Home General Section 194C of Income Tax Act, 1961

General

Section 194C of Income Tax Act, 1961

October 16, 2024

173

This article is written by Shweta Singh. It provides in detail what Section 194C of the Income Tax Act, 1961 is, along with its essential features. This article also elaborates on the compliance procedure, and what are the consequences for not fulfilling the requirement as provided under Section 194C of the Income Tax Act, 1961.

Table of Contents

Introduction

Understanding laws and rules regarding taxes may get complicated, more so if it is related to provisions like Section 194C of the Income Tax Act, 1961. This Section holds immense importance for companies, individuals as well as contractors as it requires or mandates the deduction of tax at source, which is commonly known as TDS. The tax deducted at source (TDS) is applicable to payments made to contractors and subcontractors.

Therefore, it becomes important for every individual or company, along with contractors or sub-contractors who enter into transactions with each other, to ensure effective compliance with tax laws and avoid penalties. In order to make the provision of Section 194C of the Income Tax Act, 1961, easy to understand, it has been explained in simple terms, outlining the object of Section 194C, its importance, and its application.

The scope of this Section and the types of transactions covered under this Section are also explored in depth. Whether it is a businessman or an independent contractor, the rate at which the TDS has to be deducted, the timelines in which it should be deducted, the procedural requirements, and the consequences for noncompliance are the important factors that become crucial for avoiding penalties. Before understanding the provisions of Section 194C in detail, it becomes essential to have a basic understanding of what is meant by income tax and the basic principles regarding TDS.

Meaning of income tax

Income tax is a tax that is levied on the income earned by any individual, including companies. The income upon which the earner has to pay tax includes wages, salaries, profits, rents, and other kinds of earnings or compensation.

Income tax forms one of the most significant sources of revenue for the government. Such revenue collected through the income tax is then used to finance various public services and development projects, such as improving and building infrastructure.

The income tax regime in India is governed by the provisions contained under the Income Tax Act, 1961. All the rules and regulations that are required to be followed with respect to income tax are provided in this particular legislation. This legislation is administered by the statutory body known as the Central Board of Direct Taxes (CBDT). This statutory body is responsible for the effective implementation and enforcement of the income tax rule and policy.

Meaning of tax deducted at source (TDS)

TDS is one such method that is used by the Indian Government to collect tax on the income earned by an individual right from the very source from where it is earned or originated. For the purpose of fulfilling the requirement of provisions related to TDS, the payer of an income, such as an employer or a company, has to deduct a specified percentage of tax before paying such income to the recipient.

The deducted amount is then required to be remitted to the government. Such remitted amounts constitute part of the revenue generated by the government through various means. This mechanism of deducting tax at source assists in the timely recovery of tax, thereby reducing the incidences of tax evasion.

Every individual or company that is covered by the income tax regulations is required to deduct TDS and declare it under the prescribed categories as specified under the Income Tax Act. There are different categories under which a TDS has to be deducted, and every such category is provided through several sections of the Income Tax Act. Each section outlines distinct transactions and procedures for deducting TDS.

Chapter XVII of the Income Tax Act provides provisions related to taxes deducted at source under various categories. These provisions are contained from Section 192 to Section 206AA.

What is Section 194C of Income Tax Act, 1961

Section 194C provides that for any payment made to a contractor or subcontractor for doing any work or supplying labour for doing any work, the person or entity making such payment shall deduct a certain percentage of tax at the time of crediting such payment to the account of the payee or at the time of payment, whichever is earlier.

Section 194C of the Income Tax Act is concerned with the deduction of taxes on payments made to resident contractors and subcontractors. However, just like with the majority of the tax laws in India, there are certain complexities and conditions that surround the TDS deduction rules under Section 194C.

For the purpose of making the provision of Section 194C easy to understand, the following headings have attempted to provide an in-depth analysis of the essential features of Section 194C along with the procedural requirement and pre-requisites for the deduction of TDS on the payments required to be made to the contractor or subcontractors under the contract entered into by the parties.

The detailed analysis is provided with the intent to make the reader fully aware of the application of this Section in order to be compliant with the requirement of deducting tax at source. Thereby minimising the risk of getting penalised due to improper and failure to deduct tax.

Applicability of Section 194C

Section 194C is applicable to all businesses, organisations, and individuals who are responsible for paying contractors and subcontractors. Section 194C(1) of the Income Tax Act provides that “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 deduct an amount at the time of the payment of the money for the work done or services provided. So from the above-mentioned provision, it is clear that the requirement of Section 194C applies to:

“Any person” responsible for paying any sum;
“Contractor,” who has carried out any work;
Specified categories of “work’ for which the TDS has to be deducted;
“A contract,” which contains details regarding the type of work and the amount to be paid and deducted as TDS;
“Specified person” who is eligible to deduct TDS in accordance with the provisions of Section 194C of the Income Tax Act.

The above-mentioned categories to which Section 194C applies also form an essential ingredient of this Section. Hence, it becomes important to discuss each of these elements to understand the proper application of TDS under this section.

Any person

According to Section 194C(1), “any person” who is responsible for paying a sum of an amount to a contractor for the work done by him shall deduct a TDS. The term “person”, denotes an entity that has a contract with a contractor who will work in exchange for payment. This term is defined under Section 2(31) of the Income Tax Act, 1961. According to this Section, the term ‘persons’ includes:

Government entities,
Local authorities,
Corporations,
Companies,
Co-operative societies,
Trusts,
Government universities or deemed universities,
Other organisations that are not specified in this Section.

In the case of Commissioner of Income Tax vs. Cargo Linkers (2008), the Delhi High Court decided upon the issue of what constitutes a “person responsible” as provided under Section 194C of the Income Tax Act. In this case, the assessee was a partnership firm that was responsible for receiving freight for the shipment of goods through the airlines preferred by their customers. The firm would pay these amounts to the airlines or its general sales agents. As compensation, the firm would then receive a commission from the airlines.

The assessee challenged an assessment order and appealed to the Commissioner of Income-tax (Appeals) (CIT(A)) on the grounds that its sole function is to move goods for exporters and to earn a commission from the airlines for the shipment it arranges for such exporters. It was further contended that it is not the “person responsible” for making payments pursuant to Section 194C of the Income Tax Act, 1961.

The CIT(A) accepted the plea of the assessee on the grounds that the company was not required to deduct tax at source and that there was a reasonable cause for not doing so. The revenue then preferred an appeal to the Income Tax Appellate Tribunal, Delhi Bench, which also dismissed the appeal. The learned tribunal agreed that the assessee merely played the role of an agent between the exporters and the airlines, and the contract was inherently between the exporters on the one hand and the airline on the other hand.

The Hon’ble Delhi High Court concurred with the view of the tribunal and held that the principal question was to identify as to what kind of contract was entered into between the parties. The court agreed with the contention that the contract was not between the assessee and the airline but between the exporter and the airline. As a result, the assessee cannot be termed the ‘person responsible’ for deducting tax at source under Section 194C of the Act.

Contractor and subcontractor

A contractor is any person or company who signs an agreement with a payer to provide certain services, which could be in the form of labour or materials. On the other hand, a sub-contractor is a person hired by the contractor to perform some of the responsibilities agreed in the contract between the contractor and the payer.

For instance, in a case where a firm employs a contractor for the construction of some structure and the contractor engages a subcontractor for the purpose of doing electrical or plumbing work. In this particular situation, the provision of Section 194C shall be applicable to both the contractor and subcontractor.

Section 194C provides that in case a contractor appoints a sub-contractor for a part of the contracted work, then the TDS shall be deducted from the amount paid to the sub-contractor. This deduction is therefore the responsibility of the contractor. However, if the sub-contractor produces a certificate from the assessing officer to the effect that TDS is not required on his income, then the contractor is not allowed to deduct TDS on such payments.

In the case of Manish Dutt, Mumbai vs. Department of Income Tax (2010), the assessee was involved in the business of dubbing, and he had a studio with dubbing tools and professional artists. In some cases, when the assessee’s own studio was not available, the assessee outsourced the dubbing business to other studios. In one instance, they paid ₹1,60,000 to a studio called ‘Ninety Degrees’ for dubbing services. The assessee considered this payment to have been made to a sub-contractor under a contract and thus deducted tax at source at the rate of 2% as per Section 194C.

However, the Assessing Officer disagreed, considering the payment made to be rent for studio usage. Therefore, as per the officer, the tax deduction should have been at 20% in accordance with Section 194-I of the Income Tax Act, 1961. Since the assessee failed to make the tax deduction at a proper rate, the Assessing Officer disallowed the deduction of TDS on ₹1,60,000 as a studio hire charge under Section 40(a)(ia) of the Income Tax Act, 1961.

The Income Tax Appellate Tribunal held that by utilising both the equipment and artist, the assessee had been deemed to have outsourced the services of Ninety Degree Studio. The arrangement between the assessee and Ninety Degree Studio evidently reflects that the work had been performed by employing a subcontractor.

Thus, the Tribunal held that Section 194C shall be applicable, and therefore the assessee was correct in deducting TDS at 2% on the payment made to Ninety Degree Studio as required by Section 194C. The Tribunal considered the payment of such an amount as a payment made for subcontracted work.

What constitutes “work” under Section 194C

Every person who pays a sum to a resident contractor “for carrying out any work (including supply of labour for carrying out any work)” is required to deduct tax at source from such payment under Section 194C. Therefore, with a view of ascertaining the very meaning of Section 194C, it becomes necessary to find out what kind of work falls within the scope of the word ‘work’ as envisaged under this Section.

The term “work” is defined under Section 194C(7)(iv) of the Income Tax Act, 1961. It includes:

“Advertising;
Broadcasting and telecasting, including the production of programmes 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 material purchased from a person other than such customer.”

The activities that are specifically excluded from the scope of the term “work” as per Section 194C preamble are 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.

In the case of Associated Cement Company Ltd. vs. Commissioner of Income-Tax Bihar (1993), the assessee had contracted a labour provider for the loading and unloading of goods. The question that arose in the decision was whether the assessee had to deduct tax at the source from the consideration made to the contractor.

The Supreme Court noted that the expression “any work” in the subsection is wide and cannot be restricted to the meaning of a “works contract,” which has a different statutory connotation in the context of tax law. The term clearly encompasses supplying labour to perform work, and this means that “works” for these purposes is not confined to work contracts.

The court observed that the term “works” is very broad and it encompasses any work that organisations referred to in Section 194C can have carried out through a contractor, including the supply of labour under such contracts.

Unfortunately, the Supreme Court ruling was initially misinterpreted by the revenue authorities and some high courts. The CBDT, interpreting the ruling, believed that the term “work” should cover all types of contracts. As a result, it issued Circular No. 681 on March 8, 1994, to the effect that Section 194C would be attracted in the case of transport, labour, service, advertising, broadcasting, telecasting, material, and works contracts. This interpretation resulted in several writ petitions being filed in the various High Courts.

In the meantime, the Finance Act, 1995, amended Section 194C, which came into effect on July 1, 1995, by adding Explanation III, which specifically included:

Advertising,
Broadcasting and telecasting, including the production of related programs,
Carriage of goods and passengers by any mode of transport other than railways,
Catering.

However, in the case of M/S. Birla Cement Works vs. the Central Board of Direct Taxes & Ors (2001), it was clarified by the Supreme Court that contracts related to transport are not covered by Section 194C.

The court further clarified that the earlier decision of this court in the case of Associated Cement Company Ltd vs. Commissioner of Income-Tax Bihar (1993) had not been interpreted correctly by the CBDT. It was clarified that the above-mentioned case was related to deductions made on payments for loading and unloading and not transport contracts. Therefore, the interpretation of the CBDT was not correct.

Therefore, the Supreme Court held that the phrase ‘carrying out any work’ as specified under Section 194C did not include the transport of goods. Consequently, the circular issued by the CBDT that addressed contracts related to contracts was held to be invalid. The court, however, clarified that Section 194C would cover the carriage of goods only from July 1, 1995, because of the new amendment.

Contract

As specified by Section 194C of the Income Tax Act, 1961, TDS has to be deducted by the specified person while making the payment to the contractor for the work done in accordance with the contract. Therefore, in order to decide whether and how much TDS needs to be deducted, the existence of a contract is crucial. The TDS can only be deducted for the payment made as per the valid contract.

The contract as mentioned under Section 194C of the Income Tax Act involves two parties. One is the payee who is responsible for deducting the TDS, and the other is the contractor to whom the payment is made.

The particular contracts to which Section 194C applies are works contracts (contracts related to a particular work required to be done), labour contracts (contracts related to the providing of labour for a particular work to be done), or composite contracts (have features of both works and labour contracts).

This Section does not apply to the sale of goods contracts. In other words, contracts that are executed solely for the purpose of the purchase of goods are not covered by Section 194C. However, if such a contract contains an element of work, then in such a case, the provisions of Section 194C will be applicable to it.

It is a well-known fact that works contracts are covered under Section 194C of the Income Tax Act, 1961. However, the fact that whether a particular agreement is a work contract or a contract of sale has been in constant debate between the taxpayers and the tax department.

The Supreme Court of India had, on various occasions, been called upon to decide upon this controversy. One such case in which the Supreme Court, through its decision, ended the debate concerning when a contract will be considered a work contract or a contract of sale is the case of the State of Himachal Pradesh vs. Associated Hotels (1972).

In this case, the Supreme Court recognised the difficulty encountered by various courts in deciding upon the issue of when a contract can be regarded as a contract for work and labour or a contract of sale. This difficulty arises even more, especially if it is a composite contract that involves the elements of both a work contract and a contract of sale.

The court, in this case, observed that the main difference between both contracts lies in the purpose for which the contract was signed. Therefore, a contract of sale is mainly signed for the purpose of transferring both ownership and possession of a good to the buyer. The main purpose behind a work contract or a labour contract involves the delivery of the work and does not focus on the transfer of the goods.

However, there may be times when materials may be used for the purpose of fulfilling the work and the ownership of the materials might be transferred to the other party, but that does not make such a contract a contract of sale.

The court further clarified that, on the other hand, a mere transfer of a property does not make it a contract of sale. In certain cases, materials may be employed for the performance of the work specified in the contract, and as a result, ownership in the material is transferred to the other party; such a transfer would not make the contract a contract of sale.

Therefore, it becomes essential to identify the intention of the parties at the time of signing the contract. In certain situations, parties may enter into separate agreements for work and for the sale of materials, making the transaction divisible into two parts: one for work and one for sale.

In order to determine the essential nature of a contract, it becomes important to ascertain the dominant objective behind it. If the dominant objective of a contract is transferring goods as chattels, then it would be a contract for sale, and therefore such a contract shall not be covered by Section 194C of the Income Tax Act, 1961.

While the main purpose of the contract is to accomplish certain work even though the usage of materials is involved in the process, then in that case the contract would be a works contract and the provisions of Section 194C shall be applicable.

For instance, if a person wishes to renovate their office and hires a contractor to paint and polish, wherein the contractor provides his/her own materials, this is a works contract, as the parties’ intention is not the supply of materials but the accomplishment of the work. Thus, Section 194C would apply.

But if a person needs to purchase uniforms for employees and arranges with the supplier to deliver uniforms as per some set standards and specifications, the main goal is the acquisition of goods. In this case, Section 194C would not apply because the agreement is a contract of sale, in whichever form the specifications are given.

Specified persons

As per the provisions of Section 194C, TDS has to be deducted for the work done in accordance with the contract between the contractor and a specified person. The term ‘specified persons” has been defined under Section 194C(7)(i) of the Income Tax Act, 1961. According to this Section, “specified person” means:

The Central Government or any State Government; or
Any local authority; or
Any corporation established by or under a Central, State, or Provincial Act; or
Any company; or
Any cooperative society; or
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
Any society registered under the Societies Registration Act, 1860, or any law corresponding to that Act in force in any part of India; or
Any trust; or
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; or
Any Government of a foreign State, a foreign enterprise, or any association or body established outside India; or
Any firm; or
Any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals if such person:

Does not fall under any of the preceding sub-clauses; and
Is liable to audit 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.”

Specific time at which the TDS shall be deducted

As per the provisions of Section 194C(1), the person responsible for the payment of any sum of money shall deduct TDS at the following time, whichever occurs earlier:

at the time of crediting such sum to the contractor’s account.
at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode.
At the time when an amount is credited to another account, like a “suspense account” or any similar account in the books of the person making the payment. It should be noted that as per the provisions of Section 194C(2), even if the payment is not directly credited to the payee’s account but to any other account, the law treats it as if the payment has been credited to the payee’s account.

Rate at which TDS shall be deducted

The TDS rates as provided under Section 194C(1) are as follows:

A 1% TDS rate applies to payments made to a contractor who is an individual or a Hindu Undivided Family (HUF).
A 2% TDS rate applies to payments made to any other type of contractor.

Nature of payment	TDS rate if PAN is available	TDS rate if PAN is not available
Payment made to individual	1%	20%
Payment made to HUF	1%	20%
Payment made to any other person	2%	20%
Payment made to transpoters	NIL	20%

Tax is to be deducted at these rates without adding the surcharge, education cess, or secondary and higher education cess. However, if the recipient’s PAN is not provided, tax must be deducted at a rate of 20% as per Section 206AA.

Can TDS be deducted at a lower rate

According to Section 194C of the Income Tax Act, the contractors or sub-contractors can file an application to the Assessing Officer (AO) for the deduction of tax at source at a lower rate. If the Assessing Officer (AO) is satisfied after assessing the income of the contractors and sub-contracts, he may order a TDS deduction at a lower rate.

He may also order for not deducting any TDS and may issue a certificate to that effect (lower rate or nil TDS certificate). After such an order has been passed by the AO, the contractors or sub-contractors may then furnish such a certificate to the deductor to claim the benefits.

When is TDS under Section 194C not deductible

Section 194C has made it compulsory for the persons specified therein to deduct tax on payments made to the contractor for the work delivered by him. However, there are specific exemptions where TDS is not required under this section:

No TDS is required in cases where the payment or the credit made to a contractor under a single contract does not exceed Rs 30,000.

For instance, a small business owner hires a contractor to paint their office building. The total contract amount is twenty-five thousand rupees. The TDS on this payment need not be deducted as the payment made under this single contract is below Rs 30,000.

If the aggregate of the payment made or credited in the account of the contractor during the financial year is less than Rs. 1 lakh, then it is not required to deduct TDS from the payer.

For example, there is one company that, for the purpose of maintenance services, hires a contractor. In the course of the services provided by the contractor, the company makes several payments. The company had paid Rs. 20,000 in January, Rs. 35,000 in March, and then Rs. 40,000 in June.

The aggregate amount paid to the contractor by the company for the financial year amounts to Rs. 95,000. Since the total amount is less than Rs. 1,00,000, the company is not liable to deduct TDS on such amounts.

If an amount is paid or credited by an individual or a Hindu Undivided Family (HUF) to a contractor for purely personal expenses, then the provisions of Section 194C shall not be attracted.

For instance, if a person hires a contractor to do some repair work on his residential building, no TDS shall be deducted if the recipient uses the building for personal purposes and not for any business or professional activity.

TDS is not required under certain circumstances when a payment or credit is made to a contractor for plying, hiring, or leasing goods carriages. More particularly, the contractor should not own more than 10 goods carriages at any point in the financial year, and the contractor must furnish a declaration in writing with his PAN to the person making the payment. This exemption is meant to help relieve the burden placed on small transport companies and avoid placing TDS on their income, provided they fall under the specified guidelines.

Procedure for deducting TDS under Section 194C

When deducting TDS under Section 194C, the person responsible for making the payment or crediting any sum to a contractor or sub-contractor must comply with specific reporting requirements. This includes furnishing particular details to the prescribed income-tax authority or an authorised person. The information must be provided in the prescribed format and within the stipulated time frame as outlined under Rules 31 and 31A of the Income Tax Rules, 1962.

As per the provisions of these rules, the payee is required to furnish the certificate of tax deducted at source along with the quarterly statement in Form No. 16A and Form No. 26Q, respectively. The due date for furnishing the certificate and statement is provided in the below-mentioned table:

Quarters	Due date of filing TDS Return	Due date for TDS certificate
1st Quarter (April to June)	31st July	15th August
2nd Quarter (July to September)	31st October	15th November
3rd Quarter (October to December)	31st January	15th January
4th Quarter (January to March)	31st May	15th June

Consequences of not complying with the requirements of Section 194C

The Act provides that entities are to deduct tax on any payment made to contractors for their services. If it fails to do so, the payer is liable to penalties. Further, if a contractor fails to show proof of TDS deducted from the payments he/she receives, then there may be a problem at the time of income tax return, and he/she may have to pay additional taxes or face penalties. If a payer does not deduct TDS on payments to contractors, the penalties and consequences may vary depending on the amount involved and the specifics of the contract.

Non-compliance with the TDS legislation on payments made to contractors and subcontractors attracts penalties, as well as charges on interests under the Income Tax Act, 1961. Such penalties are as follows:

If TDS is not deducted or paid by the due date mentioned in Section 139(1) of the Income Tax Act, such deduction shall be disallowed under Section 40(a)(ia) of the act.
The deductor will be considered in default and must pay interest as per Section 201(1A):

If tax was not deducted when required: interest will be charged at a rate of 1% per month or part of the month beginning on the date on which the tax ought to have been deducted until the date on which it will actually be deducted.
If tax was deducted but not deposited: interest will be charged at 1.5% per month or part of the month from the date of deduction until the date the tax is actually deposited.

The deductor is also penalised under Section 234E if he fails to furnish the quarterly TDS return in Form 26Q within the prescribed time. The fee is Rs. 200 per day for each day the failure continues, but the said fee will not exceed the total TDS amount. This late fee must be paid before the return is filed with the relevant authority.

In the case of Shri Mohmed Shakil Mohmed Shafi vs. Income Tax Officer, Sabarkantha (2021), the Income Tax Appellate Tribunal (Tribunal) held that non-compliance with Section 194C(7) should not lead to disallowance under Section 40(a)(ia) of the Income Tax Act.

In this case, the total tax assessment that was finalised was with a total income of Rs. 9,15,737. Thereafter, the reassessment order was passed by the Income Tax Commissioner because the tax was not deducted at the source on a freight payment of Rs. 10,63,995.

The Assessment Officer completed the reassessment and disallowed the freight payment on the grounds that providing the transporter’s PAN was not sufficient to comply with the provisions of Section 194C. Consequently, as a result of non-compliance the transport expenses claim of Rs. 10,63,995 was denied.

The assessee aggrieved by such a decision appealed before the Commissioner of Income Tax (Appeals) (CIT (A)). The CIT (A) dismissed the appeal due to non-compliance of Section 194C(7). Thereafter, the assessee filed an appeal against the order of dismissal to the Tribunal.

The Tribunal observed that the Assessment Officer neither questioned the validity of the evidence produced by the assessee nor verified the expenses as provided in the profit and loss account. The Tribunal further observed that the disallowance was ordered solely on the basis of non-compliance with Section 194C(7).

The Tribunal relied on cases like Soma Rani Ghosh, Kolkata vs. Assessee (2016), and Commissioner Of Income Tax vs. M/S Sri Marikamba Transport Company (2015), wherein it was established that “if the assessee complies with the provisions of Section 194C(6), no disallowance u/s 40(a)(ia) of the Act is permissible, even there is a violation of the provisions of Section 194C(7) of the Act.”

Again in the case of M/S. Quippo Oil & Gas Infrastructure Ltd. vs. Acit, New Delhi (2020), the Income Tax Appellate Tribunal (ITAT) Delhi held that disallowance under Section 40(a)(ia) of the Income Tax Act was not reasonable due to the fact that there was due compliance with provisions of section 194C(6) even though there was a violation of provisions of section 194C(7).

Conclusion

The provisions of Section 194C of the Income Tax Act, 1961, are enacted with the objective of ensuring proper compliance with tax laws on payments made to contractors and subcontractors. Section 194C requires the deduction of tax at source, and such a requirement helps in preventing tax evasion and promoting due collection of tax.

For the purpose of fulfilling the requirement of this provision, it is important for both the payer and the contractors to understand the applicable tax rates, exemptions allowed, and penalties for non-compliance. Compliance with the requirements provided in this section is essential for avoiding any legal issues regarding the contractual transaction between the parties. Meeting the compliance requirement of Section 194C not only achieves legal requirements but also ensures the performance of contracts and promotes transparency.

Frequently Asked Questions (FAQs)

What are the duties of a contractor or sub-contractor as provided for under Section 194C?

Contractors or subcontractors need to furnish his or her PAN and other relevant details to the payer for the correct TDS. Furthermore, in case the total value of the contract exceeds Rs. 1 crore, they have to get their tax audit done and provide the report to the payer.

How to calculate TDS for composite work under Section 194C?

In the case of a composite contract, as provided in Section 194C, wherein both goods and services are involved, TDS is deducted from the total consideration received for both. The rate of TDS to be deducted depends on the nature of the work done as per Section 194C. The separate value of goods and services cannot be used for TDS calculation.

What documents are required to deduct tax at the source under Section 194C?

While deducting TDS under Section 194C that is applicable to the payment made to the residential contractor for the work done, the following document is required:

Contractor PAN card;
Contract or agreement, if entered into between the parties for the purpose of executing the work as specified under Section 194C;
Invoice;
Challan, which is evidence for the deposition of the TDS amount to the government treasury;
TDS certificate.

What are the special considerations by the government on section 194C applicability?

The government has established certain special considerations regarding the applicability of Section 194C:

In the case of the government contract, the TDS rate under Section 194C is 2%.
The government may grant a certificate of no deduction of TDS in cases where the contractor is a resident and the value of the contracted amount does not exceed ₹ 1 crore.
A lower TDS certificate can be applied for and obtained by contractors who are eligible.
Section 194C does not apply to certain payments, for instance, those made to transporters for the transportation of goods.

How can TDS be deposited with the central government?

The person who has to make a deduction of tax from the contractor’s amount has to deposit the tax with the Central Government through a challan within the prescribed period. These deposits can be made at all branches of the RBI, SBI, and other PSBs of India.

What is a TDS certificate and various types of TDS certificates?

A TDS certificate refers to a document that signifies the amount of tax that has been deducted by the payer from the payment made to an individual or company. There are four types of TDS certificates. They are as follows:

Form 16: This is used for the salaries paid during the year.
Form 16A: This is used for payments other than salary payments.
Form 16B: This is used for the sale of property.
Form 16C: This is used for payments related to rents.

Is a written contract required for the application of Section 194C of the Income Tax Act?

No, a written contract is not required for the application of Section 194C of the Income Tax Act. even if the agreement takes place verbally, Section 194C shall apply.

Whether a payment made to supply of labour be covered under Section 194C of the Income Tax Act?

Yes, as per the provisions of Section 194C, TDS shall be deducted from the payments made for the service of supplying labour for the completion of certain works. However, payment made to the company giving recruitment services shall be deemed as payment for service and shall be covered under Section 194J of the Income Tax Act.

References

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/lawyerscommunity

Section 194C of Income Tax Act, 1961

Introduction

Meaning of income tax

Meaning of tax deducted at source (TDS)