When payment is made to vendors from whom vehicles are taken on hire for purposes of transportation of employees, tax is usually deducted u/s 194C. However, the tax office has come up with interesting claims over the last couple of years. They argue that “Motor Car” is covered under the definition of “Plant & Machinery” and therefore, when a Motor Car is hired, it should be treated as rent of plant and machinery and tax should be deducted u/s 194I @ 2%. The difference between deducting under these sections becomes relevant when the payee is an individual because u/s 194C, payment to individual attracts TDS @ 1%.
In most instances where the tax office has made a claim for TDS u/s 194I for hire of vehicles for transportation purposes, assessee has gone on appeal and has usually won. Nevertheless, the matter is not as straightforward as it seems at first glance.
Let us look at the following judgements to understand why this is not straightforward:
- ITAT Ahmedabad in AHMEDABAD URBAN DEVELOPMENT AUTHORITY v ACIT TDS CIRCLE
- ITAT Mumbai in ACIT (TDS) v ACCENTURE SERVICES PRIVATE LTD.
- High Court of Gujarat in CIT (TDS) v SWAYAM SHIPPING SERVICES PRIVATE LIMITED
Section 194C clearly provides that “work” includes “Carriage of goods and passengers by any mode of transport other than railways”. In all of cases above-referred, the vehicle was owned and maintained by the payee Contractor and it was undisputed that the vehicles were used for plying of employees /passengers. The ruling in all these cases was that the payment would be covered under 194C and not 194I and the broad reasoning can be summarized as follows:
- The contracts were for plying employees/passengers.
- Even though in some cases the payment was a fixed rental, the activity was of plying employees/passengers.
- Cost of running and maintenance was borne by the payee who was also the owner of the vehicle. This cost included cost of driver, fuel, repair & maintenance etc. The staff (drivers) were under supervision of the payee.
- All arrangements were the responsibility of the payee and it was not a case of only hiring a vehicle.
- Although under Rule 5 of the Income Tax Rules, the payee would claim depreciation on the vehicle under “Plant & Machinery”, that cannot be stretched to imply that the payment made was for hire of Plant & Machinery.
Therefore, it can be seen that one cannot simply conclude that hiring of vehicles (which is sometimes done for tax planning of employee salaries, too) will attract TDS u/s 194C. the essence of the contract as well as other factors like running & maintenance costs of vehicles etc. need to be looked into.
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