NO TAX WAS REQUIRED TO BE DEDUCTED BY A PERSON MAKING PAYMENT TO THE HOTEL FOR AVAILING OF THE FACILITIES/AMENITIES PROVIDED BY THE HOTEL

[Mr. M. GOVINDARAJAN]

Section 194C of the Income Tax Act deals with the liability of a person to deduct income tax while making payments to the contractors and sub contractors for the work done was inserted into the Act with effect from April 1, 1972. The said section provides that any person responsible for paying any sum to any resident (referred to as contractor) for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract between the contractor and-

a)      the Central Government or any State Government; or

b)      any local authority; or

c)      any corporation established by or under a Central, State or Provincial Act; or

d)      any company; or

e)      any co-operative society;….

shall at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to two per cent of such sum as income tax on income comprised therein.

The term 'work' has not been defined. The Board issued circular No. 86, dated 29.05.1972 in which it has been stated that Section 194C would apply only in relation to 'work contracts' and 'labor contracts' and that Section 194C would not apply to contracts for sale of goods. The Circular further states 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.

The Circular No. 93 dated 26.09.1972 clarifies that service contracts which do not involve the carrying out of any work would be outside the scope of Section 194C of the Act.

The Department issued circular No. 681, dated 08.03.1994 in which it has been stated that Section 194C would apply to all types of contracts including transport contracts, service contracts, advertisement contracts, broadcasting contracts, telecasting contracts, labor contracts, material contracts and work contracts. The said circular has been challenged. The Bombay High Court in 'Chamber of Income Tax Consultants V. CBDT' - 2008 -TMI - 20030 - BOMBAY High Court  held that Circular No. 681 is illegal to the extent it holds that tax is to be deducted from the amounts payable to lawyers, Chartered Accountants etc., towards their professional fees.

In 'Bombay Goods Transport Association V. CBDT' - 2008 -TMI - 19796 - BOMBAY High Court  the Bombay High Court held that Circular No. 681 is illegal in so far as it applies to the transport contracts. In 'Advertising Agency Association of India V. CBDT' - 2008 -TMI - 19797 - BOMBAY High Court  it was held that Circular No. 681 is illegal in so far as it applies to advertising agencies.

In the light of the above said decisions, Parliament deemed it fit to insert Explanation III to section 194C by the Finance Act, 1995 with effect from 01.07.1995 which provides that the expression 'work' shall also include-

a)      advertising;

b)      broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

c)      carriage of goods and passengers by any mode of transport other than by railways;

d)      catering.

By virtue of the above the Department required that every customer availing the facilities/amenities provided by the hotel is required to deduct income tax at the rate specified in section 194C of the Act. In 'East India Hotels Ltd., and another V. CBDT and another' - 2009 -TMI - 32651 - BOMBAY HIGH COURT  the petitioner company operates a number of five star deluxe hotels all over India. The petitioner as a chain of hoteliers offers various facilities/amenities to its guests all of which are essential for carrying on the business. The services rendered by the petitioner apart from boarding and lodging are, providing highly trained/experienced and multi-lingual staff, twenty four 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 petitioner filed the writ petition challenging the validity of circular No. 681, dated 08.03.1994. 

The Court held that 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. Admittedly the services made available by the petitioner to its customers are not covered under any of the categories specified in Explanation III to Sec. 194C.

The High Court, therefore, considered as to whether the service rendered by a hotel to its customers providing hotel room with various facilities/amenities constitutes 'carrying out any work' within the meaning of Section 194C of the Act. The petitioner contended that the above issue is no longer res integra. The Court considered the judgment of Supreme Court in 'Associated Cement Co., Ltd., V.  CIT' - 2008 -TMI - 5403 - SUPREME Court in which the Supreme Court held that the key words in section 194C are 'carrying out any work'. In the context of section 194C, carrying out any work indicates doing something to conduct the work to completion of something which produces such result. Two interpretations are reasonably possible on the question whether the contractor for carrying of goods would come or not within the ambit of the expression 'carrying out any work'. One of the two possible interpretations of a taxing statute, which favors the assessee and which has been acted upon and accepted by the Revenue for a long period should not be disturbed except for compelling reasons. The Court quashed the Circular No. 681 to the extent it relates to transport contracts. The Bombay Court from the decision of the apex Court as discussed, held that it is clear that the words 'carrying out any work' in section 194C is limited to any work which is 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.

The Court takes the Circular No. 86 as illustration. In 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 contractors/sub-contractor results in production of the desired object accomplishing the task under the contract.

The services rendered by a hotel to its customers by making available certain facilities/amenities 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. From the fact that the contracts for supply of labor to carry out the work have 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 Central Board of Direct Taxes to the extent it applies to a customer availing of the services rendered by the hotel must be held to be contrary to section 194C of the Act. 

The Court did not agree with the argument of the Revenue that the service contracts between the petitioner hotel and its customers is covered under Section 194C of the Act because neither does such a contract constitute 'work' within the meaning of section 194C of the Act nor are those contracts 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 words 'any work' in section 194C are 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 wide interpretation is uncalled for, especially when the Revenue itself had considered since inception that Section 194C is restricted to the works done by the contractors/sub contractors. Apart from the above, the CBDT by its Circular No. 715, dated 08.08.1995 clarified that the payments made by persons other than individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of 'rent' subject to TDS under Section 194-I 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 Section194 C or under section194-I of the Act.

The Court held that the facilities/amenities made available by petitioner hotel to its customers do not constitute 'work' within the meaning of section 194C of the Act. Consequently, Circular No. 681 dated 08.03.1994 to the extent it holds that the services made available by a hotel to its customers are covered under section 194C must be held to be bad in law. 

Discussions to this article

[DEV KUMAR KOTHARI]

Hotel and hospital compared: Case of hospitals is also similar - they organize various facilities. The payments are in nature of rent for space and equipment provided, facilities organized, and a major part is on account of reimbursement for fees of doctors and nurses, medicines and consumables provided etc. Since any space or equipment is not leased out or rented out S. 194 I is not applicable, Charges of hospitals cannot be regarded as professional fees so s. 194J is not applicable, various work carried by hospital cannot be called under a works contract, therefor S. 194C is also not applicable.