CA Kapil GoelCA Kapil Goel

As per Section 194C, deduction of TDS is required to be made from payments of any amount to resident contractors or sub-contractors.

Deduction of TDS from payment to resident contractors:

Sec 194C(1) provides that any person responsible for paying any sum to resident contractor for carrying out any work (including supply of labor) in pursuance of a contract between the contractor and the following:

a) The Central Government or any State Government;

b) Any local authority;

c) Any corporation established by or under a Central, State or Provisional Act;

d) Any company;

e) Any co-operative society;

f) Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both;

g) Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India;

h) Any trust;

i) Any university or deemed university;

j) Any Government of a foreign State or a foreign enterprise or any association or body established outside India;

k) Any firm;

l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,-

  • does not fall under any of the preceding sub-clauses; and
  • 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;

Note:

1. The expression “work” in this section would include—

(a) advertising;

(b) broadcasting and telecasting including production of programs for such broadcasting or telecasting;

(c) carriage of goods and passengers by any mode of transportation, other than 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 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,

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 or associate of such customer.

2. A “Contractor” for the purpose of the provisions of this section would be any person who enters into a contract with the Central Government or any State Government, any local authority, any corporation established by or under a Central, State or Provincial Act, any company or any co-operative society for carrying out any work including the supply of labor for carrying out any work.

3. A “sub-contractor” would mean any person who enters into a contract with the contractor for carrying out, or for the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or for supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.

Applicability of this section:

Provisions of Section 194C are applicable only in relation to “works contracts” and “labor contracts” but do not cover “contract for sale or mere supply of goods”.

Neither Income Tax Act nor Income Tax Rules specifies the difference between the contract for sale and works contract; so there is no standard criteria to determine whether a contract is of contract for sale or a contract for work and labor.

One of the criteria to differentiate between “contract for sale” and “works contract” is to determine the ownership regarding goods in question. In case of works contract, even though a part or whole of the materials used belongs to the contractor, yet the property in the thing produced will be the performance whereas in the case of contract for sale the things produced generally are the sole property of the party who has performed the work before its delivery and such person and the property therein passes only under the contract relating thereto to other party for price. Mere transfer of property in goods used in the performance of a contract is not sufficient. To constitute a sale there must be an agreement expressed or implied relating to sale of goods and completion of the agreement by passing of title in the very goods constructed to be sold.

The following conditions must be satisfied for applicability of this Section:

1.) The payee, i.e., contractor must be resident in India within meaning of Sec. 6 of the Income Tax Act.

2.) Payment should be made by any person specified above.

3.) Payment should be made for carrying out any work including supply of labor for carrying out any work.

4.) The payment should be made pursuant to a contract whether oral or written between payer and payee.

5.) The consideration of a contract in respect of which payment is made should exceed Rs. 30,000 at a time.

6.) If aggregate of the amount of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.1,00,000/- TDS is required to be deducted.

7.) Where advance payments are made, tax will have to be deducted if the total payment is likely to exceed Rs. 30,000.

8.) Where it was expected that the total consideration would not exceed Rs. 30,000 but later on, it was found that consideration would exceed Rs. 30,000, tax will have to be deducted in respect of earlier payments also.

Deduction of tax at source from payment to sub-contractors:

Any person (being a contractor and not being an individual or a Hindu Undivided Family) responsible for paying any sum to any resident in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labor for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labor which the contractor has undertaken to supply shall, at the time of credit of such sum to the account of the sub-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 amount equal to 1 % of sum as income-tax on income comprised therein.

Where the payment is made to sub-contractors, the following conditions must be satisfied :-

1.) Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961.

2.) Payment is made by a resident contractor, not being an individual or an HUF.

3.) Payment is made to carry out any work, including supply of labor.

4.) The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000.

5.) The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies.

Note: A contractor who is an individual or HUF is exempt from the obligation of TDS while making payment to subcontractors.

Exemption from deduction of tax at source in certain cases:

No tax is required to be deducted in the following cases:

1.) Where the sum is credited or paid in pursuance of any contract, the consideration for which does not exceed Rs. 30,000, or where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceeds Rs. 1,00,000, the person responsible for paying such sums will not deduct TDS under this section.

2.) Where the sum is credited or paid before 1st June 1973 in pursuance of a contract between the contractor and the co-operative society or in pursuance of a contract between such contractor and the sub-contractor in relation to any work (including supply of labor) undertaken by the contractor for the co-operative society.

3.) Individual or HUF not to deduct tax if the payment or amount credited to contractor is for personal use. No individual or HUF 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 purpose of such individual or any member of HUF.

Provisions for payments and TDS to transporters:

No deduction shall be made from any sum credited or paid or likely to be credited or paid during previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount.

Person responsible for deduction of TDS:

The payer is the person responsible for TDS.

When tax to be deducted:

The person responsible for making payment to resident contractor/sub-contractor should deduct TDS either at the time of crediting such sum to the account to the payee or at the time of payment thereof in cash or by issue of a cheque or by any other mode, whichever is earlier.

Amount credited to suspense account:

Where any sum 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 amount, 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. Thus, tax has to be deducted even if amount payable to resident contractor/subcontractor is transferred to suspense account by the payer in his books.

No deduction of tax or deduction at lower rate:

According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or non deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate.

Rates of tax deduction:

Rates of TDS from payment to contractors and sub-contractors are as under:

S. No. Nature of Payment TDS Rate if PAN available TDS Rate if PAN not available
1. Payment / Credit to resident individual or HUF 1 % 20 %
2. Payment/Credit to any resident person other than individual / HUF 2 % 20 %
3. Payment/ credit to Transporters NIL 20 %

Note:- No Surcharge, Education Cess and SHEC shall be added. Hence, TDS shall be deductible at basic rates.

Deduction of tax at source in case of composite contract:

1. Where materials are supplied by the government:

The question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any, on account of materials supplied by the government, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto. Where the contractor has undertaken to construct a building or a dam, and the government or other specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of cost of materials. Where, however, the contractor has undertaken only to provide the labor for the work, the ownership of the materials supplied remaining at all times with the government or other specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labor or services and will, thus, not include the price of the materials supplied by the government or other specified persons.

Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract.

2. Deduction when party supplies materials to the contractor:

When materials are supplied no deduction is possible. Consequently, no TDS is required to be made. However, when payment is made either in cash or in kind to contractor/sub-contractor tax is required to be deducted.

Deposit of tax to credit of Central Government:

The tax deducted is required to be deposited with the Central Government through a challan within the prescribed time by the person making the deduction.

TDS is to be deposited by remitting the same to any of the following banks:

  • Any branch of the RBI;
  • Any branch of the SBI;
  • Any branch of selected PSBs where Income-Tax Offices are situated.

Time Limit within which tax is to be deposited:

S. No. Particulars Due date for payment
1.) Where the payment is made by or on behalf of the Government On the same day (Without using any Challan form)
2.) Where the payment is made in any other case than the government
a) If the amount is credited in the month of        March On or before April 30th.
b) In Other months. Within 7 days from the end of the month in which the deduction is made.

Issue of TDS certificate:

In case of payments other than salary, TDS certificates are to be issued on quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by following dates :

Quarter Due date for Non-
Government deductor
Due date for
Government deductor
April to June 30th July 15th August
July to September 30th October 1 5th November
October to December 30th January 1 5th February
January to March 30th May 15th June

As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using digital signature or manual signature.

Other aspect:

Contract U/Sec. 194C Vs. professional and Technical Fees U/Sec. 194J

Sec. 194C of the Act deals with tax deduction at source on payments to contractors and sub-contractors, whereas Sec. 194J of the Act deals with TDS on fees for professional or technical services. Sec. 194C is on statute book since 1972 while as Sec. 194J was introduced with effect from a July, 1995. Sec. 194J is in a sense an off-shoot of Sec. 194C. Hence, there are a few common points between the two, although there are quite a few points of distinction.

Sec. 194C deals with payment in respect of contract of work‘, however, earlier the CBDT vide Circular no. 681, dated 8th March, 1994 sough to invoke these provisions even for contracts of professional work like audits. There was a great resistance and litigation by the professional community, which compelled the CBDT to withdraw the circular. However, the same was achieved through the introduction of new Sec. 194J to specifically cover professional fees and the rate of deduction was made as 10% as against 2% under section 194C.

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(Republished with Amendments by Team Taxguru)

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45 Comments

  1. GHANSHYAM DAS says:

    My son is doing job in MNC company and gets salary . One month he has done a contract job and got Rs. 8,000/- and company has deducted tds Rs. 160/-, so in this case. which number of ITR form will file in fy 2019-20. please guide us. dt. 30.7.2020

  2. kirit s sanghvi says:

    You state,”8.) Where it was expected that the total consideration would not exceed Rs. 30,000 but later on, it was found that consideration would exceed Rs. 30,000, tax will have to be deducted in respect of earlier payments also.” This is not true. S 194(5) says that no tax is required if 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 thousand rupee”. The liability to TDS arises at the time of credit or payment of the sum, whichever is earlier. It is at such point of time there should be likelihood, not out of imagination, but such likelihood as could be legally inferred, that the payment will exceed Rs.30,000 per transaction or Rs.1,00,000 for the year, then the liability will arise. Maybe such point of time can be anterior to the point of time when it actually reaches the limit, and it matters not if such limit is not finally reached which was likely to reach. Liability to TDS stays in that case. In a reverse situation, it is unlikely that the payments will reach the limit, and therefore no tax is deducted, and payments finally they exceed. That does not make the payer responsible retrospectively in respect of transactions concluded and paid when based on facts the aggregate amounts were unlikely to exceed.

  3. Arvind says:

    Is it true that a contractor being labour contractor ind/ huf for builder/ developer gets work done through labour subcontractor need nod deduct tds even if contract value exceeds 1 lakh.?

  4. b r bhat says:

    New section 194M was introduced, applicable w.e.f. 1 Sep 2019, where in it states that upto annual 50lakh such payments no TDS is required to be deducted. 5% TDS shall be deducted if the amount is more than 50Lakh per annum

  5. Baliram patil says:

    मी एका कंपनीचे कॉन्टॅक्ट घेतलेलं माज्या कॉन्टॅक्ट च्या रक्कमवर त्यांनी tds कपात केला aahe, पण समोरच्या पार्टीने माज्या कडून साले ची बिले घेतली पण कॉन्टॅक्ट पेक्षा sale बिले ही कमी होतात हे योग्य आहे का

  6. vswami says:

    “DEDUCTION OF TAX AT SOURCE IN CASE OF COMPOSITE CONTRACT”
    That it is so should greatly assist , to the end of possile sucess, for forcefully contesting the GST levy on ” ongoing (under-construction) contract” – that is, in respect of the supply / service components contained therein as an indivisible part and parcel of it, as llegitimate and unlawful; so also as ultra vires the CONSTITUTION.
    OVER To………………
    Courtesy

  7. Vijay Sawant says:

    Sir
    We are labour contractor and showing in bill. As a salary structure like Basic VDA other allowance ect then we have charge our commission separately than we are charge GST. We have paid full amount to our labour and payment sheet provide to Prime employer as a proof of payment made to the labour. For eg Basic 1000 VDA 500 Other allowance 500 Total Rs. 2000 than ad our commission 100 total bill 2100 and gst 378 so total Rs. 2478 than pl explain what is the TDS amount @ rate 2%
    On Rs. 2100 @ 2% is Rs42
    On Rs 100 @ 2% Rs. 2 (Only on Commission)
    Please confirm

  8. Rinku Patel says:

    One person gives another person rs. 1000000/-. For not to carry business for 10 yrs. .
    This amt assessable full one year or 10 Years??
    TDS liability under section 194 C ??

  9. Ganesh says:

    Dear Sir,
    we are having machine tool work contractors.
    we are deducting the tds as below.
    Invoice amount before GST- 10000.0
    CGST&SGST@18% – 1800.00
    Deducting TDS on Total invoice – 11800.00
    TDS @ 2% -236.00
    Amount Payable to vendor – 11564/-
    is the above workings are correct.
    please confirm.
    here my doubt is TDS Would be calculate on before GST Amount.
    please confirm anybody.
    Invoice amount including tax is 11800.00

    1. Santosh says:

      Dear Ganesh,
      TDS will be deducted on the amount before levying GST.Here you are calculating TDS on the amount after GST.Your calculation should be like;
      TDS=10000*2%

  10. Kamal says:

    Sir My query my actual purchase of T shirt is Rs 250000 but on this printing work is Rs 22000 so i did not have deduct TDS on 194c whether it is correct

  11. Senthilj says:

    Hi Experts,

    I am running a company as a sole proprietor, giving service to a Company as a IT Services (Software coding, Software design)they are charging 10% as a TDS from the amount given to them in the invoice. Ex., if i give invoice for 1 Lakh they are paying 90 K.

    I am not sure about this tax is the right figure or they need to take 2% or 1%.

    Can someone help me in the doubts please asap.

  12. narasimhamurthy.k.c. says:

    sir,
    we purchased desk to govt school for rupees 95000. Directly purchased desks. No contract betweeen head master and supplier. we gave 95000/- rupees through cheque to supplier. Not deduct tax at source . according to 194 C shall we paid 2%.

  13. Akash Gupta says:

    If a company employs a person as a driver and it pays salary but while paying a salary tds is deducted @1% and it is shown under Sec 194C. Now that person (Driver) wants to file IT return. Which ITR form he should file??? should he disclose his income as income from salary or any other???
    Please explain…
    Thanks..

  14. Mahesh Chand Tyagi says:

    We are a Limited company, having contact for repair annual meantinanc work with BSNL, & BSNL deducted TDS @ 10%, but we told to BSNLto deduct TDS 2%,
    I wants to know what rate of TDS to be deducted in our case

  15. khan saif says:

    Hello Sir,
    Agar main 1 party ka TDS on contract deduct karta hun 1 service k liye Lekin agar wahi party meri service badal kar kaam karti hai to us par TDS deduct ho ga kya
    For ,Example :,
    1) Wo mere liye export ka clearance dekhta hai main uska TDS 2% Deduct karta hun
    2) us ne mujh se professional fees liya to us par TDS deduct ho ga kya
    Please reply me fast

  16. akash vyas says:

    RS. 200 PER STUDENT ACTUALLY ATTENDING FOR LABOURTY CHARGE ON CONSUMABLES TO BE PAID TO INSTITUTION PAYMENT OF 89000
    SOURCE CUT OF PAYMENT

  17. pratham tanwar says:

    collage ko 85000
    camical and other expenses paid karte he to
    private collage ka tax amount par kitna katega or kis source mean dhara ke antargat katega

  18. Ajay Upmanyu says:

    Sir, I have hired buses to carry students for educational tour of a transporter it’s one time payment is 36000 and total payment to be made to him is less than one lac so should we deduct TDS @ of 2 percent . My institutions is Government school

    1. Anand says:

      Sir, we as coop Hsg socty have done MNC for one year for our lift for a consideration of Rs41000/- are we liable to deduct TDS for the contractor n at what rate. Pl clarify.

  19. mayank kumar says:

    If 2 contracts are made with same person(same PAN)then what if
    1. In first month itself,payment is of 80000/- & 7500/-,for above 2 contracts
    2. If payment is of 25000/- & 5100/- instead of above amounts.
    what amount of TDS would be deducted u/s 194C in both cases,would the amounts of both contracts would be clubbed or treated seperately?

  20. Saurabh Jain says:

    Sir, I want a clarification on this – If in a works contract a RA bill of only material is being received then also TDS is required to be deducted?

  21. Sandeep Pattnaik says:

    Sir we are a ltd company falling under 194 c, we are working on manpower service , we are providing some manpower to one of central govt. organisation , they told they will deduct 2 % tds .2 % for Education cess & .1% for higher education cess.. we understand 2 % TDS is ok but what about cess ,please clarify.
    regrds
    sandeep

  22. neeraj gupta says:

    sir,whether tds is applicable on esi, epf & service tax in a contractor bill(supply of man power) in govt.orgation as per income tax law.

  23. P das says:

    sir whether payment made to Government towards deposit work in respect of construction of a Building liable to deduct tax(TDS)u/s 194c , where payer is a govt. society ?
    if no, please confirm me the relevant provisions or section

  24. Musharraf Ali says:

    there is a air export agent and we deduct TDS of this but for the F.Y. 2014-15 i got demand for the short deduction i got Rs. 34 lac of bills and i deducted @ .25% tds.
    please advise me.

  25. Mary says:

    Hi,

    We are a software firm based in Ahmedabad. Our 100% invoicing/jobs are from US clients. No work/clients in India.

    Our accountant suggests that since we do not work for Indian clients, we are exempted from Service Tax. Is it correct?

    And also they suggested a way to save taxes, is to transfer the payments in someone else’s accounts and just deduct/pay 1% TDS.

    They have given us many accounts in which we transfer by check Rs 100,000 every month in each account and they charge 5% for “such service”, and in return they give us 95,000 back by cash. That is, just showing bank entries to show expenditures.

    Is this a good option or legal to do so?

    Thanks,
    Mary

  26. Manish says:

    Sir,My query is regarding the point-deduction when material are supplied by party to contractor.You have written that no TDS is required to be made.but when payment is made ,tax is to be deducted.So, sir if you can clarify “tax on which PAYMENT(amount)” is to be charged.

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