Section 393(1) Sl. 4 (194C) Contract Manufacturing and Co-Pack TDS for FMCG

A national FMCG cookie brand’s controller pulls the contract-manufacturing TDS reconciliation on 30 June 2026 for the trailing four quarters. The co-pack invoice ledger shows conversion-charge invoices of approximately ₹94 crore across 46 third-party bakeries and packing plants — a mix of large regional co-packers billing ₹8 to 12 crore per year, mid-sized units at ₹1 to 3 crore per year, and 22 small local packers below the ₹1 crore threshold. The TDS deduction register shows total deductions of ₹1.68 crore at a blended effective rate of 1.78 percent — heavier than 1 percent because 41 of the 46 contractors are companies or LLPs falling under payment code 1023 at 2 percent, and only 5 are Individual/HUF proprietorships under code 1001 at 1 percent. Form 26AS extracts show credits filed against 44 of the 46 contractors — the two gaps are one contractor whose PAN was mis-keyed in the deduction register (deduction paid but credit not landed) and one small local packer whose ₹95,000 aggregate this FY sat just below the ₹1,00,000 threshold in Q4 but has now crossed after the June invoice, triggering a retroactive deduction on the earlier five months of ₹15,000 monthly invoices. This is Section 194C contract manufacturing FMCG — now formally Section 393(1) Sl. 4 of the Income-tax Act 2025 — at production scale, and the three-way reconciliation between invoice ledger, deduction register, and Form 26AS is the discipline that keeps the brand out of a Section 396(3) interest exposure at year-end.

Quick reference

What FMCG contract manufacturing actually looks like in India

The Indian FMCG cookie, biscuit, and snack universe runs a hybrid model. Tier-1 brands operate two or three flagship in-house plants for high-volume SKUs — the mother plants that carry brand recipe custody, R&D pilot lines, and the categories with the tightest margin discipline — and outsource the rest of their footprint to a network of contract manufacturers and co-packers spread across geographies for last-mile freight economics. A leading cookie brand may run 60 percent of its national volume through 46 third-party bakeries, retaining the top 10 SKUs in its own plants and pushing the long tail (regional flavours, festive packs, price-point packs, private-label extensions) to the co-pack network.

The commercial structure is invariant across the top of the sector. The brand and the co-packer sign a contract-manufacturing agreement — typically a three-year renewable framework — that specifies the recipe, the process, the quality-control protocols, the ingredient-supply obligations (brand-supplied versus co-packer-procured), the conversion-charge structure, the FSSAI licence chain, and the payment terms. Under the framework, the brand issues purchase orders for specific production runs, ships the brand-supplied ingredients (typically the recipe-critical items — signature flour blends, cocoa, dairy, flavourings, branded packaging) on a delivery challan or ITC-04 job-work challan to preserve ITC eligibility under CGST Rule 45, the co-packer procures the balance ingredients (utility, secondary packaging, adjuvants), runs the batches, hands off the finished packaged product to the brand’s outbound logistics, and invoices the conversion charge — the labour, utilities, oven time, quality control, packing, and margin — as a service under HSN 9988 with the applicable GST rate.

The FSSAI regulatory overlay is material because the brand owner retains statutory responsibility under Section 3(1)(zf) of the FSS Act for the food safety of any product bearing the brand mark, regardless of who manufactured it. This shapes the contract structure — the FSSAI licence numbers of both the brand and the co-packer must be cited in the contract, the co-packer must intimate the FBO (food business operator) status to the state FSSAI licensing authority, and the label carries the phrase “manufactured for” or “marketed by” with the brand’s name and the co-packer’s plant address. The FSSAI licensing regulations — the authoritative reference for contract-manufacturing intimation — anchor the contract file that also feeds the Section 393(1) Sl. 4 TDS trail.

The Section 393(1) Sl. 4 overlay — successor to legacy 194C

The Income-tax Act 2025 replaces the Income-tax Act 1961 and re-organises the withholding-tax provisions under a consolidated Section 393. Sl. 4 of Section 393(1) is the direct successor to legacy Section 194C, and it covers any payment made by a resident deductor to a resident contractor or sub-contractor for carrying out any work, including the supply of labour for carrying out any work.

Two payment codes flow through the TRACES taxonomy. Code 1001 governs contractors who are Individuals or Hindu Undivided Families — a small local packer running a proprietorship, or a family-owned bakery organised as an HUF — deducted at 1 percent of the invoice value. Code 1023 governs all other contractor constitutions — companies (private and public limited), LLPs, partnership firms, cooperatives, and AOP/BOI structures — deducted at 2 percent. In practice, the majority of the co-pack universe for national FMCG brands sits in 1023 because most co-packers of any scale are organised as private limited companies or LLPs; only the local packer segment sits meaningfully in 1001.

The threshold structure is two-pronged and either prong triggers deduction. A single invoice above ₹30,000 is deductible on its face. An aggregate above ₹1,00,000 per contractor per financial year triggers retroactive deduction from the first rupee of the FY. The aggregate is the trap — small local packers billing ₹15,000 per month individually never trigger the single-invoice threshold, but the seventh invoice crosses the ₹1,00,000 cumulative, and the brand must retroactively deduct on the first six months. The Section 396(3) interest — successor to legacy Section 201(1A) — runs at 1 percent per month for the under-deducted amount from the date deduction was due, and at 1.5 percent per month for late deposit of a deducted amount to the government. A brand carrying six months of retroactive under-deduction on a ₹15,000-per-month contractor is looking at a ₹900 principal (6 percent of ₹15,000 aggregate) plus roughly ₹90 to ₹180 of interest — trivial per contractor, meaningful in aggregate across 22 small packers.

The CGST Schedule II Entry 3 anchor — always Sl. 4, never Sl. 8

The Section 393(1) Sl. 4 versus Sl. 8 classification question can trip the unwary. Sl. 8 is the works-contract provision — a narrower universe targeting immovable property construction, plant erection, and specified sectors — and it carries a distinct payment-code and rate structure. FMCG contract manufacturing is not a works contract; it is job-work on movable goods, and the statutory anchor is CGST Schedule II Entry 3, which classifies any treatment or process applied to another person’s goods as a supply of services. Because the classification is service (specifically job-work under HSN 9988) and the underlying contract is between a resident brand and a resident contractor for the supply of that service, Section 393(1) Sl. 4 applies uniformly.

The GST rate on the job-work service itself is independent of the finished-good output rate — a critical point for the September 2025 GST 2.0 rate rationalisation under CBIC Notifications 09 to 16/2025-CTR. Biscuits (HSN 1905) moved to the 5 percent slab effective 22 September 2025. Chocolates and confectionery followed. Aerated and sweetened beverages moved to the 40 percent NSAB slab. But the co-packer’s conversion-charge invoice under HSN 9988 job-work follows its own rate structure and does not automatically inherit the finished-good rate. The reconciliation engine must therefore keep the finished-good HSN and the job-work service HSN separate — the finished-good rate flows through the brand’s outbound GST cycle to the distributor and modern-trade channel (see the FMCG modern trade settlement reconciliation discipline), and the job-work service rate flows through the brand’s inbound purchase register and the ITC claim on the co-pack invoice.

A worked example — Britannia Industries cookie contract-manufacturing rollout

A leading Indian cookie brand runs a national contract-manufacturing footprint across 46 third-party bakeries and co-pack plants for FY 2025-26. The brand’s Kolkata and Bengaluru mother plants carry the top-margin SKUs; the co-pack network handles regional variants, price-point packs, festive editions, and the private-label extensions the brand runs for modern-trade chains. Aggregate conversion-charge spend across the co-pack network for the FY is approximately ₹94 crore.

Illustrative — public disclosures do not reveal the internal co-pack spend split; the figures here are representative of the operating pattern for a Tier-1 Indian cookie brand and are not actual company data. Cross-verify against your own accounts-payable ledger and TDS return submission before action.

The brand’s controller pulls the trailing-twelve-months TDS reconciliation pack on 30 June 2026.

The ₹0.04 crore gap decomposes into two items. First, one mid-sized contractor’s PAN was mis-keyed in the deduction register — the correct PAN starts AAA… and was recorded as AAB…, so the deduction landed against a non-existent PAN in TRACES and the correct contractor’s 26AS shows zero credit for the quarter. The remedy is a return revision under the successor form to Form 26Q, correcting the PAN and re-filing; the credit will then flow to the correct 26AS within the next TDS return cycle. Second, one small local packer’s aggregate this FY sat at ₹95,000 through Q4 — below the ₹1,00,000 threshold — but the June invoice at ₹18,000 has taken the cumulative to ₹1,13,000, triggering retroactive deduction on the earlier five months of monthly ₹15,000 invoices plus the June invoice. The retroactive deduction is 1 percent × ₹1,13,000 = ₹1,130, plus Section 396(3) interest at 1 percent per month on the under-deducted portion for each month it was late, computing to roughly ₹120 to ₹180. The brand pays the additional deduction plus interest via a supplementary challan, includes the correction in the next quarterly return, and issues the co-packer a TDS certificate for the FY.

The reconciliation surfaces one additional operational finding. The ITC-04 job-work challan movements at ₹218 crore of brand-supplied ingredients dwarf the ₹94 crore of conversion-charge invoices — a 2.3× ratio that is representative of the ingredient-heavy cookie model where the brand supplies wheat flour, sugar, fats, cocoa, and branded packaging, and the co-packer supplies only the conversion. The ITC-04 movements are correctly excluded from the Section 393(1) Sl. 4 deductible base because they are not consideration flowing to the contractor — they are goods sent for job-work under CGST Rule 45. But the ITC-04 quarterly return (successor obligation continuing under the current CGST regime) must reconcile to the plant’s movement register, and any ingredient shortfall on return (the co-packer returned less finished-good weight than the ingredient input less normal shrinkage) may trigger a CGST liability on the deemed supply of the shortfall — a parallel reconciliation surface that the brand’s plant accounting team must run.

Common reconciliation breakages

The three-way reconciliation between the co-pack invoice ledger, the TDS deduction register, and Form 26AS fails in five recurring modes for Indian FMCG brands.

• Aggregate threshold missed on small packers. A local co-packer billing under ₹30,000 per invoice individually never triggers the single-invoice test, and the brand’s AP system does not maintain a rolling per-contractor FY aggregate. The ₹1,00,000 threshold is crossed mid-year, retroactive deduction is due on all prior invoices, and Section 396(3) interest accrues from the due date of the first missed deduction. This is the highest-frequency failure in FMCG contract-manufacturing TDS reconciliation.

• Wrong payment code assignment. The contractor’s constitution (Individual/HUF versus other) is misclassified at contractor-master setup — often because the AP team records “M/s XYZ Bakery” without checking whether the entity is a proprietorship (1001, 1%) or a private limited (1023, 2%). The wrong-code deduction lands as a mismatch in the contractor’s 26AS and triggers a compliance query at return-filing time.

• PAN mis-keying at deduction-register entry. A single-character PAN error routes the credit to a non-existent PAN in TRACES; the correct contractor’s 26AS shows zero credit; the challan money is stranded. The remedy is a return revision, but the revision window closes at the year-end return-filing deadline, after which the fix requires a longer correction process.

• Ingredient reimbursement mis-classification. The co-packer bills a specific ingredient the co-packer procured on the brand’s behalf (say, an imported cocoa consignment) as part of the same invoice as the conversion charge but does not separately identify it with supporting purchase bills. Under the Explanation to Section 393(1) Sl. 4, reimbursements are deductible unless separately identifiable — so the reimbursement component is pulled into the deductible base and TDS is deducted on it. If the co-packer expected clean pass-through, the co-packer flags a dispute at year-end.

• Job-work HSN confusion with finished-good HSN. The GST rate on the job-work service (HSN 9988) is treated as if it inherits the finished-good output rate — biscuits at 5 percent post-22 September 2025 — and the ITC claim on the co-pack invoice reflects the wrong rate. This is a GST reconciliation failure not a TDS failure but it surfaces at the same monthly close because both flow through the same co-pack invoice line, and the brand’s inbound GST reconciliation (see the biscuit segment GST 2.0 reconciliation) must keep the two HSNs separate.

Contract-manufacturing versus in-house manufacturing — the TDS distinction

The reason Section 393(1) Sl. 4 applies to contract manufacturing but not to in-house manufacturing is a foundational payments-taxonomy point. In-house manufacturing generates no external payment to a contractor — the brand’s own plant operates on the brand’s payroll, its own utilities, its own ingredients, and its own quality-control staff, with all internal costs booked to the brand’s own P&L without an external invoice. There is no resident-payer-to-resident-contractor payment flow to trigger TDS, and the CGST job-work classification does not apply because the goods being processed are the brand’s own goods within the brand’s own registered person.

Contract manufacturing generates the external payment. The co-packer is a separate legal person (individual, HUF, LLP, or company) invoicing the brand for a service (job-work on brand-supplied goods, classified under CGST Schedule II Entry 3 as a service). The invoice is consideration flowing from a resident payer to a resident contractor for the carrying out of work, which is the elemental fact pattern that triggers Section 393(1) Sl. 4. Every other element — the threshold, the payment code, the reimbursement rule, the interest exposure — flows from this classification.

The in-house-versus-contract split also matters for PLISFPI incremental-sales certification — under the ₹10,900 crore scheme with tenure FY 2021-22 to FY 2026-27 and 53 named beneficiaries per the July 2024 DPIIT order — because the beneficiary’s incremental production may include both in-house and contract-manufactured output, and the certification pack must separately identify each source. But for TDS reconciliation, only the contract-manufactured leg feeds the Section 393(1) Sl. 4 register.

How a reconciliation platform handles this

A modern reconciliation platform ingests the accounts-payable co-pack invoice ledger, the TDS challan and deduction register, the ITC-04 job-work movement register, and the Form 26AS extract per contractor, and runs a three-way match at the contractor-PAN and invoice-reference grain. The rolling per-contractor FY-cumulative aggregate rate-flags any invoice crossing the ₹30,000 single-invoice or ₹1,00,000 aggregate threshold before the AP team releases payment, so the correct payment code (1001 or 1023) is applied at deduction time rather than reconstructed at year-end. Gaps between the three registers surface by mode — deduction unpaid, challan unfiled, payment-code mismatch, PAN error — with each failure routed to the corrective action inside the return-revision window. The output is a clean quarterly reconciliation pack that feeds CARO 2020 clause 3(vii) disclosure and eliminates the Section 396(3) interest exposure the brand would otherwise carry into the statutory audit. Terra Insight’s TransactIG platform has taken match rates on this kind of multi-register reconciliation from 51 percent to 88 percent for Indian enterprise customers, with ISO 27001:2022 controls and DPDP Act 2023 alignment on the underlying data.

Cross-cluster bridges and where to read next

Contract-manufacturing TDS sits inside the broader FMCG TDS surface alongside distributor commission under Section 393(1) Sl. 18 — the 5 percent commission TDS with payment code 1015 that governs the pyramid distributor payout — and the TPM accrual versus payout reconciliation that keeps the trade-spend liability honest. The Section 15(2) CGST trade discount valuation article covers the parallel GST discipline on the brand-to-distributor leg. For brands with contract-manufacturing plants that are PLISFPI beneficiaries, the PLISFPI incremental-sales base year article walks the FY 2019-20 base-year mechanics that determine claim eligibility on the contract-manufactured leg. The FMCG cluster hub anchors the broader category, and the commercial pillar is FMCG reconciliation software India.

The five FAQs below address the operational questions Indian FMCG controllers ask most often when implementing Section 393(1) Sl. 4 contract-manufacturing TDS reconciliation.

Terra Insight Reconciliation Infrastructure

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Published 1 July 2026

Domain expertise

TDS Reconciliation GST Input Credit Platform Settlements NACH Batch Matching Bank Reconciliation Form 26AS Matching ERP Integrations Enterprise Finance Ops

Reviewed by

NK

Navin Krishnan

Managing Director & Founder — Terra Insight

Ex Amazon India · Intuit QuickBooks · Tata nexarc

ISO 27001:2022 Patent Pending Incorporated 2024