2013 (12) TMI 546 - HC - Income Tax

Court affirms 10% tax on machinery hire under Sec 194-I, remands Sec 40(a)(ia) issue for further review.

M/s. Three Star Granites Pvt. Ltd. Versus The Asst. Commissioner of Income Tax

The court ruled against the appellant, affirming that tax should be deducted at 10% under Section 194-I for machinery hire instead of 2.24% under Section ... TDS u/s 194C or 194I - disallowance u/s 40(a)(ia) for short deduction of TDS - agreement for hire of vehicles and to be used for loading and unloading and transport of the products - The party of the first part (the owner of the vehicles) was to retain the custody, 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. - Held that:- As correctly found by the tribunal, the agreement does not require the owner of the vehicle to do any work at all. It is the assessee who makes use of the vehicles and the equipment. He pays hire charges on the basis of the number of hours of use and thus clearly the appellant is not justified in contending that Section 194C applies. Section 194-I specifically contemplates liability with any person paying rent to deduct in come tax at the rate of ten per cent for the use of any machinery or plant or equipment. (As far as the assessment year in question is concerned, the rate of tax was increased to ten per cent). - Decided against the assessee. No basis for confining the effect of the words 'other agreement or arrangement for the use of' 'either separately or together' in regard to the machinery, only if it is part of immovable property. The Legislative intent is clear, in that, it intends liability to deduct tax in respect of 'any machinery or plant or equipment'. The machinery need not be the machinery annexed or immovable property otherwise under the Transfer of Property Act. - Decided against the assessee. Issues Involved:1. Applicability of Section 194-I vs. Section 194C of the Income Tax Act.2. Applicability of Section 40(a)(ia) for short deduction of tax.Issue-wise Detailed Analysis:1. Applicability of Section 194-I vs. Section 194C of the Income Tax Act:The primary issue revolves around whether the tax should be deducted under Section 194-I or Section 194C of the Income Tax Act. The appellant, a company engaged in the mechanized manufacturing and sale of granites, had deducted tax at 2.24% under Section 194C for payments made to a contractor for loading, unloading, and transportation of granites. The assessing officer, however, held that the payments were subject to Section 194-I, which necessitates a 10% deduction, leading to disallowance under Section 40(a)(ia).The appellant argued that Section 194C applies, citing various case laws:- CIT v. Hindustan Lever Ltd.: Section 194-I applies only when immovable properties are let out.- Commissioner of Income-tax v. Singapore Airlines Ltd.: Payments for landing and parking charges do not constitute 'rent' under Section 194-I.- Commissioner of Income Tax (TDS) v. Shree Mahalaxmi Transport Co.: Payments for transportation contracts are not for renting machinery and hence fall under Section 194C.- Commissioner of Income Tax (TDS) v. Swayam Shipping Services (P) Ltd.: Section 194C applies to sub-contracts for transportation.- Central Board of Direct Taxes v. Cochin Goods Transport Association: Transport contracts without loading and unloading facilities fall under Section 194C.- Birla Cement Works v. Central Board of Direct Taxes And Others: Section 194C did not apply to transport contracts before the insertion of Explanation III.The Revenue countered that the contract was for the hire of machinery, attracting Section 194-I, and distinguished the cited cases.The court found no merit in the appellant's contentions. It emphasized that Section 194-I specifically mandates tax deduction for rent paid for machinery, plant, or equipment. The agreement between the parties was for the hire of vehicles, with the owner retaining control and providing drivers, indicating a clear case for Section 194-I. The court rejected the argument that the machinery must be immovable property to attract Section 194-I, affirming the tribunal's decision.2. Applicability of Section 40(a)(ia) for Short Deduction of Tax:The second issue concerned whether Section 40(a)(ia) applies only in cases of non-deduction of tax or also for short deduction. The tribunal had remanded this matter back to the assessing officer.The appellant cited the Commissioner of Income Tax, Kolkata-XI v. M/s. S.K.Tekriwal case, where the Calcutta High Court held that Section 40(a)(ia) refers to the duty to deduct tax and pay it to the government account. It does not treat the assessee as a defaulter for shortfall in deduction due to a difference of opinion. The court noted that the assessee could be declared a defaulter under Section 201 but not disallowed under Section 40(a)(ia).The Revenue argued that the tribunal's remand was appropriate and should not be interfered with.The court concluded that the tribunal should have rendered a finding on the matter instead of remanding it. Therefore, it set aside the tribunal's direction to remand and directed the tribunal to render its findings on the applicability of Section 40(a)(ia) and dispose of the appeal accordingly.Conclusion:The court ruled against the appellant on the applicability of Section 194-I, affirming that tax should be deducted at 10% for machinery hire. However, it remanded the issue of Section 40(a)(ia) back to the tribunal for a definitive finding, thus partly allowing the appeal.