Deduction of income-tax at source--Section 194C of the Income-tax Act, 1961--Deduction from payments to contractors and sub-contractors--Instructions regarding. - Income Tax - 086

Circular Number: 086 File Number: 275/9/72-ITJ Dated 29/05/1972 From Shri K. R. Raghavan, Deputy Secretary to the Govt, of India. To AH State Governments. Sir, Subject .--Deduction of income-tax at source--Section 194C of the Income-tax Act, 1961--Deduction from payments to contractors and sub-contractors--Instructions regarding. The Finance Act, 1972, has introduced a new section 194C in the Income-tax Act, 1961, with a view to providing for deduction of income-tax at source from income comprised in payments made to contractors and sub-contractors in certain cases. The broad effect of the new provision is that a peison responsible for paying any sum to a resident contractor for carrying out any work or supplying labour for carrying out any work in pursuance of a contract with the Central Government, State Government, local authority, statutory corporation or a com-pany will be required to deduct income-tax at the rate of 2% from any such sum paid after 31st May, 1972. Similarly, a contractor, not being an individual or a Hindu undivided family, will, in certain cases, be required to deduct tax at the rate of 1% from any payment made by him to a resident sub-contractor after that date. The substance of the new provisions is explained hereunder : (i) In the case of contractors, deduction of income-tax under the new provision will be made only where the payment is made by the Central Government or a State Government or a local authority or a corporation established by or under a Central, State or Provincial Act or by a company (such authority, corporation or company being hereinafter referred to as " specified person ") and the Con-tractor is a person resident in India. The deduction of income-tax at source from payments made to non-resident contractors will continue to be governed by the existing provision in section 195 of the Income-tax Act, 1961. (ii) The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the new provision will apply only in relation to "works contracts" and "labour contracts " and will not cover contracts for sale of goods. Since contracts for the construction of buildings or dams or laying of roads and air-fields 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 Government or any other specified person, where the ownership of such goods remains at all times with the Govern-ment or such person, will also fall within the purview of the new section. The same position will obtain in respect of contracts for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. Where, however, the contractor undertakes to supply any sea or river crafts fabricated according to the specifications given by Government or any other specified person and the property in such sea and river crafts passes to the Government or such person only after such crafts are delivered, the contract will be a contract for sale and, as such, outside the purview of the new provision. [In State of Punjab (State of Himachal Pradesh) v. Associated Hotels of India Ltd.* their Lordships of the Supreme Court observed that where the principal objective ol work undertaken by the payee of the price is not the transfer of a chattel, qua chattel, the 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 oi 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 other chattel, and the con-sideration is not for the transfer of the chattel, but for the labour and work done and the materials 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 case.] (iii) Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., can also not be regarded as contracts " for carrying out any work " and, accordingly, no deduc-tion of income-tax will be made from payments relating to such contracts. (iv) The deduction of income-tax will be made at the time of credit of the sum to the account of the contractor, or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. (v) The question whether deduction under the new provision will be made with reference to gross payment due to the contractor or the net payment, i.e., gross payment minus deductions, if any, on account of materials supplied by Government or other specified persons will have to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. Where the contractor has undertaken to construct a building or a dam, and the Govern-ment or other specified person has undertaken to supply all or any of the materials necessary for the work at stipulated prices, the deduction will have to be related to the gross payment without excluding any adjustments on account of cost of materials. Where, however, the contractor has undertaken only to provide the labour for the work, the ownership of the materials supplied remain-ing at all times with the Government or other specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will thus not include the price of the materials supplied by the Government or other specified persons. (vi) The rate of deduction of income-tax from payments made by the Government or other specified persons to any contractor will be 2% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract, as explained in item (v) above. (vii) No deduction will be required to be made if the consideration for the contract does not exceed Rs. 5,000 or where the payment is made before 1st June, 1972. In this connection, it should be noted that the deduction of tax under section 194C is required to be made in cases where the payment is made after 31st May, 1972, even though the contract in respect of which the payment is made has been entered into on or before that date. (viii) Where a contractor, not being an individual or a Hindu undivided S family, engaged for carrying out any work or for supplying labour for carrying: out such work by the Central Government or a State Government, a local autho-rity, a corporation established under a Central, State or Provincial Act or a company has, in turn, engaged any sub-contractor (a) for carrying out the whole or any part of the work undertaken by the contractor, or (b) for the supply of labour to carry out such work, or (c) for supplying any labour which the contractor had undertaken to supply, he will be required to deduct income-tax at source from payment made to the sub-contractor at the rate of 1% of such payment. The provisions governing payments to contractors as set forth at items (iv), (v) and (vii) will apply mutatis mutandis to payments made by contractors to sub-contractors. 2. Relevant forms, etc., in relation to these provisions are being prescribed by rules. In the meanwhile, the following instructions may please be noted :- (i) It is open to the contractor or the sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to bis case; such certificate will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier. (it) In view of the existing provision in section 288B of the Income-tax Act, 1961, the amount of tax to be deducted at source should be rounded off to the nearest rupee by ignoring amounts less than fifty paise and increasing amounts of fifty paise or more to one rupee. (iii) The tax deducted on behalf of the Government should be paid to the credit of the Central Government on the same day by book adjustment. In other cases, tax deducted should be paid to the credit of the Central Government within one week from the last day of the month in which the deduction is made. Challans for paying tax into the Government account are obtainable from the Income-tax Officer concerred. (iv) The persons responsible for making any payment to a contractor or a sub-contractor, as the case may be, should issue a certificate showing therein particulars of the payment, the amount of tax deducted at source and the date of credit, if any. Necessary forms in this regard are being prescribed by the rules. In the meantime, the certificate may be issued in the form appended herewith. 3. Further instructions will be communicated after relevant forms, etc., are prescribed under the rules. 4. These instructions may please be brought to the notice of all disbursing, officers and State undertakings under the control of the State Government. Sd. K. R. Raghavan Deputy Secretary to the Government of India (F. No. 275/9/72-ITJ) *[1972] 29 STC 474 (S.C.).