The Hindu Business Line : TDS on car hiring charges

For deciding whether the payment of hire charges by the employer to the agency attracts deduction of tax under Section 194-I or Section 194C, the terms of the contract between the parties need to be examined.

Vijay Vaidya

The provisions relating to deduction of tax at source (TDS) have assumed paramount importance in the past few years. The legislature has also introduced provisions for disallowance of expenditure if the TDS provisions are not complied with.

Companies are putting in additional time and efforts to ensure that they are on the right side of the law.

The provisions contained in Section 194-I, which deal with deduction of tax at source on rent, were amended with effect from July 13, 2006, whereby the definition of rent has been enlarged.

Pursuant to the amendment, rent paid for leasing/sub- leasing/tenancy of machinery, plant and equipment is also liable for TDS.

Companies generally provide cars to their executives, employees and guests. Often these cars are taken on hire from a car hiring agency.

In such arrangements, the issue arises whether payment made to the agency for hiring of the car is to be considered as rent and tax thereon to be deducted as per the provisions of Section 194-I or whether the payment is to be considered as that to a contractor and tax thereon deducted under Section 194C?

TDS rate

It is worthwhile to mention that the basic TDS rate for rent under Section 194-I is 10 per cent whereas for payment to a contractor under Section 194C is 2 per cent.

If the agreement is for leasing of the car per se, the payment would attract tax deduction under Section 194-I.

However, if the agreement is for a service of transportation to be provided by the agency, the payment would attract tax deduction under Section 194C (the definition of the term ‘work’ includes inter alia carriage of goods and passengers by any mode of transport).

Control matters

Another important factor to be considered is whether the car is under the control of the company or the agency.

In the former case, the payment would generally constitute rent, whereas in the latter, the payment would be for carriage of passengers.

Guidance on the appropriate rate to be applied can also be taken from Circular No. 558 dated March 28, 1990, issued by the Central Board of Direct Taxes, which deals with deduction of tax at source from payments by a State Transport Corporation to private bus owners.

Some of the relevant criteria indicated in the Circular are provision of a driver, keeping the bus (in our case, the car) road worthy, payment based on usage, etc., which indicate that the contract was a service contract and the provisions of Section 194C are applicable.

In sum, if a chauffeur-driven car is hired for one day, Section 194C would be attracted as the payment is essentially for carriage of passengers.

On the other hand, if a car is leased for, say, a year and is under the control of the company and it is the company’s responsibility to run and maintain it, the payment would be in the nature of rent and Section 194-I would be applicable.

(The author is Manager, Deloitte Haskins & Sells, Mumbai.)