CBDT Circulars on TDS

cbdt-circulars-on-tds

CBDT issues from time to time various clarificatory Circulars for clarifying the provisions of TDS of the Income Tax Act, 1961. Some of the Circulars are listed in this collection.




    List of CBDT Circulars on TDS


    Circular No. 681 dated 8-3-94

    Circular No: 681
    Date of Issue: 8.3.1994
    Section(s) Referred : 194C
    Statute: Income-Tax Act

    Subject: Deduction of income-tax at source under section 194C of the Income-tax Act, 1961, from payments made to contractors/sub-contractors-Supreme Court judgment dated 23rd March, 1993, in Associated Cement Co. Ltd. v. CIT-Instructions-Regarding.

    Sub-section (1) of section 194C of the Income-tax Act, 1961, lays down that any person responsible for paying any sum to any resident (herein-after referred to as ”contractor”) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the bodies mentioned therein shall, at the time of credit of such sum to the account of the contractor or 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 2 per cent. of such sum as income-tax on the income comprised therein.

    2. Sub-section (2) of section 194C of the Income-tax Act, 1961, lays down that when a contractor makes payment of any sum to a resident sub-contractor in pursuance of a contract made with him for carrying out the whole or any part of the work undertaken by the contractor, or, for supplying any labour, the contractor shall deduct an amount equal to 1 per cent. of such sum as income-tax on the income comprised therein.

    3. Section 194C was introduced with effect from 1st April, 1972. Shortly after its introduction, the Board issued Circulars No. 86, dated 29th May, 1972 (F. No. 275/9/72-ITJ), No. 93, dated 26th September, 1972 (F. No. 275/100/72-ITJ), and No. 108, dated 20th March, 1973 (F. No. 131(9)/ 73-TPL), in this regard.

    4. Some of the issues raised in the above-mentioned circulars need to be reviewed in the light of the judgment dated March 23, 1993, delivered by the Supreme Court of India in Civil Appeal No. 2860(NT) of 1979- Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435.

    5. The Supreme Court has held that “. . . there is nothing in the sub-section which could make us hold that the contract to carry out a work or the contract to supply labour to carry out a work should be confined to ‘ works contract ‘ . . .”. Their Lordships have further held that ” ‘ Any work ‘ means any work and not a ‘ work contract ‘, which has a special connotation in the tax law . . . ‘ Work ‘ envisaged in the sub-section, therefore, has a wide import and covers ‘ any work ‘ which one or the other of the organisations specified in the sub-section can get carried out through a contractor under a contract and further it includes obtaining by any of such organisations supply of labour under a contract with a contractor for carrying out its work which would have fallen outside the ‘ work ‘ but for its specific inclusion in the sub-section”.

    6. It may be pointed out that this appeal before the Supreme Court was by virtue of a special leave petition against the judgment in Writ Petition No. 2909 of 1978 of the Patna High Court in the case of Associated Cement Co. Ltd. v. CIT [1979] 120 ITR 444. The Patna High Court, while dismissing the writ petition of the aforesaid company, observed that ” In a very broad sense, a work done by one person is service rendered to another and indeed one of the dictionary meanings of the word ‘ service ‘ is work “.

    7. The conclusion flowing from the aforesaid judgments of the Supreme Court and the Patna High Court is that the provisions of section 194C would apply to all types of contracts including transport contracts, labour contracts, service contracts, etc. In the light of these judgments, the Board have decided to withdraw their above mentioned Circulars Nos. 86 and 93 and para 11 of Circular No. 108 and issue the following guidelines in regard to the applicability of the provisions of section 194C:–

    (i) The provisions of section 194C shall apply to all types of contracts for carrying out any work including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, materials contracts and works contracts.

    (ii) No deduction at source under section 194C shall be required to be made if the consideration for the contract does not exceed the prescribed amount which at present is Rs. 10,000 (ten thousand only).

    (iii) The provisions of section 194C would not apply in relation to payments made for hiring or renting of equipments, etc.

    (iv) The provisions of section 194C would not apply in relation 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.

    (v) Service contracts would be covered by the provisions of this section since service means doing any work as explained above.

    (vi) The provisions of this section will not cover contracts for sale of goods.

    (a) Since 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. Similarly, contracts granted for processing of goods supplied by the 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. The same position will obtain in respect of contracts for fabrication of any article or thing where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor.

    (b) Where, however, the 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 outside the purview of this section.

    (c) In State of Himachal Pradesh v. Associated Hotels of India Ltd. [1972] 29 STC 474, the Supreme Court observed that 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 labour. The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale ; neither the ownership of the materials nor the value of skill and labour as compared with the value of the materials is conclusive although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is, in substance, one of work and labour or one for the sale of a chattel. A building contract or a contract under which a movable is fixed to another chattel or on the land, where the intention plainly is not to sell, the article but to improve the land or the chattel and the consideration is not for the transfer of the chattel, but for the labour and work done and the material furnished, the contract will be one of work and labour. In case of doubt, whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the above mentioned case.

    (vii) The provisions of this section would apply in relation to payments made to persons who arrange advertisement, broadcasting, telecasting, etc.

    (viii) The provisions are wide enough to cover not only written contracts but also oral contracts.

    (ix) Where the total payment under the contract is likely to exceed Rs. 10,000 for the entire period during which the contract will remain in force, income-tax will have to be deducted at source. In a case where, at the time when the contract was entered into, it was expected that the total payment thereunder would not exceed Rs. 10,000 but later on it is found that the payment exceeds that amount, deduction should be made in respect of earlier payments as well.

    (x) The percentage deduction prescribed in law is with reference to the amount of payment and not ” income comprised in the payment “. The person responsible for making payment, therefore, is not required to estimate the income comprised in the payment.

    (xi) In a case where advance payments are made during the execution of a contract and such payments are to be adjusted at the time of final settlement of accounts, tax will have to be deducted at the time of making advance payments if the total payment is likely to exceed Rs. 10,000.

    (xii) Where any contractor is the recipient of any amount under a contract but the income of the recipient is not subject to income-tax, such contractor may obtain a certificate from his Assessing Officer under section 194C(4) for receiving payment without deduction of tax at source.

    (xiii) Every contractor, other than an individual or a HUF, who is responsible for paying any sum to any sub-contractor (who is resident in India), in pursuance of a contract with such sub-contractor for carrying out or for the supply of labour for carrying out, wholly or in part, of the work undertaken by the contractor or for supplying whether wholly or partly any labour which the contractor had undertaken to supply, will be required to deduct income-tax at the rate of 1 per cent. of such sum.

    8. It may be noted that–

    (i) The term ” service contracts ” would include services rendered by such persons as lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. However, services rendered for which payment is in the nature of salaries which is chargeable under the head of income ” A. Salaries ” in Chapter IV of the Income-tax Act, 1961, shall not be covered by section 194C.

    (ii) The term ” transport contracts ” would, in addition to contracts for transportation and loading/unloading of goods, also cover contracts for plying of buses, ferries, etc., along with staff (e.g., driver, conductor, cleaner, etc.). Reference in this regard is also invited to Board’s Circular No. 558, dated 28th March, 1990.

    (iii) The term ” materials contracts ” in the context of section 194C would mean contracts for supply of materials where the principal contract is for work and labour and not a contract for sale of materials.

    9. Board’s Circular No. 86, dated 29th May, 1972, and No. 93, dated 26th September, 1972, and para 11 of Circular No. 108, dated 20th March, 1973, are hereby withdrawn. Board’s Circular No. 558, dated 28th March, 1990, is reiterated.

    10. It is clarified that this circular explaining the provisions of section 194C will apply with effect from 1st April, 1994. Tax deductions made in accordance with Circulars Nos. 86, 93 and 108 up to 31st March, 1994, will be regarded as compliance of the provisions of section 194C.

    11. Copies of this circular will be available with the Directorate of Income-tax (RSP & PR), 6th Floor, Mayur Bhavan, New Delhi-110 001.

    12. Hindi version will follow.

    Sd./-
    Rajesh Chandra.
    Under Secretary,
    Central Board of Direct Taxes

    [F.No.275/54/93-IT (B), dated 8.3.94 from CBDT]


    Circular No. 433 dated 25-9-85

    Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
    1. Under section 194C, a liability is cast on any person respon­sible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between him and—
        (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
    to deduct an amount equal to two per cent of such sum as income-tax on income comprised therein.
    1. In the bidi manufacturing industry, generally there are three parties, the manufacturer, the munshis and the workers. The manu­facturer provides the raw material,i.e., leaves, tobacco, thread, etc., to the munshis who distribute the same to the workers who work at home. At regular intervals, the munshis collect the bidies prepared by the workers and hand over the same to the manufacturer. For this work, the manufacturer pays to the mun­shis, who in turn, make the payment to the workers. The workers as well as munshis get their payments at the rates agreed to.
    2. The Board have had occasion to examine the question whether a munshi engaged by the bidi manufacturer is a contractor or an agent and whether the provisions of section 194C would apply to the payments made to him. The Board are advised that in view of the position that the definition of the expression "contractor" in the Bidi and Cigar Workers (Condition of Employment) Act, 1966, includes sub-contractor, agent, munshi, thekedar or satte­dar, the provisions of section 194C would apply in respect of payments made to munshis. It may be clarified that the provisions of section 194C are wide enough to cover oral contracts also. By the very nature of the functions performed by the munshis, there is an implied contract between the manufacturer and the munshis and consequently the munshis are contractors even though there is no written contract or agreement. As such, the provisions of section 194C would apply in respect of payments made to them.
    Circular : No. 433 [F.No. 275/30/82-IT(B)], dated 25-9-1985.


    Circular No. 487 dated 8-6-1987

    Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
    1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the provi­sions of section 194C would apply in respect of payments made to munshis and that would apply to payments under oral contracts also. The payments to munshis which would be hit by the provi­sions of section 194C covered not only the payments to them for raw material but also the payments to the workers.
    2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Peti­tions Nos. 3605 to 3609 of 1978 and others in the case ofP.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
        (a)   directly employed by the manufacturers;
        (b)   employed through the medium of agency such as munshis but the workers bring bidi to the factory for quality check and for getting their payments;
        (c)   the workers are engaged by the munshis and the munshis ensure the quality and make payments.
    It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
    1. In view of the above judgment, it is nowfurther clarified that the deductions under section 194C to be made from the pay­ments to munshis need not include payments to such home workers as fall in category (b) above.
    Circular: No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.


    Circular No. 502 dated 27-1-1988

    1111. Whether provisions of section 194C are applicable to work executed under National Rural Employment Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEGP)
    1. References have been received from certain quarters about the applicability of the provisions of section 194C to the payments made in respect of the works executed under the National Rural Employment Programme (NREP) and Rural Landless Employment Guaran­tee Programme (RLEGP).
    2. According to the provisions of section 194C, any person re­sponsible for paying any sum to any contractor for carrying out any work in pursuance of a contract between the contractor and the agencies specified therein shall, at the time of credit of such sum to the amount 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. Similarly, when a con­tractor makes payment to a sub-contractor in pursuance of a contract for carrying out the whole or any part of the work undertaken, 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 any contract the consideration of which does not exceed Rs. 10,000.
    3. According to the NREP Scheme, at the district level the entire work relating to planning, co-ordination, supervision and monitor­ing of implementation of the programme will be the responsibility of the District Rural Agencies. In the implementation of the programme, the Panchayati Raj institutions are actively involved. Voluntary organisations are also involved in such implementation. The wages under this programme are paid partly in foodgrains and partly in cash. There is a specific ban on employment of contrac­tors for the execution of the work under the programme.
    4. According to the RLEGP Scheme while preparing the work project, the State Government will indicate the implementing agencies for each project. There can be different implementing agencies for different work projects in a State. The projects can be entrusted to voluntary organisations/Panchayati Raj institu­tions also for implementation. The State Government will have the overall responsibility for planning, supervision and monitoring of the projects taken up under this programme. The wages under this programme are to be paid partly in foodgrains and partly in cash. This programme also specifically bans the employment of contractors for execution of work. It has been specifically laid down in the guidelines for implementation of RLEGP that the voluntary organisations should ensure that no contractors or middlemen or any such intermediary agencies are engaged in the execution of work.
    5. Thus, it is clear that the programmes under the NREP and RLEGP are executed with the participation of the people and the Pan­chayati Raj institutions under the active supervision of the State Governments in conformity with the guidelines framed by the Central Government.There is no contract between the village committee/voluntary agencies and the State Governments, which is sine qua non for attracting the provisions of section 194C. Moreover, these schemes specifically ban the employment of con­tractors/middlemen for the execution of the work undertaken under these schemes.
    6. In view of the foregoing, theprovisions of section 194C are not attracted in the case of payments made in respect of works executed under these programmes.
    Circular : No. 502 [F.No. 385/49/86-IT(B)], dated 27-1-1988.


    Circular No. 558 dated 28-3-1990

    1116. 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.
    Circular : No. 558, dated 28-3-1990.


    Circular No. 713 dated 2-8-95

    1117. 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 194C of 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 thatthe 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 applymutatis mutan­dis to the tickets for travel of individual by any other mode of transport also.
    Circular : No. 713, dated 2-8-1995.


    Circular No. 714 dated 3-8-95

    1118. 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 introducingExplanation 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 section 194C(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 thatadvertising 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. 714, dated 3-8-1995.


    Circular No. 715 dated 8-8-95

    1119. 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 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 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 of section 194C will apply in such cases.

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

    Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. 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.

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


    Circular No. 718 dated 22-8-95

    1150. Clarification regarding deduction of tax at source from payment of rent

    1. The Finance Act, 1994 introduced section 194-I in the Income-tax Act, 1961, which provides for deduction of tax at source from payment of income by way of rent. This section as amended by Finance Act, 1995 reads as follows :

    ‘194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to any person any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of—
        (a)   fifteen per cent if the payee is an individual or a Hindu undivided family; and
        (b)   twenty per cent in other cases :

    Provided that no deduction shall be made under this section where the amount of such income, or as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or, to the payee, does not exceed one hundred and twenty thousand rupees.

    Explanation : For the purposes of this section—

         (i)   "rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building (including factory building), together with furniture, fittings and the land appurtenant thereto, whether or not such building is owned by the payee,

       (ii)   where any income 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.’

    The Board has received a number of queries from various persons regarding the application of the aforesaid provision. These queries have been carefully considered by the Board and the following clarifications are issued for information and guidance of all concerned :

    Query No. 1        :    Whether tax is required to be deducted at source where rent has been paid in advance before 1-6-1994?

    Answer               :    Where an advance of rent has been paid before 1-6-1994, there is no requirement for deduction of tax at source.

    Query No. 2        :    Whether tax is required to be deducted at source where a non-refundable deposit has been made by the ten­ant?

    Answer               :    In cases where the tenant makes a non-refundable deposit tax would have to be deducted at source as such deposit represents the consideration for the use of the land or the building, etc., and, therefore, partakes of the nature of rent as defined in section 194-I. If, however, the deposit is refundable, no tax would be deductible at source. It is further clarified that if the deposit carries interest, the tax to be deducted on the amount of interest will be governed by section 194A of the Income-tax Act.

    Query No. 3        :    Whether the tax is to be deducted at source from warehousing charges?

    Answer               :    The term ‘rent’ as defined in Explanation (i) below section 194-I means any payment by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any building or land. Therefore, the warehousing charges will be subject to deduction of tax under section 194-I.

    Query No. 4        :    On what amount the tax is to be deducted at source if the rentals include municipal tax, ground rent, etc. ?

    Answer               :    The basis of tax deduction at source under section 194-I is "income by way of rent". Rent has been defined, in the Explanation (i) of section 194-I, to mean any payment under any lease, tenancy, agreement, etc., for the use of any land or building. Thus, if the municipal taxes, ground rent, etc., are borne by the tenant, no tax will be deducted on such sum.

    Query No. 5        :    Whether section 194-I is applicable to rent paid for the use of only a part or a portion of any land or building ?

    Answer               :    Yes, the definition of the term "any land" or "any building" would include a part or a portion of such land or building.

    Circular : No. 718, dated 22-8-1995


    Circular No. 720 dated 30-8-95

    1120. 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.

    2. 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.


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


    Circular No. 723 dated 19-9-95

    SECTION 172  SHIPPING BUSINESS OF NON-RESIDENTS

    913. Tax deduction at source from payment made to foreign shipping companies
    1. Representations have been received regarding the scope of sections 172, 194C and 195 of the  Income-tax Act, 1961, in connection with tax deduction at source from payments made to the foreign shipping companies or their agents.
    2. Section 172 deals with shipping business of non-residents. Section 172(1) provides the mode of the levy and recovery of tax in the case of any ship, belonging to or chartered by a non-resident, which carries passengers, livestock, mail or goods shipped at a port in India. An analysis of the provisions of section 172 would show that these provisions have to be applied to every journey a ship, belonging to or chartered by a non-resident, undertakes from any port in India. Section 172 is a self-contained code for the levy and recovery of the tax, ship-wise, and journeywise, and requires the filing of the return within a maximum time of thirty days from the date of departure of the ship.
    3. The provisions of section 172 are to apply, notwithstanding anything contained in other provisions of the Act. Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable. The recovery of tax is to be regulated, for a voyage undertaken from any port in India by a ship under the provisions of section 172.
    4. Section 194C deals with work contracts including carriage of goods and passengers by any mode of transport other than rail­ways. This section applies to payments made by a person referred to in clauses (a) to (j) of sub-section (1) to any "resident" (termed as contractor). It is clear from the section that the area of operation of TDS is confined to payments made to any "resident". On the other hand, section 172 operates in the area of computation of profits from shipping business of non-resi­dents. Thus, there is no overlapping in the areas of operation of these sections.
    5. There would, however, be cases where payments are made to shipping agents of non-resident ship-owners or charterers for carriage of passengers etc., shipped at a port in India.Since, the agent acts on behalf of the non-resident ship-owner or char­terer, he steps into the shoes of the principal. Accordingly, provisions of section 172 shall apply and those of sections 194C and 195 will not apply.
    Circular: No. 723, dated 19-9-1995.


    Circular No. 726 dated 18-10-95

    SECTION 194J  FEES FOR PROFESSIONAL OR TECHNICAL SERVICES

    1153. Clarification regarding payments to persons resident in India by foreign companies or foreign law firms that have no presence in India
    1. Representations have been received from some law and account­ancy firms that are receiving fees for professional services from foreign companies or foreign law and accountancy firms saying that the latter find it very difficult to comply with the re­quirement of tax deduction at source under section 194J of the Income-tax Act and its payment to Central Government in the prescribed manner and within the prescribed time in the absence of any agent or business connection or permanent establishment in India. They have, therefore, requested that the provisions of section 194J of the Act may not be made applicable to the fees for professional services paid by foreign companies or foreign law and accountancy firms to persons resident in India.
    2. After carefully considering the practical difficulties involved, it is felt that,any fees paid through regular banking channels to any chartered accountant, lawyer, advocate or solici­tor who is resident in India by the non-residents who do not have any agent or business connection or permanent establishment in India may not be subject to the provisions of tax deduction at source under section 194J of the Income-tax Act.
    3. However, foreign companies or foreign law and accountancy firms are required to send a quarterly statement, indicating the name and address of the person to whom the payments are made, to the Deputy Secretary, Foreign Tax Division, CBDT, Department of Revenue, Ministry of Finance, New Delhi. The first quarterly statement would be from the quarter ending 31st December, 1995.
    Circular : No. 726, dated 18-10-1995.


    Circular No. 13/2006 dated 13-12-06


    Section 194C of the Income-tax Act, 1961 - Deduction of tax at source - Payments to contractors and sub-contractors - Applicability of TDS provisions of section 194C on Contract for Fabrication of Article or Thing as per Specifications given by the Assessee - Contradiction between two Circulars of CBDT - Resolution thereof



    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 section 194C. 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.

    N.B. This section will be updated regularly for insertion of CBDT Circulars and Instruction on TDS

    Post a Comment

    0 Comments