No TDS on payments made to a hotel by a customer - CBDT Circular quashed - Bombay High Court ( Judgement Copy Enclosed )
THERE are so many laws and complying with all of them is really a hard task. For instance did you know that you were required to deduct TDS on payments you make for lodging/boarding in a Hotel? Every time you checked into a hotel, you were violating this law! Well, there was a Board Circular to that effect! Surprised? Perhaps even the High Court was, when it observed, If the contention of the revenue is accepted, then it would mean that even the hair cutting work done by a barber would be a ’work’ and the person making payment to the barber would be covered under section 194C.”
Validity of the CBDT circular No.681 dated 8th March, 1994 is challenged in this Writ Petition. The said circular provides that all service contracts are covered under section 194C of the Income Tax Act, 1961.
As a result, every customer of the petitioner hotel, while making payment to the hotel for occupying its room and availing other facilities / amenities provided by the hotel is required to deduct income tax at the rate specified in section 194C of the Act.
The petitioner company operates a number of Five Star Deluxe Hotels all over India. The company as a chain of hoteliers offers various facilities / amenities to its guests all of which are essential for carrying on the hotel business. The services rendered by the petitioners apart from boarding and lodging are, providing highly trained / experienced multi-lingual staff, 24-hour service for reception, information and telephones, house-keeping of the highest standard, select restaurants, bank counter, beauty saloon, barber shop, car rental, shopping centre, laundry / valet, health club, business centre services etc. The question is whether these services would constitute ‘carrying out any work’ under section 194C of the Act?
Section 194C which deals with the liability of a person to deduct income tax while making payments to contractors and sub contractors for the work done, was inserted into the Act with effect from 1/4/1972. Section 194C as inserted did not define the word ‘work’. However, a circular No.86 dated 29th May, 1972 was issued by the Deputy Secretary to the Government of India, inter alia stating therein that section 194C would apply only in relation to "work contracts" and "labour contracts" and that Section 194C would not apply to contracts for sale of goods. By way of illustration, it was stated that contracts for the construction of the buildings or dams or laying of roads and air fields or railway lines or erection / installation of plant and machinery would be in the nature of contract for work and labour covered under Section 194C but, contract for sale of sea or river crafts would be a contract for sale and as such would fall outside the purview of section 194C of the Act.
It was further stated in the said circular that contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc. would not be regarded as contracts for "carrying out any work" under section 194C of the Act.
Another circular bearing No.93 dated 26th September, 1972 was issued by the Deputy Secretary to the Government of India clarifying that service contracts which do not involve the carrying out of any work would be outside the scope of section 194C of the Act.
Thus, since inception there was no dispute that all service contracts are outside the purview of section 194C of the Act. Accordingly, no tax was required to be deducted by a person making payment to the hotel for availing the facilities / amenities provided by the hotel.
However, by relying upon a decision of the Apex Court in the case of Associated Cement Co. Ltd. V/s. Commissioner of Income Tax & Anr., the CBDT issued the impugned circular No. 681 on 8/3/1994 stating therein that section 194C would apply to all types of contracts including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labour contracts, material contracts and work contracts.
Challenging the circular No.681 dated 8/3/1994 various writ petitions were filed.
The Bombay High Court had in the case of Chamber of Income-Tax Consultants & Ors. V/s. Central Board of Director Taxes & Ors. held that the circular No.681 is illegal to the extent it holds that the tax is to be deducted from the amounts payable to lawyers, chartered accountants, etc. towards their professional fees.
Similarly, in the case of Bombay Goods Transport Association & Anr. V/s. Central Board of Direct Taxes & Ors. this Court held that the circular No.681 is illegal in so far as it applies to the transport contracts.
Further, in the case of Advertising Agency Association of India & Anr. V/s. Central Board of Director Taxes & Ors. this Court held that the circular No.681 is illegal in so far as it applies to advertising agencies.
In the light of the aforesaid decisions, the Parliament deemed it fit to insert section 194J into the Act by Finance Act, 1995 with effect from 1/7/1995 so as to bring the fees for professional or technical services within the purview of deduction of tax at source.
Similarly, Parliament deemed it fit to insert Explanation III to section 194C by Finance Act, 1995 with effect from 1/7/1995 - the provisions relating to deduction of tax at source have been enlarged by bringing in some of the service contracts within the purview of section 194C. In other words, by inserting Explanation III the word ’work’ in section 194C has been expanded so as to include four types of service contracts within the purview of section 194C.
The question, to be considered in this case is, whether the services rendered by a hotel to its customers in providing hotel room with various facilities / amenities constitutes ‘carrying out any work’ within the meaning of section 194C of the Act?
The High Court noted that as rightly contended by the Advocate appearing on behalf of the petitioners, the issue is no longer res integra.
The Apex Court in the case of Birla Cements Works V/s. Central Board of Direct Taxes & Ors. has considered the scope and ambit of section 194C of the Act, validity of circular No.681.
From the decision of the Apex Court, it is clear that the word ‘carrying out any work’ in section 194C is limited to any work which on being carried out culminates into a product or result. In other words, the word ‘work’ in section 194C is limited to doing something with a view to achieving the task undertaken or carry out an operation which produces some result.
As illustrated in the circular No.86, section 194C would apply to payments for carrying out the work such as constructing buildings or dams or laying of roads and air fields or railway lines or erection or installation of plant and machinery, etc. In all these contracts, the execution of the contract by a contractor / subcontractor results into production of the desired object or accomplishing the task under the contract.
The services rendered by a hotel to its customers by making available certain facilities / amenities like providing multilingual staff, 24 hour service for reception, telephones, select restaurants, bank counter, beauty saloon, barber shop, car rental, shopping centre, laundry / valet, health club, business centre services, etc. do not involve carrying out any work which results into production of the desired object and, therefore, would be outside the purview of section 194C of the Act.
The fact that the contracts for supply of labour to carry out any work has been specifically brought within the purview of section 194C and the fact that four categories of service contracts have been specifically brought within the purview of section 194C by inserting Explanation III to section 194C, it cannot be inferred that the services rendered by a hotel to its customers are also covered under section 194C of the Act. In other words, as the services rendered by a hotel to its customers by providing certain facilities / amenities do not constitute ‘work’ within the meaning of section 194C, the impugned circular No.681 issued by the CBDT to the extent it applies to a customer availing the services rendered by the hotel must be held to be contrary to section 194C of the Act.
It is true that the word ’work’ in section 194C is not restricted to ’works contract’ only as held by the Apex Court in the case of Associated Cement Co. Ltd. However, as held by the Apex Court in the case of Birla Cement Works the word ’work’ in section 194C has to be understood in a limited sense and would extend only to the service contracts specifically included in the said section by way of Explanation III. Therefore, the argument of the revenue that the service contracts between the petitioner hotel and its customers is covered under section 194C of the Act cannot be accepted because, neither such a contract constitutes ’work’ within the meaning of section 194C of the Act nor those contracts are covered under service contracts specifically included by way of Explanation III to section 194C of the Act.
If the contention of the revenue that the word ’any work’ in section 194C is very wide enough to include all types of work is accepted, then it would mean that even the hair cutting work done by a barber would be a ’work’ covered under section 194C and the person making payment to the barber would be covered under section 194C. Such a wider interpretation is uncalled for, especially when the revenue itself had considered since inception that section 194C is restricted to the works done by contractors / sub-contractors. Apart from the above, the CBDT by its circular No.715 dated 8/8/1995 has clarified that the payments made by persons other than individuals and HUF’s for hotel accommodation taken on regular basis will be in the nature of ’rent’ subject to TDS under section 194I of the Act. Thus, there is inconsistency in the stand of the CBDT as to whether the services rendered by a hotel to its customers is covered under section 194C or under section 194I of the Act.
The High Court held that the facilities / amenities made available by the petitioner No.1 hotel to its customers do not constitute ’work’ within the meaning of section 194C of the Act. Consequently, the circular No.681 dated 8/3/1994 to the extent it holds that the services made available by a hotel to its customers are covered under section 194C of the Act must be held to be bad in law.
So the petition is allowed by quashing the circular No.681 dated 8/3/1994 to the extent it holds that section 194C of the Income Tax Act applies to payments by the customers to the petitioner No.1 hotel for availing the facilities / amenities made available by the petitioners.
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