AMENDMENT IN TDS U/S 194C

TDS from consideration paid or payable to a contractor under section 194C

1.Section 194C has been substituted by a new section with effect from October 1, 2009. The new provisions are given below –

   

1.1 Who is deductor -Any of the following persons responsible for paying any sum to a resident contractor is

                                 Supposed to deduct tax at source under section 194C, if the other conditions are satisfied -

                                 

        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; or

        h.any trust; or

        i. any university or an institution declared to be a university; 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. an individual or a Hindu undivided family (HUF) or an association
          of persons (AOP) or a body of individuals (BOI).

* Additional requirement if payer is an individual/HUF/AOP/BOI -



                                            Additional requirement   Additional requirement
                                            in the case of an            in the case of an
                                            individual/HUF                AOP/BOI


Payment/credit should be       It should not be              No such requi-
for business purposes            exclusively for                 rement
                                            personal purposes


Audit of books of account       Books of account are      Books of account 
                                            liable to be audited         are liable to be 
                                            under section 44AB(a)    audited under se-
                                            /(b) during the financial    ction 44AB(a)/(b) 
                                            year immediately prec-     during the financial
                                            ending financial year        year immediately
                                            in which tax is deductibe  preceding financial
                                                                                   year in which tax 
                                                                                  is deductibe

1.2 Who is recipient - Recipient should be a resident contractor.If, 
                                  however, recipient is a transport contractor 
                                  (maybe an individual, firm, company or any 
                                  other person) and he or it furnishes his PAN 
                                  to the deductor, tax is not deductible.
                                  “Transport operator” is a person who is in the
                                  business of plying, hiring or leasing of goods 
                                  carriages.

1.3 Payments subject to tax deduction under section 194C - If the
                                 above two conditions are satisfied, section 194C 
                                 is aplicable in respect of consideration for carrying 
                                  out any works contract (including supply of labour 
                                  for carrying out any work). For this purpose, 
                                  “contract” shall include subcontract.


* Work as defined in section 194C - The expression “work” shall also 
                                  include the following –
                    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.


It 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.


In other words, the provisions of section 194C are attracted 
only where any sum is paid for carrying out any work 
(manpower is sine qua non and without manpower it cannot
be said that work has been carried out) including supply of
labour and five services noted above – Khaitan & Co.
vs. CIT [2007] 12 SOT 120 (Delhi).

* Payment which are not subject to TDS under section 194C -

  Even though the term ‘work contract’ as used in section 194C is 
inclusive, it does not include each and every work/service. It 
includes carrying out any “work” (where manpower is essential 
requirement), supply of labour and five services (i.e., advertising,
broadcasting and telecasting, carriage of goods/passengers, 
catering and tailor- made manufacturing when raw material is 
supplied by buyer). Section 194C is not applicable in respect of the 
following contracts –


      1. Other services ( i.e, other than 5 services noted above)
          where no work is performed by the service provider nor
          any labour is supplied or engaged to do any work as part of 
          the services so provided or the work so performed, cannot 
          be said to be covered under section 194C –Khaitan &
          Co. (supra).



      2. “Work” shall 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 as such a contract is a 
          contract for ‘sale’. This will however not apply to a contract
          which does not entail manufacture or supply of an article 
          or thing ( e.g, a construction contract).


      3. Payment to transport operators ( i.e, in the course of 
          business of plying, hiring or leasing goods carriages) is 
          not subject to TDS under section 194C if the recipient 
          furnishes his PAN to the payer. Deductors who
          make payments to transporters without deducting TDS
          (as they have quoted PAN) will be required to intimate 
          these PAN details to the Income TaxDepartment in the 
          prescribed format.

1.4 When tax has to be deducted at source - Tax is to be 
         deducted either at the time of credit of such sum to the 
         account of the payee, or at the time of payment thereof
         in cash or by issue of cheque or by any other mode,
         whichever is earlier.

      For this purpose, any sum credited to any account, whether called
      “Suspense account” or by any other name,in the books of account
      of the payer, is treated as credit of such income to the account of 
      the payee.

1.5 Rate of TDS - In order to reduce the scope for disputes regarding 
     classification of contract as sub-contract, the same rate of TDS 
     has been specified (with effect from October 1,2009) for payments
     to both contractors as well as subcontractors.To rationalise the 
     TDS rates and to remove multiple classifications, the same rate of 
     TDS will be applicable in the case of payment for advertising 
     contracts. With effect from October 1, 2009, the following TDS 
     rate will be applicable under section 194C –


                           If the recipient is an individual/HUF    -    1%
                           If the recipient is any other person     -    2%



* Other points - The following points should be noted –

1. There is no surcharge, education cess or secondary and higher
    education cess.

2. If the recipient is a transport operator and he furnishes his PAN to
    the payer, TDS rate is nil. “Transport operator” is a person who
    is in the business of plying, hiring or leasing of goods carriages.

3. In the case of work contract being manufacturing or supplying
    product according to the specification of customer (by using
    material purchased from such customer), TDS shall be deducted
    on the invoice value excluding the value of material purchased
    from such customer if such value is mentioned separately in the

    invoice. Where the material component has not been separately
    mentioned in the invoice, TDS shall be deducted on the whole
    of the invoice value.

** Comparison of old and new rates - The table given below old 
   and new TDS rates under section 194C –

Recipient                                                           TDS rate             TDS rate

                                                                         up to                   from

                                                                         30/9/2009     1/10/2009*

Individual/HUF contractor                                        2%                    1%

Other than individual/HUF Contractor                       2%                    2%

Individual/HUF sub-contractor                                 1%                     1%

Other than individual/HUF sub-contractor                 1%                     2%

Individual/HUF contractor/sub-contractor for
advertising                                                             1%                    1%

Other than individual/HUF contractor/ sub-
contractor for advertising                                         1%                    2%

Sub-contractor in transport business                       1%                     Nil**

Contractor in transport business                             2%                     Nil**

*If the recipient does not furnish PAN, TDS rate will be 20% from
 April 1, 2010.

** NIL rate will be applicable if the transporter furnishes his PAN.If
    PAN is not furnished, the rate will be 1% for an individual/HUF
    transporter and 2% for other transporters during October 1,2009
    andMarch 31, 2010 and 20% after March 31, 2010.

1.6 When tax is not deductible - In the following cases, tax is not 
      deductible or deductible at lower rate under section 194C –

* Petty cases - To avoid tax deduction in petty cases, tax is required
      to be deducted at source where the amount credited or paid to 
      a contractor exceeds Rs. 20,000 in a single payment or credit 
      or Rs. 50,000 in the aggregate during a financial year. 
      
      In other words, tax is not be deductible under section 194C if 

      the following two conditions are satisfied—

a. the amount of any (single) sum credited or paid (or likely to be
    credited or paid) to the contractor does not exceed Rs. 20,000; and

b. the aggregate of the amounts of such sums credited or paid (or
    likely to be credited or paid) during the financial year does not
    exceed Rs. 50,000.

* Transport operators - Payment to transport operators (i.e., in the 
           course of business of plying, hiring or leasing goods 
           carriages) is not subject to TDS under section 194C if 
          the recipient furnishes his PAN to the payer. Deductors
          who make payments to transporters without deducting 
         TDS (as they have quoted PAN) will be required to 
         intimate these PAN details to the Income Tax 
        Department in the prescribed format.

* Lower rate TDS certificate under section 197 - If the 
        recipient obtains a certificate for no deduction or lower

        deduction of tax at source under section 197, then tax will

        be deductible at the rate given in the certificate.