Sec 194C - TDS on Payment to Transportation Contractors

Section 194C of Income Tax Act, 1961 deals with Tax Deduction at Source (TDS) provisions relating to payments made to contractors 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. Sec 194C provides that, the 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 any cheque or draft or by any other mode, whichever is earlier, deduct a sum equal to:

1. one percent (1%) where the payment is being made or credit is being given to an individual or a Hindu Undivided Family(HUF)
2. two percent (2%) where the payment is being made or credit is being given to a person other than an individual or HUF. 

Further, sub-section 5 of Sec 194C provides as following :
194C(5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees :
Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds seventy-five thousand rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section.

Explanation (iv)(c) given to the Section includes, "carriage of goods or passengers by any mode of transport other than by railways." within the definition of work thereby making the provisions of this section applicable to payments made or credit being given to a transporter. However, there are many confusions and many queries which arises while assessing the applicability of the section for individual transporters. So, in this article we'll be digging through various related provisions to get a clear understanding of applicability of TDS provisions to various transporters and try to answer any queries that may befall. 

Explanation (i) given to the Section provides as following:

(i)"Specified person" shall mean,-

1. the Central Government or any State Government; or
   
2. any local authority; or
3. any corporation established by or under a Central, State or Provincial Act; or
4. any company; or
5. any co-operative society; or
6. any authority, constituted in India by or under any law, engaged either for the purpose of dealing with or satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both; or
7. any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; or
8. any trust; or
9. any university established or incorporated by or under Central, State or Provincial act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); or
10. any Government of a foreign State or a foreign enterprise or any association or body established outside India; or
11. any firm; or
12. any person, being an individual or a Hindu Undivided Family or an association of persons or a body of individuals, if such person, 
1. does not fall under any of the preceding sub-clauses; and
2. is liable to audit of accounts under clause (a) or (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;

However, before the amendments brought out by Finance Act, 2015, subsection (6) of Sec 194c provided as follows: 

No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his Permanent Account Number (PAN), to the person paying or crediting such sum.

Explanation (ii) to the Act provides : "goods carriage" shall have the meaning assigned to it in the Explanation to sub-section 7 of section 44AE.

Explanation to sub-section 7 of Section 44AE provides as follow:

    (a) the expression "goods carriage" shall have the meaning  assigned to it in section 2 of Motor Vehicles Act, 1988 (59 of 1988).

With all these references from one section to another, we are left with no choice but to refer to section 2 of the Motor Vehicles Act, 1988. Section 2 subsection 14 of the said Act, provides as follows:

      (14) "goods carriage" means any motor vehicle constructed or adapted for use solely for the carriage of goods, or any motor vehicle not so constructed or adapted when used for the carriage of goods. 

So, basically all kind of vehicles when used as a carriage of goods (transportation of goods from one place to another) are to be considered as goods carriage and the provision of section 194c shall apply accordingly. However, please note that the transaction should be of commercial nature as TDS provision is not applicable where the sum is paid or credited to the contractor exclusively for personal purposes of such individual or HUF by virtue of sub-section (4) of section 194c.

Sec 194c(4) is reproduced below from bare act :

No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

A plain reading of the act shows that tax shall not be deducted from any payments made or any credit being given to their account if they furnish their PAN number to the person paying or crediting such sum. This status was legally valid and many transporters took the benefit thereunder, despite the real intention of the taxation authorities was not to exempt all transporters from the applicability of the provisions of section 194c. The main reason for introduction of this clause, by Finance Act, 2009, was to exclude small transporters (transporters owning 10 or less than 10 goods carriage) from the provisions of TDS and other ancillary compliances and have them assessed under the presumptive taxation scheme as described under section 44AE of the Act.

However, realizing that the loophole was there in the existing provision, under which shelter have been taken by many transporters/goods carriages for whom the provisions of advance tax and tax deduction at source are equally applicable, Finance Act, 2015 amended the sub-clause 6 to sec 194c to include such transporters who are engaged in the business of hiring, plying or leasing of goods carriages if such person owns more than 10 goods carriages within the purview of Sec 194C. The relevant extract of Section 194C(6) after amendment is re-produced below :

No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

TDS-Chart-u/s-194C-transportation-contractors

The above amendment is made effective from 1st June, 2015 and any person paying or crediting the amount to any transporters involved in the business as discussed above shall be liable to deduct tax at source at applicable rates, unless he/she receives a declaration from the contractor transporter furnishing the information as required by sec 194c(6).

That's not all. Additional liability has been imposed upon the person, making or crediting the payment of the nature specified under section 194C(6), by sub-section (7) of the section, which provides as follow:

194C(7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.

The Central Government vide Rule 31A of Income Tax Rules, 1962, has specified such form and time frame as mentioned under Sec 194C(7). Relevant portions of the rule are produced below for your reference.

Rule 31A: Statement of Deduction of Tax under sub-section (3) of Section 200. 

(1). Every person responsible for deduction of tax under Chapter XVII-B, shall, in accordance with the provisions of sub-section (3) of section 200, deliver, or cause to be delivered, the following quarterly statements to the Director General of Income-tax (Systems) or the person authorised by the Director General of Income-tax (Systems), namely:

(a)		Statement of deduction of tax under section 192 in Form No. 24Q;
(b)		Statement of deduction of tax under sections 193 to 196D in—

(i)		Form No. 27Q in respect of the deductee who is a non-resident not being a company or a foreign company or resident but not ordinarily resident; and
(ii)		Form No. 26Q in respect of all other deductees.

(4) The deductor at the time of preparing statements of tax deducted shall,—

(i)		quote his tax deduction and collection account number (TAN) in the statement;
(ii)		quote his permanent account number (PAN) in the statement except in the case where the deductor is an office of the Government;
(iii)		quote the permanent account number of all deductees;
(iv)		furnish particulars of the tax paid to the Central Government including book identification number or challan identification number, as the case may be;
(v)		furnish particulars of amount paid or credited on which tax was not deducted in view of the issue of certificate of no deduction of tax under section 197 by the Assessing Officer of the payee;
(vi)		furnish particulars of amount paid or credited on which tax was not deducted in view of the compliance of provisions of sub-section (6) of section 194C by the payee;
(vii)		furnish particulars of amount paid or credited on which tax was not deducted in view of the furnishing of declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A by the payee;]
(viii)		furnish particulars of amount paid or credited on which tax was not deducted in view of the notification issued under sub-section (1F) of section 197A. ]

Conclusion

TDS provisions have always been complex and vague in nature. And, their compliances is a huge burden on the assesses (being the deductor i.e. person responsible for making the payment or crediting the amount of the nature as specified under various sections from Sec 192 to Sec 196D of the Income Tax Act, 1961. 

For appropriate compliance under the section as discussed above following checklist is recommended to the deductors. 

1. Identify the parties who provides services in the nature of carriage of passengers or goods by mode of transport other than by railways (i.e. by road and by air). 
2. Ask them to give the declaration required under section 194C(6), if they own (either registered or beneficial) more than 10 goods carriage vehicles at any time during the year.
   Format of the declaration for non-deduction of tax at source under sub-section (6) of section 194C can be downloaded from this link. Further, for your ease a macro has been designed where you can simply fill the party details and generate a declartion with just a click of mouse. :D
3. If you are unable to obtain the declaration under point (2) above, deduct tax at source at appropriate rates (1% for Individual & HUF and 2% for other categories), even though the transporter own less than 10 goods carriage at any time  during the year. 
4. Maintain the details of payment made or credit given to transporter contractor who furnish the details as required under point (2), to furnish to the department as and when demanded.