There is an ambiguity with respect to applicability of TDS under section 194C of Income Tax Act, 1961 (‘the Act’) with respect to printed material like bill book, visiting cards, dairy, calendar etc., which are printed as per specification of the customer. As the printing of material is in the nature of works contract comprises of both material and labour, it important to analyze the provision of section 194C of the Act relating to applicability of TDS on these kind of contract.
1. Provisions of section 194C of the Act
This section specifies that any person making payment to a resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and such person, then such person has to withheld the tax at source out of the payment to be made to the contractor at a specified rates based on the status of the contractor (i.e. Individual, HUF, Firm etc).
Further, Explanation to section 194C provides inclusive definition of work. The term “work” among other things includes manufacturing or supplying a product according to the requirement or specification of a customer by using material 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.
2. Analysis of section 194C of the Act
In the backdrop of Explanation to section 194C of the Act, in order to apply the provisions of this section on transaction relating to work involving printing of material, there should be a supply of material by the customer to contractor and contractor has carried out any process on such material using his labour.
The important point emerging from the analysis of section 194C is only contract for work is covered under this section and not the contract for sale which involves the transfer of title in goods from seller to customer.
Further, it is pertinent to note the following circulars issued by the CBDT on this subject matter;
In this circular CBDT has clarified that if the contractor undertakes to supply any article or thing fabricated according to the specifications given by the customer and it involves transfer of title in goods, then it is in the nature of contract for sale and such transactions are outside the purview of section 194C.
This circular had contained may FAQ’s relating applicability of TDS provisions introduced through Finance Act, 1995. It had a question relating to printing of material as under:
Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications?
The Circular No.715 had created further confusion in the minds of tax payers with respect to applicability of TDS under section 194C on printed material.
The CBDT had cleared this confusion by issuing Circular No.13/2006.
In this circular, the CBDT had clarified that before taking a decision on the applicability of TDS under section 194C on a contract, it would have to be examined whether the contract in question is a ‘contract for work’ or a ‘contract for sale’ and TDS shall be applicable only where it is a ‘contract for work’.
In the light of the above, it is ample clear that TDS under section 194C is applicable to that contract which involves contract for work.
The printing of bill books, visiting card, diary, calendar etc. as per the specifications of customer are in the nature of ‘contract for sale’, as the customers are not supplying any material to contractor. The contractor purchases the material on his own and applies his labour on such material purchased. Further, the contractor is transferring the title in goods to customer and hence it is outside the purview of section 194C.
Accordingly, TDS under section 194C is not applicable on printing material as per customer specification, wherein customer has not supplied any material to contractor and contractor has supplied the final product for a price, which is in the nature of contract for sale.