A Chartered Accountant’s Insight into Thresholds, Applicability, Compliance, and Consequences
1. Introduction
Tax Deduction at Source (TDS) is a critical component of the Indian taxation system, designed to enable pre-collection of tax at the very point of income generation. Among the various provisions, Section 194C governs the TDS on payments made to contractors and sub-contractors, and its implications are far-reaching, especially in cases involving annual maintenance contracts (AMC), service agreements, and repair work.
In this article, we explore the nuances of Section 194C, particularly focusing on scenarios where one or more bills in a financial year cross prescribed thresholds, and provide clarity on what a business should do to remain compliant.
2. Legal Provision – Section 194C
2.1 Statutory Text
As per Section 194C(1) of the Income-tax Act, 1961:
“Any person responsible for paying any sum to any resident contractor for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and—
- (a) the Central Government or any State Government; or
- (b) any local authority; or
- (c) any corporation established by or under a Central, State or Provincial Act; or
- (d) any company; or
- (e) any co-operative society; or
- (f) any authority… etc.,
shall, at the time of credit of such sum or at the time of payment… whichever is earlier, deduct an amount equal to:- 1% where the payment is made to an individual or HUF;
- 2% in other cases, on such sum.”
3. Scope of the Term “Work”
Explanation (iv) to Section 194C defines “work” to include:
- Advertising
- Broadcasting and telecasting
- Carriage of goods and passengers
- Catering
- Manufacturing or supplying a product according to customer specification
- Repairs and maintenance, construction work, AMC, etc.
Thus, maintenance contracts fall squarely within the ambit of this section.
4. Threshold Limits Under Section 194C
TDS under Section 194C is applicable only if the payments satisfy any one of the following two conditions:
| Condition Type | Threshold | TDS Applicability |
|---|---|---|
| Single payment | Exceeds ₹30,000 | Applicable |
| Aggregate in FY | Exceeds ₹1,00,000 | Applicable |
| Both not satisfied | Not met | Not Applicable |
🔍 Important Note: Once either threshold is breached, TDS is required on the entire amount, even on subsequent small bills within the same contract.
5. Practical Scenarios and Interpretation
Scenario 1: One Invoice Above ₹30,000
If a vendor raises a single maintenance invoice of ₹32,000:
- TDS is applicable on this invoice even if total annual billing is below ₹1,00,000.
- Future payments, even if individually below ₹30,000, will continue to attract TDS if made under the same contract.
Scenario 2: Multiple Invoices Each Below ₹30,000
Suppose a vendor raises 4 invoices of ₹25,000 each:
- TDS not required initially.
- Once the 5th invoice pushes the aggregate above ₹1,00,000, TDS becomes applicable from that point onward.
- No retrospective deduction is required for earlier invoices unless a single invoice exceeded ₹30,000.
Scenario 3: Different Contracts with Same Vendor
Even if the vendor is the same, each contract is evaluated separately.
- A standalone AMC and an installation contract, both worth ₹40,000, will be treated individually.
6. Time of Deduction
TDS should be deducted at the earlier of:
- Date of credit in the books, or
- Date of actual payment.
This is crucial to avoid interest under Section 201(1A).
7. Rate of TDS
| Type of Payee | TDS Rate |
|---|---|
| Individual / HUF | 1% |
| Partnership Firm / Company / Others | 2% |
| If PAN Not Furnished | 20% (Sec 206AA) |
✅ TDS is not applicable if payee provides a declaration in Form 15G/15H (individuals/HUFs with income below threshold, where applicable).
8. Contractual Nature – Written or Oral?
The term “contract” includes written and oral agreements, as clarified by CBDT Circular No. 715 dated 8-8-1995. Hence, even verbal service arrangements, if evidenced by payment trail and repetition, may attract 194C.
9. Maintenance Contracts – What to Watch For
Maintenance contracts generally have:
- Annual scope, sometimes broken into monthly billing
- One-time repair or overhauling charges
- Separate material and labour components
In such cases:
- TDS is on the gross invoice unless separate bills for material and service exist, and material cost is supported with documentation.
- Under CBDT Circular 715, even composite contracts attract TDS on full value, unless segregation is genuine and evidenced.
10. Exceptions / Exemptions
- Payments to government bodies or exempt institutions (subject to notification under Sec 197A).
- Personal payments by individuals not under audit are not covered.
- Reimbursements may be excluded only if:
- Contract specifically excludes them.
- Proper documentary proof exists.
11. Consequences of Non-Deduction / Short Deduction
| Consequence | Section | Remarks |
|---|---|---|
| Treated as Assessee-in-default | 201(1) | Unless recipient pays tax and files return |
| Interest liability | 201(1A) | 1% or 1.5% p.m. depending on default |
| Disallowance of expense (30%) | 40(a)(ia) | Amount not deductible while computing PGBP |
| Penalty and prosecution | 271C, 276B | In case of willful default |
12. Recent Updates & Practical Points (As of FY 2024-25)
- No change in TDS thresholds for 194C in Union Budget 2024.
- Enhanced scrutiny by CPC-TDS and TRACES system for matching PAN-TAN details.
- E-payments and digital trails make it easier for the department to track and enforce TDS compliance.
- Increasing use of AIS (Annual Information Statement) to detect missing TDS entries.
13. Recommendations for Compliance
- Track vendor-wise and contract-wise thresholds.
- Use accounting software with TDS triggers based on thresholds.
- Always obtain PAN and bank details of vendors.
- Where the nature of contract is composite, get service/material split on invoice.
- Ensure timely TDS deposit and return filing (Form 26Q).
- Maintain audit trail and working to prove compliance during scrutiny.
14. Conclusion
TDS compliance under Section 194C, though seemingly straightforward, demands careful monitoring of vendor payments, contract terms, and invoice-wise thresholds. In the case of maintenance contracts, where monthly or quarterly bills are common, even one bill exceeding ₹30,000 mandates TDS deduction, and the same must continue on all further bills in that contract, even if they are below ₹30,000 and total billing is less than ₹1 lakh.
Proper documentation, timely deduction, and clear understanding of the provisions can help businesses avoid unnecessary litigation, disallowances, and penalties.
✍️ By a Chartered Accountant
Specializing in TDS, Compliance & Indian Tax Laws
Stox N Tax 
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