Payment to Contractor or Rental payment

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:

  1. ITAT Ahmedabad in AHMEDABAD URBAN DEVELOPMENT AUTHORITY v ACIT TDS CIRCLE
  2. ITAT Mumbai in ACIT (TDS) v ACCENTURE SERVICES PRIVATE LTD.
  3. 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:

 

  1. The contracts were for plying employees/passengers.
  2. Even though in some cases the payment was a fixed rental, the activity was of plying employees/passengers.
  3. 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.
  4. All arrangements were the responsibility of the payee and it was not a case of only hiring a vehicle.
  5. 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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Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Amount paid for non-compete rights while acquiring business – Capital Expense?

The assessee acquired the mailing business of Kilburn Office as a going concern on a slump sale basis pursuant to a Business Transfer Agreement. The consideration for the transfer was Rs. 18.92 crores which included Rs. 5.94 Crores by way of non-compete fee for a period of 5 years. In its books of accounts, the expenditure was treated as a capital payment though a deduction was claimed in the computation u/s 37(1). The AO disallowed the claim though the CIT (A) allowed it as deferred revenue expenditure. On appeal by the department, the Tribunal reversed the ruling of the CIT (A) following Tecumesh India though it directed the AO to consider whether the payment was an “intangible asset” for purposes of depreciation. On assessee’s appeal to the High Court at Delhi, it was held that the amount paid for Non-Compete rights was to be treated as Capital Expenditure and not deductible u/s 37. As regards availability of depreciation charge against this, the High Court confirmed the ruling of the Tribunal which had remitted the matter back to AO for consideration on depreciation.

 

This case is almost identical to that of Tecumesh India Pvt Ltd. where the Tribunal, after applying the ratio of various judgments, including the Supreme Court had held that 5 years is sufficient to lead to enduring benefit and the agreement for non-compete was neither permanent nor ephemeral. On this ground the case can be distinguished from the decision of the Delhi High Court in Eicher Company Ltd.

 

Disclaimer:

Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Audit Objection – whether valid ground for reopening assessment

In a recent judgement relating to Cadila Healthcare Ltd. delivered on 14th December, 2011, the High Court of Gujarat has considered whether assessment can be reopened u/s 147 based on objection by audit party. Audit party had communicated objection to AO in respect of failure of withhold tax u/s 195 in respect of a remittance made by assessee outside India.

It is settled law that reopening of cases u/s 147 of the Income Tax Act, 1961 is justified where the AO has reason to believe that income has escaped assessment or that excess deduction of expenses has been allowed. However, the AO must have reasons to believe so and a mere change in opinion would not warrant reopening of assessment.

In the instant case, the AO sought to reopen assessment based on opinion of the Audit Party. The AO had replied to the objection of the Audit Party that in her view, no withholding tax was required to be deducted because the income was not liable to tax in India. Therefore, the AO did not have reason to believe that income had escaped assessment and, in fact, held a belief that was the opposite. In such circumstances, there could be no justification for reopening of the assessment and the notice u/s 148 for reopening was struck down.

This decision of the High Court is consistent with other cases involving reopening at the instance of Audit objection. The Supreme Court, in CIT v Lucas TVS Ltd has held that reopening was not justified where apart from objection of audit party, the AO had no other information for reopening assessment. A Division Bench of the Gujarat High Court had also held in Agricultural Produce Market Committee v ITO that reopening based only on objection of Audit objection was liable to be quashed.

Added disclaimer below on December 27, 2011

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.