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2009 (3) TMI 8 - HC - Income TaxValidity of the CBDT circular No.681 dated 8/3/94 - said circular provides that all service contracts are covered u/s 194C petitioner, a hotel - whether the services rendered by the petitioner to its customers is covered u/s 194C as facilities/amenities made available by petitioner do not constitute work within the meaning of section 194C, consequently, the circular No.681 to the extent it holds that the services made available by a hotel are covered u/s 194C must be held to be bad in law
Issues Involved:
1. Validity of CBDT Circular No. 681 dated 8th March 1994. 2. Applicability of Section 194C of the Income Tax Act, 1961 to services provided by hotels. Detailed Analysis: Validity of CBDT Circular No. 681 dated 8th March 1994: The primary issue in this judgment is the challenge against the validity of CBDT Circular No. 681, which stated that all service contracts, including those provided by hotels, are covered under Section 194C of the Income Tax Act, 1961. This section mandates the deduction of income tax at source for payments made to contractors for carrying out any work. Applicability of Section 194C of the Income Tax Act, 1961 to Services Provided by Hotels: 1. Background and Scope of Section 194C: - Section 194C was introduced to ensure tax deduction at source for payments made to contractors and sub-contractors for work done. Initially, the term "work" was not defined within the section. - Circular No. 86 (29th May 1972) and Circular No. 93 (26th September 1972) clarified that Section 194C applied to "work contracts" and "labour contracts" but excluded "contracts for sale of goods" and professional services. 2. Circular No. 681 and its Implications: - The CBDT issued Circular No. 681 on 8th March 1994, expanding the scope of Section 194C to include various types of contracts such as transport, service, advertisement, broadcasting, telecasting, labour, material, and work contracts. - This circular led to disputes and multiple writ petitions challenging its validity, particularly concerning its applicability to professional fees, transport contracts, and advertising agencies. 3. Judicial Precedents: - Several High Courts, including Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa, and Delhi, ruled against the expansive interpretation of Section 194C as proposed by Circular No. 681. - The Supreme Court in Birla Cements Works v. CBDT (248 I.T.R. 216) clarified that "carrying out any work" under Section 194C is limited to activities that culminate in a product or result. It does not include mere transportation of goods or other services that do not result in a tangible outcome. 4. Explanation III to Section 194C: - To address ambiguities, Parliament inserted Explanation III to Section 194C via the Finance Act, 1995, effective from 1st July 1995. This explanation explicitly included advertising, broadcasting, telecasting, carriage of goods and passengers (excluding railways), and catering within the scope of "work." 5. Services Provided by Hotels: - The court examined whether the services provided by hotels, such as multilingual staff, 24-hour reception, telephones, restaurants, bank counters, beauty salons, barber shops, car rentals, shopping centers, laundry, health clubs, and business centers, constitute "carrying out any work" under Section 194C. - It was determined that these services do not culminate in a product or result and thus do not fall under the definition of "work" as intended by Section 194C. 6. Conclusion: - The court concluded that the services rendered by hotels do not involve "carrying out any work" as per Section 194C. Therefore, the impugned Circular No. 681, to the extent it applies to hotel services, is contrary to the provisions of Section 194C. - The petition was allowed, and Circular No. 681 was quashed insofar as it mandated tax deduction at source for payments made by hotel customers for availing facilities and amenities. Final Judgment: - The rule was made absolute, quashing Circular No. 681 dated 8th March 1994, to the extent it applied Section 194C to payments made by customers to hotels for availing their services. No order as to costs was made.
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