No TDS on payments made for outsourcing categorized as sale

The Central Board of Direct Taxes has issued the much awaited circular clarifying that the manufacturing companies which outsource their products would not have to deduct tax at source on the payments made for the outsourced activity. As per the circular, the provision of section 194C of the Income Tax Act would apply in respect of a contract for supply of an article or thing as per prescribed specifications only if it is a contract for work and not a contract for sale. Under Section 194 of the Income Tax Act, 1961, TDS has to be deducted at source on any payment in lieu of any contract for work. This implies that the companies which outsource a complete product will not be liable to deduct tax at source. However, those companies which outsource a part function of their manufacturing activity will be liable to deduct tax at source on payments made for it.
(Circular No. 13/2006 Dated 13.12.2006)