SECTION 194C l PAYMENTS TO CONTRACTORS AND SUB-

CONTRACTORS

1107. Applicability of section 194C to service contracts

- Clarification regarding Supreme Court judgment in
Associated Cement Co. Ltd. v. CIT [1993] 67 Taxman
346/201 ITR 4351
1. 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 (hereafter 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 by any other mode, whichever is earlier, deduct
an amount equal to 2% 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% 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 Circular No. 86,
dated 29-5-1972, No. 93, dated 26-9-1972 and No. 108, dated 20-
3-1973 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 works 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

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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. 2909/1978 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 Circular 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,
material 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

CircularNo.681 dated 8-3-1994 (1994) 206ITR (St). 299 2

 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 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 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 Hostels 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.

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(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 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% 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.,

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 driver, conductor, cleaner, etc.). Reference in this regard is also
invited to Boards Circular No. 558, dated the 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. Boards Circular No. 86, dated 29-5-1972 and No. 93, dated 26-
9-1972 and para 11 of Circular No. 108, dated 20-3-1973 are
hereby withdrawn. Boards Circular No. 558, dated 28-3-1990 is
reiterated.
10. It is clarified that this circular explaining the provisions of
section 194C will apply with effect from 1st of April, 1994. Tax
deductions made in accordance with Circular Nos. 86, 93 and 108
up to 31st March, 1994 will be regarded as compliance of the
provisions of section 194C.
Circular : No. 681, dated 8-3-1994.

JUDICIAL ANALYSIS

n Any work occurring in section 194C means any work and not a
works contract and, therefore, a person who credits to account of or
pays to a contractor any sum payable by any of organisations
specified in section 194C(1) for carrying out any work (including
supply of labour for carrying out any work) in pursuance of a
contract between contractor and specified organisation, is liable to
deduct two per cent of such sum as income-tax as required under
that sub-section - Associated Cement Co. Ltd. v. CIT [1993] 67
Taxman 346/207 ITR 435 (SC).
n Expression any work used in section 194C means works contracts
and contracts for work i.e., labour contracts, but not service
contracts or transport contracts - Bombay Goods Transport
Association v. CBDT [1994] 76 Taxman 334/210 ITR 136 (Bom.).
n Provisions of section 194C are not confined to activities of
carrying out works contracts only, but apply to contract of carrying
out other work also - All Gujarat Federation of Tax Consultants v.
CBDT [1995] 80 Taxman 460/214 ITR 276 (Guj.)
n Before a person can be called a contractor within the meaning of
section 194C, his status must have nexus in its characteristic as
carrying out work for another person as a contractor in the ordinary
sense and not merely carrying on activities of his own business or
profession in the ordinary course - All Gujarat Federation of Tax
Consultants v. CBDT [1995] 214 ITR 276/80 Taxman 460 (Guj.).

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n Section 194C is applicable only to payments made to any person
for any work and not the payments made as fee for services
rendered or the commission paid to commission agents or brokers,
and, therefore, Circular Nos. 661 and 681, dated 8-10-1993 and 8-
3-1994, respectively, directing the authorities under the Act to give
effect to the provisions of section 194C as against commission
agents, brokers, lawyers, chartered accountants, etc., are not
within the scope of section 194C - S.R.F. Finance Ltd. v. CBDT
[1994] 76 Taxman 432 (Delhi).
In the result, the two impugned Circulars No. 661, dated 8-10-1993
and No. 681, dated 8-3-1994 were quashed to the extent the said
circulars govern the payments to the commission agents and
brokers for the services rendered by them; further, it was declared
that section 194C does not operate on such payments and the
respondents were restrained from enforcing them.
Per Court - It should be borne in mind that a Judge while writing his
judgment would be focussing his attention on the immediate
problem before him. The Court is concerned with the particular facts
of the case. The law to be applied to these facts has to be identified
and in some cases elaborated. Court may not envisage the possible
constructions that are likely to be placed in future, on each and
every sentence found in the judgment. Each sentence, normally,
has a connection to the sentence preceding it and that idea
contained in it normally emanates from the earlier process of
consideration which leads to the next step. A sentence may reflect a
particular reasoning. Every reason is a link to the ultimate
conclusion, linking the thought process to each other, from its
commencement to the end. Therefore, to lift a sentence from a
judgment, as if it is an independent provision in a statute and
emphasise it as declaring the law, will result in unanticipated and
unexpected consequences.
Doctrine of contemporanea expositio is not confined strictly to the
interpretation of ancient statutes. There are several instances in
which the Supreme Court applied the doctrine to interpret the
recent fiscal legislations.
Note : SLP rejected [Source : [1995] 212 ITR 375 (St.)]
n Section 194C is inapplicable to payments of fees for professional
services, thus Circular No. 681 issued by CBDT on 8-3-1994
requiring deduction of tax at source under section 194C in respect
of payments of fees for professional services is illegal, based on an
erroneous reading of observations of Supreme Court in Associated
Cement Co. Ltd. v. CIT [1993] 201 ITR 435, in regard to true
meaning and import of word work appearing in section 194C(1) -

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Chamber of Income-tax Consultants v. CBDT [1994] 75 Taxman
669/209 ITR 660 (Bom.).
n Circular No. 681, dated 8-3-1994 to the extent it purports to
govern profession of advocates, architects and chartered
accountants is ultra vires the provisions of section 194C - High
Court Bar Association v. CBDT [1995] 81 Taxman 324 (Delhi).
n Circular No. 681, dated 8-3-1994, issued by the CBDT is being
violative of articles 14 and 265 of the Constitution of India and
opposed to section 194C of the Act, insofar as it requires deduction
at source from payments made by way of professional fees to
advocates, solicitors, chartered accountants, tax practitioners, etc.,
for the services rendered by them - Madras Bar Association v. CBDT
[1995] 216 ITR 240 (Mad.)
When a client engages an advocate, prima facie relationship of
advocate and client is not one of contract falling within ambit of
section 194C - Andhra Pradesh Tax Bar Association v. CBDT [1994]
118 CTR (AP) 281.
n Engagement for professional service or services simpliciter which
do not involve contract for carrying out any work itself, or contract
for labour for carrying out such services, are not within the purview
of section 194C - All Gujarat Federation of Tax Consultants v. CBDT
[1995] 80 Taxman 460/214 ITR 276 (Guj.).
n Circular No. 681, dated 8-3-1994 of CBDT to the extent it
purports to rope in profession of architects within the ambit of
section 194C, is invalid - Indian Institute of Architects v. CBDT
[1995] 81 Taxman 309 (Delhi).
n CBDT Circular No. 681 to the extent it purports to extend
provisions of section 194C to activities of persons conducting tours
and arranging hotel accommodation for tourists, is ultra vires and
unenforceable - Indian Association of Tour Operators v. CBDT
[1995] 81 Taxman 340 (Delhi).
n Circular No. 681, dated 8-3-1994 of CBDT is illegal and without
jurisdiction insofar as it purports to make provisions of section 194C
applicable to payments made to advertising agencies for
professional services rendered by them; therefore, requirements of
section 194C would not apply to payments made to advertising
agents rendering professional services - Advertising Agency
Association of India v. CBDT [1994] 76 Taxman 352/210 ITR 152
(Bom.).
n Payment made to advertising agencies or agents for rendering
professional services are not covered by section 194C - Madras Bar
Association v. CBDT [1995] 216 ITR 240 (Mad.).

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n Contracts for advertising, contract of goods, transport simpliciter,
persons engaged in the business of broker as commission agent
without carrying out any work for their principal, or professionals
redering professional services by charging fees in the course of their
profession, are not emenable to the provisions of section 194C - All
Gujarat Federation of Tax Consultants v. CBDT [1995] 214 ITR
276/80 Taxman 460 (Guj.).
n CBDT circular No. 681, dated 8-3-1994 is based on an erroneous
reading of decision of Supreme Court in Associated Cement Co. Ltd.
v. CIT [1993] 201 ITR 435/67 Taxman 346 and certain observations
made therein and, therefore, it is illegal and without jurisdiction
insofar as it requires deduction of tax at source under section 194C
from payments made under contracts for mere carriage of goods
which do not include any other services like loading and unloading
and are not in any way connected with any work to be performed by
carrier - Bombay Goods Transport Association v. CBDT [1994] 76
Taxman 334/210 ITR 136 (Bom.).
Note : SLP granted [Source : [1995] 212 ITR 375 (St.)]
n Circular No. 681, dated 8-3-1994 is ultra vires the provisions of
section 194C insofar as it purports to cover cases of actual carriage
of goods on hire in case of truck-owners/transporters - Delhi Goods
Transport Association v. CBDT [1995] 80 Taxman 525 (Delhi).
n Section 194C will not apply to transport contracts for mere
carriage of goods - Madras Bar Association v. CBDT [1995] 216 ITR
240 (Mad.).
n Amount of two per cent required to be deducted by payer out of
sum credited to account of or paid to contractor is not to be
confined to his income component out of that sum, but it has to be
deducted on sum credited to account of or paid to contractor in
pursuance of contract - Associated Cement Co. Ltd. v. CIT [1993]
201 ITR 435 (SC).
n Circular No. 681 issued by the Board in so far as it provides that
the transport contracts fall within the mischief of section 194C, is
legal and valid - Ekonkar Dahsmesh Transport Co. v. CBDT [1996]
219 ITR 511 (Punj. & Har.).
n CBDT Circular No. 681, dated 8-3-1994 requiring deduction at
source from payments to professionals, i.e., lawyers, chartered
accountants, doctors, engineers, architects etc., is beyond the
scope of Boards powers under section 119 and, therefore, liable to
be quashed - Rakesh Raj & Associates v. CBDT [1997] 223 ITR
282/91 Taxman 158 (Punj. & Har.).
n There is no infirmity in CBDT Circular No. 681, dated 8-3-1994,
making section 194C applicable to transport contracts. It was issued

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under the authority of law and within the jurisdiction and
competence of the Board - Birla Cement Works v. CBDT [1997] 95
Taxman 377 (Raj.).
n CBDT Circular No. 681, dated 8-3-1994 to the effect that
transport contracts in general come within the purview of section
194C, is erroneous and illegal - Sethi Transport v. CBDT [1997] 226
ITR 274 (Ori.).
n CBDTs Circular No. 681 extending purview of section 194C to
transport contracts for mere carriage of goods is based on a
misreading and misconstruction of judgment of Supreme Court in
Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435 and
therefore, said circular to that extent is erroneous and illegal - Inter
State Transporters Association v. CBDT [1997] 93 Taxman 227
(Ori.).
n Circular No. 681, dated 8-3-1994 making section 194C applicable
to professionals is not valid in respect of period up to 30-6-1995 -
Rajasthan Tax Consultants Association v. CBDT [1998] 229 ITR 657
(Raj.).
n Question of deduction of tax at 2 per cent from payment made to
contractor has to be decided independent of CBDT Circular No. 681,
dated 8-3-1994 which is issued only as guideline in regard to
applicability of section 194C - All Gujarat Federation of Tax
Consultant v. CBDT [1994] 76 Taxman 307 (Guj.).
EXPLAINED IN : Birla Cement Works v. CBDT [2001] 248 ITR 216
(SC), in following words :
It is evident that Associated Cement Co. Ltd.s case [1993] 201
ITR 435 (SC), was not in respect of transport contracts. The
controversy therein was deduction of tax at source from
payments made for loading and unloading of goods. The
question whether the expression carrying out any work would
include therein carrying of the goods or not, was not in issue in
Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC).
That is precisely the question in the present case. The decision
in Associated Cement Co. Ltd.s case [1993] 201 ITR 435 (SC)
has not been correctly understood by the Central Board of
Direct Taxes. It would not be correct to come to the conclusion,
as the Central Board of Direct Taxes did, that the question
involved is covered by the decision in the case of Associated
Cement Co. Ltd.s case [1993] 201 ITR 435 (SC). (pp. 229, 230)
... If the only view of section 194C had been the one reflected in
the impugned circular, then the issue of earlier circulars and
acceptance and acting thereupon by the Revenue reflecting the
contrary view would have been of no consequence. That,

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 however, is not the position. Further, there are no compelling
reasons to hold that Explanation III inserted in section 194C
with effect from July 1, 1995, is clarificatory or retrospective in
operation. We hold that section 194C before insertion of
Explanation III is not applicable to transport contracts, i.e.,
contracts for carriage of goods.
For the aforesaid reasons the appeal is allowed, the impugned
circular to the extent it relates to transport contracts is
quashed. (p. 231)
EXPLAINED IN : Chief Electoral Officer v. ITO [1999] 68 ITD 439
(Chd.) in following words:
The contents of para 7(vi)(b) and (c) of Circular No. 681 which are
still valid and binding on the departmental authorities cannot be
ignored. It is clearly mentioned in sub-clause (b) of clause (vi) of
para 7 that where the contractor undertakes to supply any article or
thing fabricated according to the specifications given by the Govt. or
any other specified person and the property in such article or thing
passes to the Govt. or such person only after such article or thing is
delivered, the contract will be a contract for sale and outside the
purview of section 194C. (p. 455)

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