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Tuesday, October 9, 2012

Law on TDS - Sec - 194C


“THE LAW ON TDS”

As famously said by Albert Einstein,The hardest thing in the world to understand is the income tax”, the provision of TDS is "the source of income for purposes of the income tax" and one of the most controversial and litigated provision of the Income Tax Act, 1961.

INTRODUCTION TO SECTION 194C

Section 194C was introduced in the Income Tax Act, 1961 w.e.f. 1st April 1972.

In a very short span of time, soon after its introduction in the Act, Central Board of Direct Taxes promptly came up with Circular No. 86 dated 29-5-1972, Circular No. 93 dated 26-9-1972 and Circular No. 108 dated 20-3-1973 throwing light on the interpretation & application of the provision in a given case.

The Amendments to the provision sec-194C were made from time to time and as on today the law reads,

q       that TDS has to be made at a prescribed rate by any person/Contractor who is responsible for making payment of any sum to any resident for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and any “Specified Person”

q       that TDS has to be made @1% in case of individuals and in case of Hindu Undivided Family and any other case it is @2%;

q       that TDS has to be made by the contractor in pursuance of a contract with the sub-contractor for carrying out any work or for supply of labour for carrying out such work (whether whole or any part of the work) either by way of cash or by way of cheque or draft, or any other mode;

q       that No Tax is required to be deducted where sum credited or paid or likely to be credited or paid does not exceed Rs.30000/-. However, if the aggregate of such sums credited or paid or likely to be credited or paid in the financial year exceeds Rs.75,000/-, TDS is required to be made;

The expression "Contractor" shall include a contractor who is carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the Government of a foreign State/ foreign enterprise/ any association or body established outside India. 

For the purpose of the applicability of the provision, the term "work" includes –

q       Advertising;
q      Broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
q       Carriage of goods and passengers by any mode of transport other than by railways;
q       Catering;
q       Manufacturing or supplying a product according to the requirement or specification of a customer by using the material purchased from such customer,

However, it does not include manufacturing or supplying a product according to the requirement or specification given by a customer using the material purchased from a person, other than such customer.

HISTORY OF THE PROVISION OF SEC-194C

CIRCULAR NO. 86 DATED 29.05.1972 CLARIFIED

q       distinction between a “work contract” and a “contract for sale” It was clarified that the “contracts for construction” and “the contract and erection or installation of plant and machinery” are in the nature of contracts for work and labour;

q       that where materials are supplied by one person and the fabrication work is done by a contractor the contract is that of a works contract;

q       that the Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. CANNOT be regarded as contract "for carrying out any work" and, accordingly, no deduction of income tax shall be made from payments relating to such contracts. 

CIRCULAR NO. 93 DATED 26.09.1972 CLARIFIED


CONTRACT OF SALE
CONTRACT OF WORK
the main object is the transfer of property and delivery of possession of the property
the main object in a “contract for work” is not the transfer of the property but it is one for work and labour
if is it by transfer at the time of delivery of the finished article as a chattel it is a “sale”
by accession during the procession of work on fusion to the movable property of the customer the contract is “works-contract”


q       that a transport contract cannot ordinarily be regarded as "contract for carrying out any work" and, as such, no deduction is required to be made from the payments made under contract;

q       EXCEPTION, that in the case of Composite Contract involving transport as well as loading and unloading charges, the entire contract is regarded as "works contract".  

q       Note: w.e.f. 01.07.1995 a new explanation was inserted which includes the carriage of goods and passengers by any mode other than railways within the meaning of “carrying of work”.

 REVIEW OF THE ABOVE CIRCULARS AND REFERENCE MADE BY HON’BLE SUPREME COURT IN THE CASE OF

“Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435”

Guidelines pronounced & in pursuant to the same Central Board of Direct Taxes clarify the applicability of the provisions of section 194C: —

(A) The Provision of sec-194C would be applicable:

q       to all types of contracts for carrying out any work including, transport contracts, service contracts, advertisement contracts, broadcast­ing contracts, telecasting contracts, labour contracts, material contracts and works contracts;

q       to contracts for the construction, repair, renovation or alteration of buildings or dams or laying of roads or airfields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts;

q       to contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Gov­ernment or such person, will also fall within the purview of this section.

q       to payments made to persons who arrange advertisement, broadcast­ing, telecasting, etc;

q       to payments made for hiring or renting of equipments, etc;

q       to payments made to banks for discounting bills collecting/receiving payments through cheques/drafts, opening and nego­tiating Letters of Credit and transactions in negotiable instruments;

q       not only to written contracts but also oral contracts;

q       to “Service contracts” since the term ‘service’ means doing any work as explained above.

(B) The provisions of this section would not cover “Contracts for Sale of Goods”:

q  Where the contractor undertakes to supply any article or thing fabricated according to the specifications given by Government or any other specified person and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and therefore outside the purview of this section.

CIRCULAR NO. 681 DATED 08.03.1994

With the issuance Circular No. 681 dated 08.03.1994, Central Board of Direct Taxes decided to withdrew both the Circular no. 86 and 93.

In circular no. 681 CBDT has clearly prescribed that, the provisions of section 194C would not cover contracts for sale of goods. It has further stated that, where a contractor undertakes to supply any article or thing fabricated according to the specifications given by the Government or any other specified person, and the property in such article or thing passes to the Government or such person only after such article or thing is delivered, the contract will be a contract for sale and as such would be outside the purview of this section.

State of Himachal Pradesh vs. Associated Hostels of India Ltd. [1972] 29 STC 474

In the above-captioned case, Hon’ble Supreme Court has laid down few principles as guidelines, to be followed-

v     where the principal objective of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, contract is of work and labor;

v     whether or not the work and labor bestowed end in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of skill and labor as compared with the value of the materials is conclusive and it has to be determined in the light of the facts and circumstances of a particular case to find out that, whether the contract is, in substance, one of work and labor, or one for the sale of a chattel;

v    where the intention is not to sell the article but to improve the land or the chattel & the material is furnished for work to be done the contract will that be of work and labor;

In case of any controversy regarding issue as to whether a particular contract would be a work contract or contract for sale the above guidelines prescribed by the Supreme Court were followed.

Subsequently, CBDT came up with another Circular namely CIRCULAR NO. 715 DATED 3-8-1995 clarifying several queries and bringing various types of contracts in the ambit of section 194C. The following nature of contracts were included-

q       Payments made to clearing and forwarding agents;
q       Payments to couriers;
q       Payments to transporters; and
q       Supply of printed material

Therefore, the controversy of the interpretation and determination of the nature of contract has continued and till today the issue is a subject-matter of litigation at various stages.

CONTROVERSY

WORK CONTRACT VS. CONTRACT OF SALE

the difference between the two expressions & a broader interpretation made by Hon’ble Judicial & Quasi- judicial authorities while adjudicating the controversy of determining whether a contract is a “contract for sale” or “work contract”

Section 194C provides that, any person responsible for paying any sum to any resident for carrying out any work has an obligation to deduct tax at source on such payment. The crux of the litigation is as to whether the supply of products by third parties constituted ‘work’ for the purpose of section 194C. The amendment made to the Explanation II of section 194C by the Finance Act 2009 provided an inclusive list of activities that would be considered as ‘work’.

In language of a layman, a contract for sale can be distinguished from a contract of work.

The issue as to whether a particular agreement falls within one or the other category depends upon, -

 the object and intent of the parties which is evidenced by the terms of the contract;
       the circumstances in which it was entered into and;
       the custom of the trade

If a contract involves the sale of movable property it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour.

The most relevant circumstance from a clear distinction can be made is, whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price.

When the title to the property vests with the purchaser upon delivery, that is an important indicator suggesting that the contract is that of a contract for sale and not a contract for work.

The Controversy started with the pronouncement of authoritative decision in the case of State of Himachal Pradesh v. Associated Hotels of India Ltd. by Hon’ble the Supreme Court of India.

Subsequent, to the above judicial pronouncement, several matters have been adjudicated and controversies as to how the “contract for work” and “contract for sale” could be distinguished were resolved in the light of the facts and circumstances of each case.

Some of the important decisions are mentioned as here under: -

q       BDA Ltd. Vs ITO [2006] 281 ITR 99 (BOM)- In this case the assessee had distillery, wherein it has purchased materials that is required for bottling and marketing the foreign made Indian liquor inclusive of the printing and packing of material. M/s. Mudranika, another establishment was also supplying the printed labels, which was required to be rapped on the bottles to the assessee. The assessing officer held that, the payment made to M/s. Mudranika, the supplier of the printed material from whom the printed labels were purchased were in pursuance of a contract and thus liable to deduct tax at source u/s. 194C of the Act. The Hon’ble High Court observed that the assessee has issued purchase order in favour of M/s. Mudranika for the supply of printed labels as per the specification provided and the assessee did not supply the raw material. In the light of the above, Hon’ble Bombay High Court held that the supply of printed labels by M/s. Mudranika to the assessee was “contract for sale” & it could not be deemed as “works contract”.

q       Glenmark Pharmaceuticals Ltd. v ITO (TDS), Hon’ble ITAT has observed that, the goods were manufactured by the manufacturers in their own establishments in accordance with the specifications given by the assessee. The raw material cost and other expenses were also incurred by themselves. The manufacturers also paid the excise duty when the goods were sold & the sales tax was paid. When the goods were sold to the assessee the property in them passed over to the assessee. Therefore, Hon’ble ITAT held that the agreements of the assessee with the manufacturers cannot be termed as ‘works contract’ and no TDS u/s. 194C has to be made.

q       Commissioner of Income Tax vs. Deputy Chief Accounts Officer, it was held that, the fact that the goods manufactured were according to the requirement of the customer did not mean or imply that any work carried out on behalf of that customer. Accordingly, held that the purchase of particular printed packing material by the respondent was a contract for sale and outside the purview of Section 194C of the Act.

LANDMARK JUDGMENT

KONE ELEVATORS (INDIA) LTD. 2005(181) ELT 156(SC)

Explains the difference “Contract of Sale” vis-a-vis “Works Contract

The most crucial TEST that shall be applied is to study and interpret the essence of the contract and the reality of the transaction as a whole.

CONTROVERSY
COMPOSITE / INDIVISIBLE CONTRACT VS.  DIVISIBLE/ SEPARATE AGREEMENT

A major un-ending controversy pertaining to “Turn- key projects” largely revolving around generation of windmill projects comprising of supply, erection & installation for the Generation of Wind-mill

Recently, I have worked on a Income Tax appeal matter, where our client/assessee has been treated as an “assessee-in-default” and interest were charged u/s. 201 (1A) for non-deduction of TDS read with Sec-194C of the I.T. Act, 1961. The Revenue was of the opinion that assessee ought to have deducted TDS on the supply of material portion & that upon wrong interpretation of facts & materials put on record has treated the separate agreements (one for supply of supply of materials i.e. spare parts & Wind Turbine Generator) & another for (work comprising of supervision, erection & installation) as one and Indivisible or Composite Contract.

The necessary VAT was paid on the sale of generator and supply of materials delivered as chattel to the assessee. The two contracts were separate and divisible which is apparent from the materials submitted on record.

The Turn-key projects and issue of TDS u/s. 194C is still lingering before several judicial authorities, at several stage and it is pertinent to mention that, this particular issue may indeed never have one final verdict, as each case although by facts and circumstances may look similar, still the facts, circumstances and evidences found upon study of records may only be the main decisive factor of determining the fate of each case.

I would like to state some outstanding pronouncements passed by Judicial and quasi-judicial bodies related to the above issue:

When the parties entered into a consolidated contract with a spilt of consideration towards material & other of labour one cannot be termed as an indivisible works contract. Therefore, no tax is required to be deducted on the payment towards supply portion of the contract.

There are certain essential attributes, which are necessarily to be followed in order to come to a conclusion, that whether the contract is of Composite in nature or purely divisible one. These essentials are as follows: -

The obligations under the contract are distinct ones;
The supply obligation is distinct and separate from the service obligation

Hence, it is pertinent to mention that, in some cases assessee while entering into contract of work or even service, both the parties may enter into separate agreements, one of work and service, and other of sale and purchase of materials. Under such circumstances, the transactions would not be one and indivisible, but would fall into two separate agreements, one for work or service and the other of sale.

Hon’ble Supreme Court in the case of ITO vs. Sriram Bearings Ltd. (1987) 224 ITR 724 (SC) has held that, where the two parts of a contract, which are interdependent, cannot be treated as one, when the consideration and the services are distinct. 

Again Hon’ble Hyderabad ITAT Bench in the case of Power Grid Corpn. Of India Ltd. vs. Assistant Commissioner of Income Tax [2007] 108 ITD 340 (Hyd) has held that, where the title in goods has passed to the assessee before the commencement of work and the assessee has treated the goods as his property before issuing the same for erection; contract of supply shall be treated as contract of sale.

In the recent past, Hon’ble ITAT, Bangalore Bench in the case of Karnataka Power Transmission Corporation vs. Asst. CIT has held that, when an assessee is under no obligation to deduct tax on supply portion, the assessee’s case would not fall within the ambit of the provisions of Sec-201 (1) of the I.T. Act, and thus, the assessee could not be treated as an “assessee in default”.

Judgment passed by Hon’ble High Court of Madras in the case of State of Tamil Nadu vs. Titanium Equipment and Anode Manufacturing Corporation Ltd. in (1998) 110 STC 43 (Madras) is also utterly necessary to mention. In this case there was a contract for design, engineer, manufacture, supply and supervision of installation and commissioning. The Hon’ble Tribunal held that the contract is indivisible. 

Hon’ble Madras High Court reversed the decision of the Tribunal and held that the contract was clearly a divisible contract, i.e. one for the supply of the titanium anodes and another for supervision and installation and undertaking recoating maintenance. The price payable for the supply of material was distinct from the consideration payable for the supervision of installation and commissioning and for recoating maintenance. The parties themselves has no doubt as to the nature of the arrangement they has entered into and had specifically provided for the payment of the excise duty, sales tax and all other statutory levies by the buyer.

Likewise, Hon’ble Supreme Court has also taken a reversed view in many cases, where the contracts entered into by parties were not divisible and therefore the same was treated as a “composite and an indivisible contract”. I would like to mention couple of such decisions, which are as under.

In the case of Vanguard Rolling Shutters & Steel Work vs. Commissioner of Sales Tax [1977] 39 STC 372 (SC) and Ram Singh and Sons Engineering Works vs. Commissioner of Sales Tax AIR 1979 SC 545, it was held upon perusal that, the price charged by the contractor from the customer was in a lump sum and did not show a break up of the materials used or fabricated or the cost of services or labour separately. Hence, the same was held to be as “composite contract”.

It is also pertinent to state a very important judicial pronouncement passed by the Hon’ble Supreme Court in the case of Hindustan Shipyard Ltd. vs. State of Andhra Pradesh, where it was clarified that, -

  it is not the bulk of the material used in the construction alone but the relative importance of the materials qua the work, skill and labour of the payee which also has to be seen, but it is a relevant parameter.

Therefore, single evidence would not be sufficient to treat an assessee as “assessee-in-default” for non-deduction of TDS U/s. 194C & the entirety of the facts and circumstances of any given case has to be taken into consideration in order to reach at a proper & applicable verdict.

POSITION OF A SUB - CONTRACTOR U/S. 194C
No TDS u/s. 194C in absence of contract between Contractor and sub-contractor 
Sub-section (2) of section 194C of the Income-tax Act, 1961 lays down that, any person (being a contractor and not being an individual or a Hindu undivided family), responsible for paying any sum to any resident (hereafter in this section referred to as the sub-contractor) in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labour for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labour 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 an amount equal to one per cent of such sum as income-tax on income comprised therein.
Hence, in terms of the provisions of section 194C (2) as clarified by the Board vide Circular No. 715 dated 8-8-1995, conditions that are to be satisfied are:
(i)            that the assessee should be a contractor,
(ii)          that the assessee should enter into a contract with a sub-contractor,
(iii)         that the sub-contractor should carry out any part of the work undertaken by the contractor and;
(iv)        that the payment should be made for the work done.

Also interesting enough to mention that, the provisions of section 194C as substituted by the Finance Act 2 of 2009 w.e.f. 1-10-2009 has not made any distinction between a payment made to a contractor or sub-contractor and that all payments made for carrying out any work in pursuance to a contract are covered within the section 194C (1) of the Act

For the purpose of the section the expression ‘work’ comprises of 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 and (e) manufacturing or supplying a product according to the requirement or specification of a customer by using 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 material purchased from a person, other than such customer.
Work that is not covered under this provision is: 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.

Consequently, due to non-deduction of TDS, an assessee has to face challenges at several stages of litigation on account of disallowance u/s. 40 (a) (ia). The proof of existence of a ‘contract’ in the form of concrete evidence, either by the assessee or by the Revenue is disputed.

In the case of ITO V Rama Nand & Co (163 ITR 702), High Court of Himachal Pradesh has defined the expression “sub-contractor”. It stated,

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

The Hon'ble Supreme Court in Birla Cement Works v CBDT [2001] 248 ITR 216 has laid down the conditions precedent for attracting the provisions of section 194C, which are as follows,

(i)                  there must be a contract between the person responsible for making payment to contractor,
(ii)                the contract must be for carrying out of any work,
(iii)               the work is to be carried through the contractor,
(iv)              the consideration for the contract should exceed Rs.10,000/-, i.e., the amount fixed by section 194C and
(v)                that the payment is made to the contractor for the work carried out by him. 

The above principles were discussed in the case of Safiuddin, Kolkata vs. Assessee. The controversy in the case was regarding the payments made for disbursement of labour charges to labour-heads and applicability of sec -194C. Revenue claimed that there was no necessity for the existence of a written contract and that an oral contract was equally valid. Although, there was no direct evidence on record to conclusively hold that there was any written contract or even oral contract agreement between the parties.

Therefore, in the light of the principles laid down by the Hon’ble Supreme Court in the case Birla Cement, Hon’ble ITAT, Kolkata restored the matter back to A.O. to decide the issue for determination of existence of any contract between the assessee and the labour-heads.

Likewise, several judgments were passed in the light of the said principles and to name few of them,
  
q       ACIT vs. Shiva Construction
q       ITO vs. Rama Nand and Co.
q       CIT vs. Esskay Construction Co. 
q       M/s. Samanwaya Vs. ACIT
q       S.S. Construction, Kolkata vs. Department of Income Tax

SECTION - 194C VS. 194I

Whether expression “carriage of goods and passengers by any mode of transport” finds place in section 194C or section 194-I of the Income Tax Act?

Section 194I of the Income Tax Act, 1961 is required to deduct Tax at source at the time of payment of any income by way of rent i.e. @10% for the use of any machinery or plant or equipment.

On the other hand Section 194C says that, TDS is to be made @2% for carrying out any work which includes carriage of goods and passengers by any mode of transport other than by railways.

Generally, all types of machinery, plant and equipment are given on hire and therefore gets covered u/s. 194I. However, hiring of transport vehicles in order to carry out work i.e. carriage of goods and passengers get specifically covered u/s. 194C.

Loudly, provision of sec-194C (2) clause (c) of Explanation III is subject to TDS provision on account of Transport vehicles that are used for carriage of goods and passengers.

As per rules of interpretation, a very well-established principle says, “a specific provision prevails over general provisions”. Section 194C contains specific provision for deduction of tax in transport contracts, whereas Sec. 1941 comprises of general provision for deduction of tax on rent on account of hiring of plants, machineries etc.

Number of cases had gone through litigation over the period of years. The issue not only revolved around the applicability of either of the provisions, but whether provisions of sec-194C would get attracted in case of carrying out work for transport of any goods or passengers from one place to another or not.

As discussed earlier it may be worth mentioning that, presence of contract is the dominant object for the purpose of section -194C (2). 

In the case of Dy. CIT vs. Satish Aggarwal & Co. (2009) 27 DTR 34 (Asr.), the assessee hired trucks for a fixed period upon payment of hire charges, utilized in the business of civil construction. There was no agreement for carrying out any work or to transport any goods or passengers from one place to another.

As hiring of trucks for the purpose of using those in business did not amount to contract for carrying out any work as contemplated in section 194C.

It was held that, in absence of a contract, the provision of section 194C did not get attract and hence no disallowance under section 40(a) (ia) can be made.

CIRCULAR NO. 715 DATED 8-8-1995

Clarifications provided on sec -194C in consonance to the amendments brought by Finance Act, 1995

The Finance Act, 1995, has enlarged the scope of TDS by making various amendments to the provisions of the Income Tax Act. Number of queries was raised at various associations/professional bodies regarding the scope and application of tax deduction at source.

In order to provide with right clarifications in a question and answer form, Circular No. 715 dated 08-08-1995 were issued by CBDT, thereby clearing the following doubts:

Question 1: What would be the scope of an advertising contract for the purpose of section 194C of the Act?
Answer: The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.

Question 2: Whether the advertising agency would deduct tax at source out of payments made to the media?

Answer: No. The position has been clarified in the answer to question No. 1 above.

Question 3: At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for artwork and other related jobs as well as payments made by them to media?

Answer: The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent.


Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.
Question 4: Where the tax is required to be deducted at source on payments made directly to the print media/ Doordarshan for release of advertisements?

Answer: The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.

Question 5: Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act?

Answer: The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.

Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods?

Answer: The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.

Question 7: Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers?

Answer: The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.

Question 8: Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc.?

Answer: The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.

Question 9: In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill?

Answer: Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.

Question 10: Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis?

Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.

Question 11: Whether a contract for catering would include serving food in a restaurant/sale of eatables?

Answer: TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.

Question 12: Whether payment to a recruitment agency can be covered by section 194C?

Answer: Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

Question 13: Whether section 194C would cover payments made by a company to a share registrar?

Answer: In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.

Question 14: Whether FD commission and brokerage can be covered under section 194C?
Answer: No

Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications?

Answer: Yes.

Question 16: Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product?

Answer: Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.

Question 17: Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media?

Answer: Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.

Question 18: Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organizers?

Answer: The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.

Question 19: Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organizations?

Answer: Yes.

DEBATE ON THE APPLICABILITY OF TDS ON REIMBURSEMENT OF EXPENDITURE

Where the expenses are claimed through separate statements, TDS on reimbursement of actual expenses is not required

The term "Reimbursement" has not been defined in the Income Tax Act and hence the meaning has to be understood in terms of dictionary meaning.


Black’s Law Dictionary defines "reimburse" as to pay back, to restore or to repay which is expended.

Question 30 of CBDT Circular No 795 dated 08.08.1995 clarifies an issue as to whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses.

In view of the above query, it was explicitly clarified that,

Sections 194C and 194J refer to any sum paid”. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.

Where a single bill has been raised for professional fee and also inclusive of the reimbursement of actual expenditure, then in such a case TDS has to be made on the entire gross amount/bill. However, TDS on reimbursement of expenses is not required to be made when separate bills are raised.

The view has been supported in the case of ITO v. Dr. Willmar Schwabe (2005) 3 SOT 71.

Although circular No. 715 dated 8-8-1995 lays down that, TDS should be on the entire payment i.e. inclusive of the reimbursement of expenses, ITAT on the other hand has held that, where a separate bill is being raised for reimbursement of expenses provisions of TDS does not attract.

The view has been taken by way of many judicial decisions and to name few are:

q       Mitra Logistic Pvt. Ltd.  V. ITO, ITAT, Kolkata;
q       DCIT vs. Lazard India Pvt. Ltd., ITAT, Mumbai;
q       ITO V. M/s Planet Herbs Life Science Pvt. Ltd., ITAT, Delhi;
q       Income Tax Officer vs. Travels and Shopping (P) Ltd

Therefore in my view, it is worth mentioning that, where the amounts are reimbursed and are clearly identifiable, duly supported with concrete evidence of payment & thereof separately charged, there shall be no requirement of TDS on such amount paid fully supported by the above judicial pronouncements.

CONCLUSION AND REMARKS

an attempt to understand the complex issues simplified by way of the above analysis of issues

Section 194C as discussed above has been prone to prolonged litigation since its very inception. Hence, the issues pertaining to interpretation of the statute, amendments and clarifications by CBDT have lead various assessees’ and tax representatives stuck in litigation. Lots of queries were raised by the taxpayers and tax consultants, seeking for clarifications on the provision.

I have tried to discuss the topic at length so as to help the enthusiastic readers to get a precise idea of the judicial controversies involved in the provision of sec-194C of the Income Tax Act, 1961.


~THANK YOU~

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