TDS on Payment to Contractors

Lunawat & Co.
Chartered Accountants
3rd April, 2015

• Overview
• Applicability
• Scope
• Issues
• Judicial Analysis
LUNAWAT & CO.
Wednesday, September 28,
2016
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• Any person responsible for paying any sum to any resident (i.e.
Contractor)
• for carrying out any work
• in pursuance of the contract between the contractor and the
specified person
• Deduct TDS at the time of payment at the time of credit and payment
which ever is earlier.
o 1% - If amount is paid or credit is made to individual and HUF.
o 2% - If amount is paid or credit to others.
on such sum as income tax on income comprised therein
LUNAWAT & CO.
2016
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LUNAWAT & CO.
• The Bombay High Court in Bombay Goods Transport Association
held that any work means “work contracts” and “contracts for
work” i.e. Labour contracts.
• Manpower is the sine qua non and without manpower, it cannot be
said that work has been carried out.
• Whether assessee is required to deduct TDS of cab company u/s
194C or 194I?
 The assessee is required to deduct the TDS u/s 194C. The same was
also affirmed by ahmedabad Bench of ITAT in ahmedabad urban
development authority.
ASSESSEE CABS
HIRES
2016
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LUNAWAT & CO.
Work Shall Includes:
• Advertising
• broadcasting and telecasting including production of programees for such
broadcasting or telecasting.
• carriage of goods and passengers by any mode of transport other than
railways
• catering
• Manufacturing or supplying a product according to the requirement or
specification of a customer by using the 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 the
material purchased from a person, other than such customer. i.e. Job Work.
2016
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LUNAWAT & CO.
Advertising: Advertising shall include the payment for the following and
also the payment made to the advertising agency:
1. Space in Print Media or electronic media
2. Online Venues
3. Broadcast Time
4. Hoarding
5. Calendar Dairies
6. Direct Mail Advertising.
7. Sponsorship of debates, seminars or other functions.
2016
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LUNAWAT & CO.
It shall include:
1. Payment made to foreign ships or Indian Ships.
2. Payment made by the assessee for wholly chartering a plane or a bus or any other
mode of transport.
3. Payment made to the Clearing and Forwarding Agents. (Glaxo Smithkline Consumer
Healthcare Ltd v. ITO 12 SOT 221 (Del))
4. Payment made to Couriers for carrying documents and letters as these are in the
nature of carriage of goods.
It shall not include:
1. Payment made to travel agent or airlines for the purchase of ticket for travel.
2. Payment made to railways.
2016
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LUNAWAT & CO.
Payments to Clearing and forwarding agents:
1. Port dues
2. Customs duties
3. Stamp charges
4. Freight Charges
5. Commission, handling or other charges.
 SC in Transmission Corporation of AP Ltd. v. CIT (1999) 239 ITR 587 held that:
“It was held that since the deduction of tax at source must be in relation to an
income or trading receipt only, the actual cost reimbursements and other statutory
charges do not come within the purview of section 194C.”
 The Kolkata Tribunal in DCIT vs Maruti Freight Movers Ltd [2013] 40
taxmann.com 120 also held the same.
2016
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LUNAWAT & CO.
EXPOTER
CLEARING AND
FORWARDING AGENT
(C&F AGENTS)
AIRLINES
• Whether the Exporter or C&F agents is liable to deduct TDS u/s 194C?
 The Delhi High Court in the case of CIT v. Cargo Linkers [2009] 179 TAXMAN
151 (DELHI) held that the C&F Agents was not a ‘person responsible’ for
deduction of tax at source in terms of section 194C, since contract was actually
between exporter and airline and C&F Agents was only an intermediary.
 Also in CIT v. Hardarshan Singh [2013] 30 taxmann.com 245 (Delhi).
2016
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LUNAWAT & CO.
• Issue: Whether TDS u/s 194 C attracts on payments made by school to transporters
for picking and dropping the students to and from school to their homes by their
buses.
 Same is covered u/s 194C and not u/s 194I. The same was confirmed by Delhi
High court in Lotus Valley Education Society V. CIT[2011] 10 taxmann.com 46.
• Issue: whether TDS is liable to be deducted on reimbursement to clearing and
forwarding agents, the amount of freight charges paid by them on behalf of assessee
by raising a separate bill.
 No, TDS liability u/s 194C as these are reimbursement of expenses mere
reimbursement of charges would not require deduction of taxes at source. Held
by the Delhi HC in CIT v. Opera Global (P.) Ltd. 52 taxmann.com 299.
2016
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LUNAWAT & CO.
2016
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Job Work Covers:
1. A Contract between the customer and Manufacturer or Supplier for supply of goods.
2. The manufacture of goods by the manufacturer or Supplier is as per the specification
provided by the customer.
3. The customer provide the raw material used for the manufacture of the of the
product. i.e. it doesn’t cover when raw material is purchased independently by the
manufacturer from a person other than the customer.
Analysis:
The rationale behind this was that where a customer provides the material, what the
manufacturer does is to convert the material in to a product desired by the customer,
the contract essentially involves work of labour and not a sale.

LUNAWAT & CO.
2016
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A & Co.
Manufacture of
Chocolates, Noodles
or coffee etc.
Basic Feature of Contract:
1. A & Co. will be provided with the
Raw material, basic flavor and Know
how of manufacturing, from Nestle.
2. A & Co. will also of the labeling of
the Product for the name of Nestle.
3. Nestle will receive the final product
from the A & Co.
4. Nestle Will then market such products
manufacture by A & Co.
• Whether such manufacturing agreement
will the Job Work and Liable for TDS u/s
194C?
 Yes, since the ownerships of such
goods remains at all times remains
with the Nestle.
CONTRACT

LUNAWAT & CO.
2016
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A & Co.
Supply uniform.
Basic Feature and Facts of the Contract:
1. B & Co. wants to purchase uniform
for its employees and for that it enter
into contract with A & Co. for such
supply of uniform.
2. A & Co. purchases the material from
the market and prepares the uniforms
as per the specification and delivers
the same to B & co. against payment.
• Whether such manufacturing
agreement will the Job Work and
Liable for TDS u/s 194C?
 No, the dominant object is
purchase of uniform irrespective
of the fact that supply is to be
made as per the specification of
the customer.
B & Co.
CONTRACT

LUNAWAT & CO.
2016
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A & Co.
Manufacture of
Shoes etc.
Basic Feature of Contract:
1. A & Co. will manufacture the shoes
for the Rebook India and the raw
material used for the manufacturing of
the shoes will be purchased by A &Co.
from the third party.
2. A & Co. will do manufacturing of the
product, as per the specification given
by the Rebook and also do the labeling
on shoes for the name of rebook.
3. Rebook will receive the final product from
the A & Co. and will do the marketing of
the same.
• Whether such manufacturing agreement
will the Job Work and Liable for TDS u/s
194C?
 No, since the ownership in such
goods is transferred only when goods
are delivered and are in the nature of
sale.
CONTRACT

LUNAWAT & CO.
2016
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1. If the assessee has entered into two separate contracts, one for the
material i.e. for supply of material and one for labour.
2. The transaction would not be one and indivisible, but would fall
into two separate agreements, one for work/ service and the other
for sale.
3. In the said case the provisions of Sec- 194C could apply only to
labour contract and not to material contracts.
4. The same view is supported by Karnataka Power Transmission
Corporation Ltd v ACIT, 2011],10 taxmann.com 237 (Bang. ITAT).

LUNAWAT & CO.
2016
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Sec- 194C also covers the payments made to the following:
1. Routine repair and maintenance contracts would be covered u/s
194C. It also covers payment of annual maintenance charges. i.e.
(AMC Charges)
2. Payments made to electrician or a contractor who provides service of
the electrician.
3. Payments made for freight charges.
4. Payments made to sub contractors for sub contracting.
5. Payments made to hotel under the yearly contract for providing hotel
rooms at less rent.

LUNAWAT & CO.
2016
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Sec- 194C doesn’t covers the following payments made:
1. No TDS is required to be made by an individual or a HUF where payment is
required to be made for the work carried out for the personal purpose.
2. No TDS is to be made where sum credited or paid does not exceed Rs.30000/‐ or
aggregate of payment of Rs. 75000/- during the whole of the year.
3. Payments made to daily wage workers could not be considered as contractual
payments u/s 194C.(CIT vs DewanChand178 Taxman 173 (Delhi High Court)).
4. Payment was made for purchase of goods (inclusive of freight charged separately)
for which there was no separate contract for carriage of goods, the provisions of
section 194C could not be applied.
(Bhagwati Steels 326 ITR 108 (P&H High Court)).

LUNAWAT & CO.
2016
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Payment to Transporter:
1. Earlier payment to transporter is exempt from the deduction of TDS, if the
transporter furnish his PAN, by the person paying or crediting such sum.
2. After amendment the Payment made to transporter is liable to TDS.
3. TDS shall not be deducted if the transporter doesn’t own more than 10 trucks at
any time during the previous year(as defined in Section 44AE of the IT Act.) and
the transporter furnishes a declaration to that effect.
4. The transporter that also furnish his PAN.
5. The said amendment will take effect from 1st June, 2015.

LUNAWAT & CO.
2016
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LUNAWAT & CO.
2016
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Presented By: Harshit Arora
Mobile no.: +91-95825-45933
Email: harshit@lunawat.com
( Article Assistant at Lunawat & Co.)

TDS on Payment to Contractors

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