Hi Balu, Jaysukh, Madhu and Rajendra,
Theoretically, you guys are correct. But I am looking at thesubstance of the transaction rather than its form. I understand mostof these car finance companies enter into some sort of an agreementthat on paper at least looks like what may be called a hire-purchaseagreement. But if you look beyond the fine print of the agreement,you'd find these are simple finance transactions with a lender and aborrower. Assessees often try to sidestep their TDS responsibilitiesby advancing the argument that such transactions are Hire-purchasein nature. Since the ownership hasn't passed on to them, whatthey're paying is not interest but hire charges.But in almost all such cases, the same assessees also don't want toforego the depreciation on these assets. They incorporate the costof the car in the books and start claiming depreciation on it rightfrom year one. Now you have to be the owner of the asset in order toclaim depreciation on it. If you've put forward a claim ofdepreciation, you can't in the same breath contend that you'remerely a hire-purchaser, when it comes to making the TDS.So I think if an assessee purported to be a hire-purchaser, isn'tclaiming depreciation on the car, then it might be okay not todeduct TDS on the hire charges paid to Maruti Countrywide, et al.Balu, the CBDT circular of 1981 you've quoted from must have had itsrelevance in its heyday, but not any more. There's a huge emphasison Substance over Form in interpreting business transactions thesedays. And yes we have to refer to AS 19 as well to resolve thisissue, in view of the fact that AS 19 includes hire-purchaseagreements within the meaning of leases. There're two kinds ofleases: A Finance lease and an Operating lease. Hire-purchasecontracts are treated as finance leases. The soul of a finance leaseis the passing of all risks and rewards of ownership of the asset tothe lessee. Since this practically makes the lessee the owner of theasset, AS 19 requires us to recognize the leased asset in the booksof the lessee. Not doing so wouldn't reflect a true and fair view ofthe state of affairs. An asset actively deployed in the services ofthe business ought to be reflected in the books at some value.The Supreme court in the case of Asea Brown Boveri Ltd. v.Industrial Finance Corpn. of India [2005] 56 SCL 21 hascategorically said that a finance lease is merely a loan indisguise. A finance lease is a transaction current in the commercialworld, its primary purpose being the financing of the asset by thepurchaser, the court said.Another thing to be noted is lessor in finance lease cases istypically a financial institution, like we have the MarutiContrywide in the instant case. By its very nature, a financialinstitution is in the business of dispensing money. It merelystepped in as an intermediary between the assessee and the cardealer. Maruti Countrywide and other such finance companies havebeen formed for engaging in the business of financing and not thebusiness of giving assets on hire. Section 194-I, in my opinion,gets attracted where the person we hire the equipment from is in thebusiness of giving those equipments on hire. A car finance companyisn't in the business of giving cars on hire. The car has alreadybeen bought and sold for. The dealer is out of the picture. MarutiCountrywide made the payment on our behalf on the promise that weshall repay it over a period of time. We can't say we hired the carfrom Maruti Countrywide.So methinks, TDS u/s 194A would be applicable on the interest(doesn't matter what you call that amount—Substance over Form!)comprised in the EMIs paid to the car finance company.And Mr Soodan, yes that's a practical problem—how to "deduct" TDSwhen you've already parted with the pre-filled PDCs? I guess wemight have to somehow recover the tax amount from them separatelyagainst the issue of Form 16-A. The TDS issues need to be clearlysorted out before we go in for financing through these privatecompanies.Thanks,CA Sanjeev Bedi--- In
ICAI_CIRC_MEERUT_CA@yahoogroups.com, "balunand"
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