TDS on Payment to Contractor : section 194C

By | May 25, 2016
(Last Updated On: January 20, 2017)

TDS on Payment to Contractor

TDS on Payment to Contractor is covered under Section 194C of Income tax act

TDS on Payment to Contractor section 194C of income tax

TDS on Payment to Contractor : Salient Features of Section 194C :

  • No TDS on payment to contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns 10 or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.
  • No TDS on Payment to Contractor if any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor,is upto Rs 35000 /-
  • However TDS on Payment to Contractor shall be deducted if aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds   Rs 75000  ( Rs 1,00,000 w.e.f 01.06.2016 as per Finance Act 2016 )
  • Any person responsible for paying any sum to any resident (called contractor)
  • Payment is made for carrying out any work  (including supply of labour for carrying out any work)
  • Payment is made  in pursuance of a contract between the contractor and a specified person
  • TDS on Payment to Contractor shall be deducted 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
  • TDS on Payment to Contractor shall be deducted @ 1%  of such sum where the payment is being made or credit is being given to an individual or a Hindu undivided family;
  • TDS on Payment to Contractor shall be deducted 2%of such sum  where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family
  • TDS on Payment to Contractor shall be deducted even when payment  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 income.
  • No individual or Hindu undivided family 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 purposes of such individual or any member of Hindu undivided family
  • In case of manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, TDS on Payment to Contractor shall be deducted
    • on the invoice value excluding the value of material, if such value is mentioned separately in the invoice or
    • on the whole of the invoice value, if the value of material is not mentioned separately in the invoice

Latest Books on TDS


TDS on Payment to Contractor : Amendment by Finance Act 2016

Amendment of section 194C of Income Tax Act by Finance Act 2016

74. In section 194C of the Income-tax Act, in sub-section (5), in the proviso, for the words “seventy-five thousand rupees”, the words “one lakh rupees” shall be substituted with effect from the 1st day of June, 2016.

Explanation of above amendment by Finance Act 2016 is given  in Clause 72

Clause 72 of the Finance Bill 2016 seeks to amend section 194C of the Income- tax Act relating to payments to contractors.

The proviso to sub-section (5) of the aforesaid section provides that the person responsible for paying the sums referred to in sub-section (1) of the said section shall be liable to deduct income-tax, where the aggregate of the amounts of the sums credited or paid or likely to be credited or paid during the financial year exceeds seventy-five thousand rupees.

It is proposed to enhance the said threshold limit from seventy- five thousand rupees to one lakh rupees for the aggregate transactions during the financial year.

This amendment will take effect from 1st June, 2016.

TDS on Payment to Contractor : Section 194C of Income Tax Act

Payments to contractors

194C.  (1) Any person responsible for paying any sum to any resident (hereafter in this section 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—

(i)one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
(ii)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.

(2) Where any sum referred to in sub-section (1) 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 income, 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.

(3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source—

i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or

ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice.

(4) No individual or Hindu undivided family 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 purposes of such individual or any member of Hindu undivided family.

(5) No deduction shall be made from the 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 rupees :

Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds  seventy-five  thousand rupees [ Rs 1,00,000 w.e.f 01.06.2016 as per Finance Act 2016 ], the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

(6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with  his Permanent Account Number, to the person paying or crediting such sum.

(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

Explanation.—For the purposes of this section,—

(i)“specified person” shall mean,—
(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, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
(h)any trust; or
(i)any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); 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)any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—
(A)does not fall under any of the preceding sub-clauses; and
(B)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;
(ii)“goods carriage” shall have the meaning assigned to it in the Explanation to sub-section (7) ofsection 44AE;
(iii)“contract” shall include sub-contract;
(iv)“work” shall include—
(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,
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.]

TDS on Payment to Contractor : TDS on Print & TV Advertising

Issue of applicability of TDS provisions on payments made by television channels or media houses publishing newspapers or magazines to advertising agencies

CIRCULAR NO.5/2016 [F.NO.275/06/2016-IT(B)], DATED 29-2-2016

The issue of applicability of TDS provisions on payments made by television channels or media houses publishing newspapers or magazines to advertising agencies for procuring and canvassing for advertisements has been examined by the Board in view of representations received in this regard.

2. It is noted that there are two types of payments involved in the advertising business:

(i)Payment by client to the advertising agency, and
(ii)Payment by advertising agency to the television channel/newspaper company

The applicability of TDS on these payments has already been dealt with in Circular No. 715 dated 8-8-1995, where it has been clarified in Question Nos. 1 & 2 that while TDS under section 194C (as work contract) will be applicable on the first type of payment, there will be no TDS under section 194C on the second type of paymente.g. payment by advertising agency to the media company.

3. However, another issue has been raised in various cases as to whether the fees/charges taken or retained by advertising companies from media companies for canvasing/booking advertisements (typically 15% of the billing) is ‘commission’ or ‘discount’. It has been argued by the assessees that since the relationship between the media company and the advertising company is on a principal-to-principal basis, such payments are in the nature of trade discount and not commission and, therefore, outside the purview of TDS under section 194H. The Department, on the other hand, has taken the stand in some cases that since the advertising agencies act on behalf of the media companies for procuring advertisements, the margin retained by the former amounts to constructive payment of commission and, accordingly, TDS under section 194H is attracted.

4. The issue has been examined by the Allahabad High Court in the case of Jagran Prakashan Ltd. and Delhi High Court in the matter of Living Media Limited and it was held in both the cases that the relationship between the media company and the advertising agency is that of a ‘principal-to-principal’ and, therefore, not liable for TDS under section 194H. The SLPs filed by the Department in the matter of Living Media Ltd. and Jagran Prakashan Ltd have been dismissed by the Supreme Court vide order dated 11-12-2009 and order dated 5-5-2014, respectively. Though these decisions are in respect of print media, the ratio is also applicable to electronic media/television advertising as the broad nature of the activities involved is similar.

5. In view of the above, it is hereby clarified that no TDS is attracted on payments made by television channels/newspaper companies to the advertising agency for booking or procuring of or canvassing for advertisements. It is also further clarified that ‘commission’ referred to in Question No.27 of the Board’s Circular No. 715 dated 8-8-1995 does not refer to payments by media companies to advertising companies for booking of advertisements but to payments for engagement of models, artists, photographers, sportspersons, etc. and, therefore, is not relevant to the issue of TDS referred to in this Circular.

TDS on Payment to Contractor : TDS on Payment to production houses

Issue of applicability of TDS provisions on payments made by broadcasters/telecasters to production houses

CIRCULAR NO.4/2016 [F.NO.275/07/2016-IT(B)], DATED 29-2-2016

The issue of applicability of TDS provisions on payments made by broadcasters/telecasters to production houses for production of content or programme for broadcasting/telecasting has been examined by CBDT in view of representations received in this regard.

2. It has been noted that disputes have arisen on the issue as to whether payments made by the broadcaster/telecaster to production houses for production of content/programme are payments under a ‘work contract’ or a contract for ‘professional or technical services’ and, therefore, liable for TDS u/s 194C or u/s 194J of the Income-tax Act, 1961 (the Act).

3. While applying the relevant provision of TDS on a contract for content production, a distinction is required to be made between (i) a payment for production of content/programme as per the specifications of the broadcaster/telecaster and (ii) a payment for acquisition of broadcasting/telecasting rights of the content already produced by the production house.

4. In the first situation where the content is produced as per the specifications provided by the broadcaster/telecaster and the copyright of the content/programme also gets transferred to the telecaster/broadcaster, it is hereby clarified that such contract is covered by the definition of the term ‘work’ insection 194C of the Act and, therefore, subject to TDS under that section. This position clearly flows from the definition of ‘work’ given in clause (iv)(b) of the Explanation to section 194C and the same has also been clarified vide Qn.No. 3 of Circular No. 715 dated 8.8.1995.

5. However, in a case where the telecaster/broadcaster acquires only the telecasting/broadcasting rights of the content already produced by the production house, there is no contract for ‘carrying out any work’, as required in sub-section (1) of section 194C. Therefore, such payments are not liable for TDS under section 194C. However, payments of this nature may be liable for TDS under other sections under Chapter XVII-C of the Act.

TDS on Payment to Contractor : TDS on Contract for Fabrication of Article

Issue of applicability of TDS provisions of section 194C on Contract for Fabrication of Article or Thing as per Specifications given by the Assessee

CIRCULAR NO. 13/2006, DATED 13-12-2006

  1. Representations have been received in the Board seeking clarification on the applicability of section 194C on such transactions, where the assessee has outsourced certain work relating to fabrication or manufacturing of article or thing in accordance with the specifications given by the assessee. Circular No. 681, dated 8-3-1994 of the Board clarifies in para 7(vi) that the provisions of section 194C would not apply to contracts for sale of goods and further clarifies that where the property in the article or thing so fabricated passes from the fabricator-contractor to the assessee only after such article or thing is delivered to the assessee, such contract would be a contract for sale and so outside the purview of section 194C. However, in reply to question No. 15 in Circular No. 715, dated 8-8-1995 on the subject of applicability of section 194C, in respect of contract for supply printed material as per prescribed specifications, it has been said that such contracts would also be covered under section194C. It has been represented that the views expressed in these two circulars, to the extent as pointed out above, are in contradiction to each other.
  2. The matter has been examined by the Board and it is considered that exclusive reliance on Question/Answer No. 15 of Circular No. 715, without taking into account the principles laid down in Circular No. 681 is not justified. 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’.
  3. It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale as per the principles in this regard laid down in para 7(vi) of Circular No. 681, dated 8-3-1994

TDS on Payment to Contractor : Govt Clarification regarding TDS on payment made to Transporters

Finance Act, 2015 – Circular No. 19/2015, Dated 27-11-2015

43. Clarification regarding deduction of tax from payments made to transporters

43.1 Under the provisions of section 194C of the Income-tax Act payment to contractors is subject to TDS at the rate of 1% in case the payee is an individual or Hindu undivided family and at the rate of 2% in case of other payees if such payment exceeds Rs. 30,000 or aggregate of such payment in a financial year exceeds Rs. 75,000. Prior to 1.10.2009, section 194C of the Income-tax Act provided for exemption from TDS to an individual transporter who did not own more than two goods carriage at any time during the previous year.

43.2 The Finance (No.2) Act, 2009 substituted section 194C of the Income-tax Act with effect from 1.10.2009, which inter alia provided for non- deduction of tax from payments made to the contractor during the course of plying, hiring and leasing goods carriage if the contractor furnishes his Permanent Account Number (PAN) to the payer. The memorandum explaining the provisions of Finance (No.2) Bill, 2009 indicates that the intention was to exempt only small transport operators (as defined in section 44AE of the Act) from the purview of TDS on furnishing of Permanent Account Number (PAN). Thus, the intention was to reduce the compliance burden on the small transporters. However, the language of sub-section (6) of section 194C of the Income-tax Act did not convey the desired intention and as a result all transporters, irrespective of their size, were claiming exemption from TDS under the existing provisions of sub-section (6) of section 194C of the Income-tax Act by furnishing their PAN.

43.3 As there is no rationale for exempting payment to all transporters, irrespective of their size, from the purview of TDS, the provisions of section 194C(6) of the Income-tax Act have been amended so as to expressly provide that the relaxation under sub-section (6) of section 194C of the Income-tax Act for non-deduction of tax shall only be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to a contractor who is engaged in the business of transport i.e. plying, hiring or leasing goods carriage and who is eligible to compute income as per the provisions of section44AE of the Income-tax Act (i.e a person who is not owning more than 10 goods carriages at any time during the previous year) and who has also furnished a declaration to this effect along with his PAN, to the person paying such sum.

43.4 Further, this exemption from TDS is applicable only in respect of transport charges received for plying, hiring or leasing of goods carriage (s) owned by the transporter. Therefore, if a person receives payment in respect of plying, hiring or leasing of goods carriage (s) which are not owned by him, he shall not be entitled to claim exemption from TDS in respect of these payments.

43.5 The condition of not owning more than ten goods carriages by the transporter is required to be fulfilled on the date on which the amount is credited or paid, whichever is earlier. In case a transporter does not own ten goods carriages on the date on which the amount is credited or paid but becomes owner of ten goods carriages later in the previous year, the payer shall not be required to deduct tax from the payment made to the transporter during the period of the previous year when he was not owning more than ten goods carriages. However, the tax shall be required to be deducted from the payment made during that part of the previous year during which the transporter owned more than ten goods carriages.

43.6 Further, for determining the aggregate amounts of sum credited or paid for the purposes of proviso to sub-section (5) of section 194C all the payment made during the financial year shall be taken into account including the amount credited or paid during the period of the financial year during which the transporter was not owning more than ten goods carriages. However, as the provisions of section 194C(6) were amended with effect from 1st June, 2015, for determining the aggregate payments for the financial year 2015-16, the payments made on or after 1st June, 2015 shall only be taken into account. This is explained by way of following illustration:-

‘T’, an individual owns five goods carriages from 1st April, 2015 to 31st October, 2015. On 1st November, 2015, he purchased 6 more goods carriages. On 1st January, 2016, he sold 8 goods carriages. ‘P’ makes following payment of transport charges to ‘T’ during the financial year 2015-16:

15th April, 2015Rs. 35,000
15th July, 2015Rs. 40,000
15th November, 2015Rs. 20,000
15th December, 2015Rs. 20,000
15th February, 2016Rs. 50,000

No tax is deductible on payment made on 15th April, 2015 if ‘T’ furnishes his PAN as per the pre-amended provisions of section 194C(6) of the Income-tax Act. No tax is deductible from payment made on 15th July, 2015 if ‘T’ furnishes a declaration that he does not own more than 10 goods carriages during the relevant financial year along with his PAN as per the requirement of the amended provision of section 194C(6) of the Income-tax Act. The tax is also not deductible from payment made on 15th November, 2015 as the payment does not exceed Rs.30,000 and the aggregate of payments during the period from 1st June, 2015 [i.e. the date of effectivity of the amended provision of section 194C(6)] to15th November, 2015 does not exceed Rs.75,000 as specified in proviso to section 194C(5) of the Income-tax Act. Tax at the rate of 1% i.e. Rs.200/- is deductible from payment made on 15th December, 2015 as ‘T’ owns more than 10 goods carriages on that date and the aggregate of the payments made during the period from 1st June, 2015 to 15th December, 2015 exceeded the threshold of Rs.75,000. Tax is also deductible from the payment made on 15th February, 2016 even though ‘T’ did not own more than 10 goods carriages on 15th February, 2016. This is because ‘T’ owned more than10 goods carriages during the financial year 2015-16 and the payment exceeded both the specified threshold for individual and aggregate payments. In view of this, ‘T’ is not eligible to claim the exemption under section 194C(6) of the Income-tax Act by furnishing declaration along with the PAN in accordance with the provisions of section194C(6) in respect of payments made on 15th December, 2015 and 15th February, 2016.

43.7 Further, for the purposes of ensuring uniformity in the format of declaration to be furnished by the payee under section 194C(6) of the Income-tax Act for receiving the payment without deduction of tax, the following format for furnishing of declaration is specified:

“DECLARATION UNDER SECTION 194C(6) OF THE INCOME-TAX ACT, 1961

No……… (To be provided by payee)Date……………..

From : (Name & address of the payee)

To : (Name & address of the payer)

The freight/transport charges amounting to Rs…………for transportation of goods by goods carriages having Registration Number …………may be paid or credited to my account without deduction of tax undersection 194C of the Income-tax Act, 1961. I/We, ……………….. in the capacity of ……………hereby declare that I/We do not own more than ten goods carriage and also did not own more than ten goods carriage at any time during the period from 1st April …….. to ……………..My Permanent Account Number (PAN) is ……….I hereby enclose a self-attested photocopy of my PAN Card.

…………….……………..

Place:Signature of the person making declaration”

43.8 It may be mentioned here that the person responsible for paying to transporter is required to report the particulars of payment made to transporters without deduction of tax in compliance to the provision of section194C(6) of the Income-tax Act in the statement of deduction of tax (Form 26Q) as per the provision of rule 31A(4)(vi) of the Income-tax Rules, 1962. Non-furnishing or incomplete furnishing of this information shall make the deductor liable for penalty as per the provision of section 271H of the Income-tax Act.

43.9 Applicability – This amendment takes effect from 1st June, 2015.

TDS on Payment to Contractor : TDS on Gas Transportation Charges

Issue of  TDS on Gas Transportation Charges paid by the purchasers of Natural gas to the sellers of gas.

CIRCULAR NO. 9/2012 [F. NO. 275/11/2012-IT(B)], DATED 17-10-2012

Representations have been received from various sections of the Industry on the difficulties faced in the matter of Tax Deduction at Source on Gas Transportation Charges paid by the purchasers of Natural gas to the sellers of gas.

2. The Hon’ble Gujarat High Court in the case of CIT (TDS) v. Krishak Bharati Cooperative Limited [2011] 27 taxmann.com 304 (Guj.) in Tax Appeal No. 618 of 2010 vide order dated 12-7-2011, has held that the question as to whether payment of Gas Transportation Charges by the purchasers of Natural gas to the Gas Distribution Companies is covered under the provision of Chapter XVII-B of Income-tax Act, 1961 (the Act) or not, can be ascertained only on the basis of the terms of agreement between the Gas Distributing Company and the purchaser of the Natural gas. In the operative part of the order, the Hon’ble Court says that in the facts of the abovementioned case, the agreement is for purchase and sale of gas. Transportation of gas is only a part of the entire sale transaction. Laying down the pipeline and supplying gas through such pipeline were the steps taken in furtherance of such a contract. There was a clear understanding of the parties that the ownership of gas would pass on to the buyer at the delivery point which clearly shows that transport of gas by the seller was a step towards execution of contract for sale of gas and there was no contract for carriage of goods. The Court added that Transportation of gas was only in furtherance of contract for sale of gas. The Hon’ble High Court then decided that in such a case the supply of gas is under a ‘contract for sale’ and not under a ‘works contract’ as envisaged under section 194C of the Act and hence in such a case TDS provisions are not applicable.

3. The matter has been examined by the Board. The main stakeholders in this Industry are the – Owners/Sellers of the gas (which could be a Gas Distribution Company); Transporters of gas (which could be the Owners/Sellers of the gas or a third party/parties) and the purchasers/ end-users of the gas. The Owner/Seller of the gas may transfer the ownership of the gas to the purchaser either at the point of delivery at the premises of the purchaser or at any intermediate point.

4. It is clarified that in case the Owner/Seller of the gas sells as well as transports the gas to the purchaser till the point of delivery, where the ownership of gas to the purchaser is simultaneously transferred, the manner of raising the sale bill (whether the transportation charges are embedded in the cost of gas or shown separately) does not alter the basic nature of such contract which remains essentially a ‘contract for sale’ and not a ‘works contract’ as envisaged in section 194C of the Act. Hence in such circumstances, provisions of Chapter XVII-B of the Act are not applicable on the component of Gas Transportation Charges paid by the purchaser to the Owner/Seller of the gas. The use of different modes of transportation of gas by Owner/Seller will not alter the position.

5. It is needless to mention that transportation charges paid to a third party transporter of gas, either by the Owner/Seller of the gas or purchaser of the gas or any other person, shall continue to be governed by the appropriate provisions of the Act and TDS shall be deductible on such payment to the third party at the applicable rates.

TDS on Payment to Contractor :Issue of TDS in case of tickets sold by airlines and travel agents to customers

Circular : No. 713, dated 2-8-1995.

  1. Clarification regarding applicability of section 194C in case of tickets sold by airlines and travel agents to customers
    1. The Finance Act, 1995 has amended the provisions regarding tax deduction at source contained in section 194Cof the Income-tax Act. As per the amended provisions, deduction of tax at source is to be made, inter alia, from payments made in respect of contracts for carriage of goods and passengers by any mode of transport other than Railways.
    2. A number of queries have been received as to whether tax has to be deducted at source from payments to travel agents or the airlines for purchase of tickets for travel by air.
    3. The matter has been examined by the Board. It is clarified that the provisions of section 194C do not apply to the payments made to the airlines or the travel agents for purchase of tickets for air travel of individuals. The provisions shall, however, apply when payments are made for chartering an aircraft for carriage of passengers of goods.
    4. The clarification in para 3 (above) shall apply mutatis mutandis to the tickets for travel of individual by any other mode of transport also.

TDS on Payment to Contractor :Applicability of section 194C/194J in case of advertising agency 

Circular : No. 714, dated 3-8-1995.

  1. Clarification regarding applicability of section 194C/194J in case of advertising agency 
    1. Finance Act, 1995 has amended section 194C dealing with tax deduction at source for carrying out any work by introducing Explanation III therein. By this Explanation, the expression “work” has been defined, inter alia, to also include—

  (a)   advertising;

  (b)   broadcasting and telecasting including production of programmes for such broadcasting and telecasting.

According to the amended provisions, tax is to be deducted at the rate of 1 per cent in cases of advertising and at the rate of 2 per cent in the other cases, of the sum as income-tax on income comprised therein.

  1. The Act has also introduced section 194J and this section deals with deduction of tax at source from ‘fees for professional or technical services’. This section prescribes deduction of tax at source at a rate of 5 per cent of the sum as income-tax on income comprised therein. The term “Professional Services” has been defined in theExplanation to this section to mean services rendered by a person in the course of carrying on legal, medical, engineering or the profession of accountancy or technical consultancy or interior decoration or advertising or such activity as is notified by the Board for the purpose of section 44AA or of this section.
  2. Representations have been received regarding the scope and meaning of the term “advertising” used in section194C(1), where tax deduction at source has to be made at the rate of 1 per cent as against rate of 2 per cent in the other cases. It is clarified that advertising may be in print or electronic media, i.e., in newspapers, periodicals, radio, television, etc. In such cases the tax will be deducted at the rate of 1 per cent of the payment made for advertising including production of programmes for such broadcasting and telecasting to be used in such advertising. In all other cases of work of broadcasting and telecasting including production of programmes for such broadcasting and telecasting, where advertising is not involved, tax will be deducted at the rate of 2 per cent of the sum.
  3. It is also clarified that the tax will be deducted at source under section 194J from payments made for professional services. Thus, when an advertising agency makes payments for professional services to a film artiste such as an actor, a cameraman, a director, etc., tax will be deducted at the rate of 5 per cent.

Circular : No. 715, dated 8-8-1995.

TDS on Payment to Contractor : Clarifications on various provisions relating to TDS u/s 194C

  1. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995

The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :

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 art work 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 section194C 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 section194-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 194Cof 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 ofsection 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 undersection 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

1Question 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 organisers ?

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 organisations ?

Answer : Yes.

Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?

Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.

Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?

Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.

Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?

Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.

Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?

Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.

Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?

Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.

Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?

Answer : Clause (B) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.

Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?

Answer : Yes.

Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?

Answer : Yes.

Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?

Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions ofsection 194C will apply in such cases.

Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194Cor 194J of the Act ?

Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.

Question 30 : 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 ?

Answer : 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.

Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?

Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.

Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?

Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.

Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest ?

Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.

Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?

Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.

TDS on Payment to Contractor : Clarification Regarding Question No. 20 of Circular No. 715, dated 8-8-1995

Circular : No. 5/2002, dated 30-7-2002.

Clarification Regarding Question No. 20

  1. Circular No. 715, dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—

. . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?

Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.” [Emphasis supplied]

In this context, doubts have been raised as to what constitutes “hotel accommodation taken on regular basis” for the purpose.

  1. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.

Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.

  1. However, often, there are instances, where corporate employers, tour operators and travel agents enter intoagreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate-contract agreements.

TDS on Payment to Contractor : Payment of any sum shall be liable for deduction of tax only under one section

Circular : No. 720, dated 30-8-1995.

  1. Payment of any sum shall be liable for deduction of tax only under one section

It has been brought to the notice of the Board that in some cases persons responsible for deducting tax at source are deducting such tax by applying more than one provision for the same payment. In particular, it has been pointed out that the sums paid for carrying out work of advertising are being subjected to deduction of tax at source under section 194C as payment for work contract as also under section 194J as payments of fees for professional services.

  1. It is hereby clarified that each section, regarding TDS under Chapter XVII, deals with a particular kind of payment to the exclusion of all other sections is this Chapter. Thus, payment of any sum shall be liable for deduction of tax only under one section. Therefore, a payment is liable for tax deduction only under one section.

TDS on Payment to Contractor : Clarification regarding hire charges paid to bus owners from the hire of buses

Circular : No. 558, dated 28-3-1990.

  1. Clarification regarding hire charges paid to bus owners from the hire of buses
    1. According to the provisions of section 194C any person responsible for paying any sum of any resident for carrying out any work in pursuance of a contract between the contractor and the bodies specified therein shall, at the time of credit of such sum to the account of the contractor or payment thereof in cash, etc., deduct an amount equal to 2 per cent of such sum as income-tax on income comprised therein. The bodies are :

  (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.

Similarly when a contractor makes payment to a resident sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken by him, he is required to deduct an amount equal to 1 per cent of such sum as income-tax on income comprised therein. However, no such deduction is required to be made from any sum credited or paid in pursuance of a contract the consideration of which does not exceed Rs. 10,000.

  1. A question has arisen whether the provisions of section 194C are applicable to the payments made by a State Road Transport Corporation to private bus owners from whom buses are hired for plying on specified routes. Placing reliance on the answer given to question No. 5 in Board’s Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.
  2. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :—

    (i)   The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.

  (ii)   The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.

(iii)   The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.

(iv)   The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.

   (v)   The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.

(vi)   The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.

(vii)  The corporation shall pay the owner at the rate of Rs. …..as fixed cost per day in addition to Rs. …..per km. operated as variable cost, etc., etc.

On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of provisions of section 194C in such cases may be considered on merits in the light of the aforesaid observations, and to this extent the clarification given in question No. 5 in Board’s Circular No. 98, dated 26-9-1972 stand modified.

Related post and Case Laws – TDS on Payment to Contractor

  1. TDS Rates and Limit revised w.e.f 01.06.2016
  2. TDS on Payment to harvester / transporter of Sugarcane from Farmers field
  3. Payment to intermediaries for hiring of transport for carriage of goods is also liable for TDS u/s 194C
  4. Even in case of oral contract with transporters TDS is liable to be deducted u/s 194C
  5. Purchases made after payment of excise duty and availment of credit can not be held as job work, no TDS under section 194C
  6. TDS on Provision for Expenses
  7. Section 194C payments to newspaper publishers
  8. No TDS on Reimbursement Expenses if separate bills raised
  9. All About 26AS (TDS, Refund , AIR information )
  10. 40(a)(ia) TDS default based on opinion of CA was bona fide mistake , No Penalty
Direct Taxes Ready ReckonerService Tax Ready ReckonerCompany Law Ready Reckonertax deduction at source
New Books Released on Tax , GST and law