Amendment to Section 194C by Finance Bill 2020-2021

Amendment to Section 194C by Finance Bill 2020-2021

Let’s understand the Reason for Amendment through examples: -

Example 1:  Beta Private limited entered into contract agreement with Alpha Private Limited for supplying a product according to the requirement or specification of Alpha Private Limited by using material purchased from such Alpha Private Limited.

Whether Alpha Private Limited will be required to deduct TDS under Section 194C?

Answer is Yes, since as per section 194C, TDS to be deducted for carrying out any “work”

Definition of “Work” as per Explanation iv of Section 194C,

Work includes

“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”

Example 2: Beta Private limited entered into contract agreement with Alpha Private Limited for supplying a product according to the requirement or specification of Alpha Private Limited by using material purchased from a Director (related parties) of such Alpha Private Limited.

Whether Alpha Private Limited will be required to deduct TDS under Section 194C?

Answer is No, since as per section 194C, the above-mentioned contract agreement is out of definition of “work”

Definition of “Work” as per Explanation iv of Section 194C, Work includes

“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”

Understanding the Loophole

some assessees are using the escape clause of the section by getting the contract manufacturer to procure the raw material supplied through its related parties. As a result, a substantial amount of income escapes the tax net.

Amendment

Therefore, to bring clarity in the section and plug the leakage, it is proposed to amend the definition of “work” under section 194C.

After Amendment the Definition of “Work” shall include-

(i) manufacturing or supplying a product according to the requirement or specification of a              customer by using material purchased from such customer or its associate, being a person          placed similarly in relation to such customer as is the person placed in relation (i)   to the            assessee under the provisions contained in clause (b) of sub-section (2) of section 40A

(ii) 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 or              
     associate of such customer

Summary 

Cases	Situations	194C?
1	supplying a product according to the requirement or specification of a customer by using material purchased from such customer	YES
2	supplying a product according to the requirement or specification of a customer by using material purchased from related parties [s.40A(2)(b)] of such customer	YES
3	supplying a product according to the requirement or specification of a customer by using material purchased from third parties not related to customer	No