4.4       Query

Deduction of tax at source from payments to

Contractors & Sub- Contractors vide Section 194C of

the Income-tax Act, 1961.

We would like to have the benefit of your advice on the following two points arising out of the clarification given by Ministry of Finance, Government of India, by their Circular No. 86 dated 29^th May, 1972 in respect of deduction of income-tax at source under Section 194C of the Income-tax Act, 1961: -

1.The circular referred to above stated that in case of fabrication contracts where the materials are supplied by buyer to the fabricator and the ownership of the material is retained by the buyer, the contract will come under the purview of the deduction. It is, however, not clear what will be deduction liability in cases where materials are partly supplied by the buyer and partly by the fabricator. Speaking about ourselves, we have entered into fabrication contracts with the fabricators where part of the required material has been/will be supplied by us and part by the fabricators themselves.

2.It is also necessary for us to know the liability under the new Section in case of Canteen Contracts where materials and services are provided by the Canteen Contractor in exchange of stipulated amounts which will exceed Rs.5000/- a month.

                                                                         Opinion                                September 15, 1973

(1)The contract for fabrication of materials which are supplied partly by the buyer and partly by the fabricator would constitute a contract of work and labour. The circular of the Board does not say that in order to constitute a contract for work and labour, the material for fabrication must be supplied wholly by the Government or the person for whom the contract is carried out. Therefore, even if a part of the material is supplied by the person who is making payment of the purchase price the contract would still continue to be one of work and labour. The test laid down by the Supreme Court in the case of State of Punjab (State of Himachal Pradesh) Vs. Associated Hotels of India Ltd. (1972) 29 S.T.C. 474 as has been explained in the circular of the Board itself makes it clear that the contractor is not selling the goods which are utilised by him for the purpose of completion or execution of the contract. The utilisation or supply of the goods partly by the contractor himself is incidental to the main purpose of the contract which is primarily for the purpose of fabrication work. Since the contractor is not the owner of the goods and does not, therefore, sell the goods which are completed in the process of execution of the fabrication contract, the contract cannot be said to be one for sale of goods or services. Consequently, the amount payable to the contractor would be subject to deduction of tax at source in full. The deduction cannot be restricted to the proportion of the contract price as may be attributable to the goods or material supplied by the Government or other person for whom the contract is carried out.