Section 194C Note on Deduction of Tax At Source From Payment To Contractors/Sub-Contractors

Definition/Meaning

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 the contractor. The term contractor will include a sub-contractor also.

Scope and applicability

This section applicable to the specified person which are:-

  • Any trust
  • A firm including LLP
  • Central Government or State Government
  • Individual
  • HUF
  • AOP/BOI
  • Local Authority
  •  A company
  • A co-operative society
  • Any Govt of a foreign state or foreign enterprise or any association or body established outside India.

Important points under scope and applicability

  • Any individuals, HUF/BOI/AOP will be treated as specified person if such person are liable to do audit.
  • EXCEPTION: No individuals or HUF shall be liable to deduct tax on the sum credited or paid to the contractor exclusively for personal purposes of such individual or HUF.

Non-Applicability

  • Circular No. 172 issued by the CBDT has made it clear that the provisions of sec. 194C and 195 relating to tax deduction at source will not apply to the payments made to non-resident shipping companies only if their income is assessed u/s 172 of the Act.
  • The assessee has to show that the shipping companies to whom payments were made are not only non-residents but also he has to show they were assessed under section 172. Only if the assessee is able to prove the above facts, then he will be relieved of from the liability to deduct tax at source from the payments made to them towards freight and insurance charge.

Monetary limit for deduction

  • No tax is deductible at source on any sum paid or credited or likely to be credited or paid if such sum does not exceed prescribed limit no tax is to be deducted. Prescribed are the below limit:-
Each payment Aggregate payment during F. Y.
30000 100000
  • If the single payment does not exceed but the aggregate payment exceeds the limit during any time in F. Y then deduct on aggregate payment at that stage.

Concession to goods transport operators

  • With effect from 1.06.2015 provision has been amended to provide relaxation to transporters from no-deduction of tax under 194C. If the following condition is satisfied :

1. Recipient is engaged in the business of transport (hiring, plying or leasing good carriage).

2. Recipient own 10 or less goods carriages at any time during the F. Y.

3. Recipient furnishes a declaration to this effect along with PAN.

  • “Goods Carriage” means any motor vehicle use solely for the carriage of goods.

What payment are covered by section 194C?

  • This section are applicable only where contract is either “work contract” or “contract for supply of labour for works contract.” Therefore, this is not applicable for payment made under contract for sale of goods.
  • Where payment were made to the employees of the assessee on daily wage basis such payment could not be said contractual payment and not covered under section 194C. Only contractual payment are covered.

What is the meaning of “any work”? And other key points

  • The expression ‘any work’ has been subject matter of interpretation at various levels.
  • Work also include- service contracts, transport contracts, advertising contracts, broadcasting , telecasting, labour material & works contract, catering services, outsource of some manufacturing activity will be also ‘work’ & attract 194C.
  • This section does not apply to commission agent or broker.
  • Fees for professional/technical service will be included in 194J not in 194C.
  • Electrician contract, routine maintenance contract, cold storage facility, repair & maintenance contract, event management, payment for security services, cargo handling charges, warehousing charges.
  • Freight paid to Non-Residents will not covered under section 194C.
  • Placement fees/carriage fees paid by assessee to cable operators will also attract 194C.
  • Payment to recruitment agencies are in the nature of services rendered hence 194C will not apply & will fall under 194J.
  • Any kind of sponsorship by the organisers will also fall in 194C.

When tax to be deducted?

Tax is to be deducted either (a) at the time of credit of such to the account payee or (b) or at the time of payment thereof in cash or by issue cheque or any other mode, Whichever is earlier.

Effects of non-furnishing of PAN on rate of tax

  • Every person whose receipts are subject to deduction of tax at source shall furnish the PAN to the deductor. If the person does not furnish the deductor will deduct tax at higher rates in the following rates:-

1. At the rate prescribed in the Act

2. At the rate in force or

3. At the rate of 20%

  • No tax or lower tax is to be deducted when the assessing officer has issued the lower deduction certificate.

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