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Tax deduction at source (TDS) on car-hire charges has raised a controversy. Is tax is to be deducted under Section 194C (for payment made to contractor) or under Section 194I (for payment of rent) of the Income Tax Act, 1961. Under section 194C, tax at 2% is to deducted at source if a single payment exceeds Rs 20000 or if the aggregate payments made to a person in the financial year exceed Rs 50000. Under Section 194I, tax at 10% is to be deducted at source if the rent paid/payable exceed Rs 120000 per annum.
From 13 July 2006, rent under Section 194I means any payment by whatever name — lease, sub-lease, tenancy or any other agreement or arrangement — for the use of (either separately or together) of any land or any building (including factory building) or land appurtenant to a building, machinery, plant, equipment, furniture or fittings, irrespective of any/all such owned by the payee.
Car-hire falls under renting of machinery and, hence, covered under Section 194I. Prior to the amendment, the definition of ‘rent’ did not include rent for machinery. Hence, prior to 2006, car-hire was not covered under Section 194I.
Provisions of Section 194C are applicable only where the contract is either a "work contract" or a "contract of supply of labour for works contract". Under Secction 194C, expression "work" includes advertising, broadcasting/ telecasting/ production of programmes, carriage of goods and passengers by any mode of transport other than by railways, and catering. So car-hire would fall under, "Carriage of goods and passenger by any mode of transport other than by railway".
As per circulars No 715, dated 8 August 1995, and 713, dated 2 August 1995, payment made for purchase of ticket would not be subject to TDS. But when any mode of transport is chartered, then Section 194C will get attracted.
It was argued that car-hire is a hire contract and not a service contract and cannot be covered under Section 194C. However, the Central Board of Direct Tax (CBDT), in its circular No 558, dated 28 March 1990, examined the following terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation (SRTC):
* The owner of the bus has to give his bus on hire to the corporation for plying on notified routes. * The owner has to provide a driver, with a valid licence and badge for the vehicle supplied by him. He will have to follow the instructions of the authorised officials of the corporation. * The owner has make available the bus for 14 hours a day and complete the schedules given to him for the day. * The owner has to keep the bus road-worthy by carrying out necessary maintenance and repairs. l The owner has to submit his claim twice a month. * The corporation will pay the owner a fixed cost per day in addition to per km cost, operated as variable cost.
Consequently, the CBDT has advised that although the contract may appear to be a single-hire contract, it is actually a service contract (for carrying out any work) entered into between the SRTC and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of Section 194C are applicable.
TDS on hire charges of taxi/car charges can be covered under both Sections 194C and 194I and is a debatable issue. Clarification on the issue is awaited.
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