Amending definition of ‘work’ in section 194C of the Act

Section 194C of the Act provides for the deduction of tax on payments made to contractors. The section provides that any person responsible for paying any sum to a resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall at the time of such credit or at the time of payment whichever is earlier deduct an amount equal to one per cent in case payment is made to an individual or an HUF and two per cent in other cases. Clause (iv) of the Explanation of the said section defines “work”. Sub-clause (e) of this definition includes manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer within the definition. However, it excludes 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.

It has been noted that some assessees are using the escape clause of the section by getting the contract manufacturer to procure the raw material supplied through its related parties. As a result, a substantial amount of income escapes the tax net.

Therefore, to bring clarity in the section and plug the leakage, it is proposed to amend the definition of “work” under section 194C to provide that in a contract manufacturing, the raw material provided by the assessee or its associate shall fall within the purview of the ‘work’ under section 194C. Associate is proposed to be defined to mean a person who is placed similarly in relation to the 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 of the Act.

This amendment will take effect from 1st April, 2020.

[Clause 76]

Extract of Relevant Clauses of Finance Bill, 2020

Clause 76

“Clause 76 of the Bill seeks to amend section 194C of the Income-tax Act relating to payments to contractors.

Sub-section (1) of the said section provides that any person responsible for paying any sum to any resident (referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person 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 one per cent. where the payment is being made or credit is being given to an individual or a Hindu undivided family; 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.

Item (B) of sub-clause (l) of clause (i) of the Explanation to the said section provides the definition of “specified person” to mean any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person, 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.

It is proposed to amend the said sub-clause so as to define the expression “specified person” to mean any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person, 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.

Sub-clause (e) of clause (iv) of the Explanation to the said section defines “work” to include manufacturing or supplying a product according to the requirement or specification of a customer by using raw 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 raw material purchased from a person, other than such customer.

It is proposed to substitute the said sub-clause so as to modify the definition of “work” to include 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. It is also proposed to insert “or associate of such customer” in the long line.

These amendments will take effect from 1st April, 2020.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

76. Amendment of section 194C.

In section 194C of the Income-tax Act, in the Explanation,–

(I) in clause (i), in sub-clause (l), in item (B), for the words, brackets, letters and figures “is liable to audit of accounts under clause (a) or clause (b) of section 44AB”, the words “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” shall be substituted;

(II) in clause (iv),–

(i) for sub-clause (e), the following sub-clause shall be substituted, namely:–

“(e) 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,”;

(ii) in the long line, after the words “other than such customer”, the words “or associate of such customer” shall be inserted.

Source- Finance Bill 2020 / Union Budget 2020-21

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