To assess the applicability of Section 194C of the Income Tax Act, 1961 on the purchase of cards, prospectus and letterheads printed as per the requirements of the customer, Section 194C has to be read along with its Explanation.
Sub-Section (1) of Section 194C of the Income Tax Act, 1961 reads as under:
194C. (1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to—
- one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
- two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.
Reading the above sub-section, it is clear that Section 194C is only applicable to “any work (including supply of labor for carrying out any work)”. The term “work” is defined in the clause (iv) of Explanation to Section 194C of Income Tax Act, 1961 as under:
(iv) “work” shall include—
(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
(c) carriage of goods or passengers by any mode of transport other than by railways;
(e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,
but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.
The above definition specifically excludes “supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.” This is further supported by the decision of Punjab & Haryana High Court in the case of Commissioner Of Income Tax vs Deputy Chief Accounts, (2008) 217 CTR P H 555, 2008 304 ITR 17 P H.
The Central Board of Direct Taxes has issued Circular No. 13/2006, dated 13-12-2006 on “Section 194C of the Income-tax Act, 1961 – Deduction of tax at source – Payments to contractors and subcontractors – 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”. Point no. 3 of the circular states as under:
3. It is, therefore, clarified that the provisions of section 194C would apply in respect of a contract for supply ofany 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.
The circular limits the applicability of Section 194C of the Act to “contract for work” and excludes the “contract for sale” from its applicability. To decide whether a contract is for “work” or for “sale”, we have to refer Circular No. 681 dated 08-03-1994. Extracts of the clause (vi) to the Point no. 7 of the circular reads as under:
(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.
The sub-clause (b) above clearly mentions that if the property in such article or thing passes to the customer after its delivery, such a contract is a contract for sale.
Applying the above provisions of the law, we can conclude that Section 194C of the Income Tax Act, 1961 does not apply to contract if following points are satisfied:
- It is not covered in the definition of “work”.
- The material used in supply of customized cards, prospectus and letterheads is not supplied to the supplier by the customer.
- The contract is in the nature of contract for sale not a contract for work.
- The property in material is transferred to the customer after its delivery.
Hence, in our opinion TDS is not deductible on Prospects and forms supplied by the printer/supplier to the company.