails to keep the promise, the other is entitled to legal redress. The term contract is wide enough to cover both Oral and written contracts. The term transport contract would in addition to contracts for transportation and loading / unloading of goods also cover contracts for plying busses, ferries etc. along with staff (e.g. driver, conductor, cleaner etc.). As per sub section6 – 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, on furnishing of his Permanent Account Number, to the person paying or crediting such sum.
In case of program of public welfare run by the state government in conformity with the guideline of central government. There is no contract between the village committee or voluntary agency and state government, which is Sine qua non for attracting provisions of Section 194 C. Moreover these schemes specifically ban the employment of contractor/ middle man for execution of the work undertaken under the schemes. Therefore provisions of Section 194C would not be attracted in such cases. [Circular No. 502 dated 27th January 1988].
The term contract include Sub contracts.
Payment has to be made above specified Limit :- 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 86[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 87[seventy-five] thousand rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.
Rate of Tax to be deducted :- Person making payment shall deduct tax 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.