Hiring of vehicle on hourly basis shifts TDS obligations from sec. 194C to sec. 194-I front yard

Where assessee entered into an agreement with a contractor for hiring of vehicles and made use of vehicles and paid hire charges on number of hours of use, section 194-I and not section 194C would be attracted.

Facts:

1)  The assessee entered into an agreement with contractor for hiring of vehicles to be used for loading, unloading and transportation of goods. It applied provisions of section 194C and deducted tax at 2 %;

2)  However, the Assessing Officer (‘AO’) held that the assessee was to deduct tax at source under section 194-I;

3)  On appeal, the CIT(A) confirmed the order of AO which was further affirmed by the Tribunal. Aggrieved-assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) The agreement entered into by assessee was composite agreement for hiring of vehicles to be used for loading, unloading and transportation of goods;

2) The owner of the vehicles was to retain ownership and possession of the vehicles. The vehicles were to be driven and operated by the persons who were to be paid by the owner;

3) The agreement did not require the owner of the vehicles to do any work at all. It was the assessee who made use of the vehicles. He paid hire charges on the number of hours of use and, thus, clearly the assessee was not justified in contending that section 194C was applicable;

4) What the assessee was permitted to do with the vehicles alone was mentioned in the contract. All those works were done by the assessee and no work within the meaning of section 194C was actually done by the owner;

5) Section 194-I specifically contemplates liability of person paying rent to deduct income tax at the rate of ten per cent for the use of any machinery or plant or equipment. Thus, in the instant case section 194-I was attracted instead of section 194C - Three Star Granites (P.) Ltd. v. ACIT [2014] 41 taxmann.com 91 (Kerala)