Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
Circular No. 487 was issued by the Central Board of Direct Taxes on 8 June 1987. Its subject is Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Narrows what a bidi manufacturer must deduct on when paying a munshi. Circular No. 433 dated 25 September 1985 had said section 194C applies to payments to munshis, including under oral contracts, and covered not only payments for raw material but also payments meant for the workers. Representations pointed out that many such workers are entitled to the benefits of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, and drew attention to the Supreme Court's judgment of 25 September 1985 in P.M. Patel & Sons v. Union of India, in Writ Petitions Nos. 3605 to 3609 of 1978 and others, which dealt with three kinds of bidi workers: those directly employed by the manufacturer; those engaged through an agency such as a munshi but who bring the bidis to the factory for quality check and for their payment; and those engaged by the munshi, who checks quality and pays them. The Court held that workers of the second kind are employees entitled to provident fund benefits. The Board therefore clarifies that deduction under section 194C from payments to munshis need not include payments to home workers of that second category.
Representations on the provident fund entitlement of these workers, together with the Supreme Court's judgment which the circular names, led the Board to revisit the earlier position.
Tax deduction at source from payments to contractors and sub-contractors in bidi manufacturing industry - Whether munshis are contractors
1. Under File No. 275/30/82-IT(B), dated 25-9-1985, a Circular No. 433 [Clarification 1] was issued clarifying that the provisions of section 194C would apply in respect of payments made to munshis and that would apply to payments under oral contracts also. The payments to munshis which would be hit by the provisions of section 194C covered not only the payments to them for raw material but also the payments to the workers.
2. Board have received representations that many of the workers to whom such payments are made are entitled to the benefits of Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Board’s attention has also been drawn to the judgment of the Supreme Court dated 25th September, 1985, in the Writ Petitions Nos. 3605 to 3609 of 1978 and others in the case of P.M. Patel & Sons v. Union of India [1985] 67 FJR 457. In the judgment in para 3, the Supreme Court has dealt with three kinds of bidi workers :
(a) directly employed by the manufacturers;
(b) employed through the medium of agency such as munshis but the workers bring bidi to the factory for quality check and for getting their payments;
(c) the workers are engaged by the munshis and the munshis ensure the quality and make payments.
It is held that in the types covered by category (b) above, the bidi workers are employees entitled to the benefits of provident fund, etc.
3. In view of the above judgment, it is now further clarified that the deductions under section 194C to be made from the payments to munshis need not include payments to such home workers as fall in category (b) above.
Circular : No. 487 [F.No. 275/34/86-IT(B)], dated 8-6-1987.
In a TDS survey or a section 201 proceeding against a bidi manufacturer over deduction on payments routed through munshis.
Source: the Income Tax Department’s own published text — its page for this instrument.