TDS on Hotel Accommodation

There are lots of questions related to TDS deduction on Rent. Though section 194I of Income Tax Act, specifically defines the situations where tds would be applicable however, there are situations when there are utter confusion whether the payment made is in the nature of Rent.

Key conditions under which TDS is not deducted for hotel accommodation payments 

TDS is not deducted for hotel accommodation payments if:

• The payer is an individual or HUF with gross receipts, or turnover not exceeding Rs. 1 crore for business or Rs. 50 lakhs for profession in the previous financial year.
• The rent income is credited or paid in respect of any real estate asset that is owned directly by the trust under Section 10 (23FCA).

There are some questions which need careful study before taking a call whether TDS should be applied or not.

1. Whether TDS need to be deducted on payment of Room Rent to Hotel/ Guest House etc.? If yes, whether such Payment of Room Rent will be liable for TDS deduction u/s 194C or 194I?
2. Whether TDS would be applicable on payment to hotel by company for taking banquet/ conference hall/ party hall etc. If yes, under which section?
3. Whether TDS is deductible on payment of room rent of hotel booked through and paid to travel agent? If yes, under which section- 194C or 194I?
4. And so on…

Let’s have a look on the definition of Rent for the purpose of Section 194I.  Explanation to section 194I defines the term specifically for the purpose of it.

"Rent" means any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any, -

(a)  land; or
(b)  building (including factory building); or
(c)  land appurtenant to a building (including factory building); or
(d)  machinery; or
(e)  plant; or
(f)  equipment; or
(g)  furniture; or
(h)  fittings,

whether or not any or all of the above are owned by the payee;

There are some pronouncement of department which can help us to understand Nature of Rent for the purpose of Section 194I and to correctly decide whether or not TDS would apply in such situations.

Circular No. 715 / 1995

Question : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?

Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.

Above circular specifies that TDS on payment of Hotel rooms shall be applicable wherein such rooms are taken on regular basis.

Now some other question erupts about what does taken on regular basis means?

1. What if there is dedicated room(s) is/are taken on specified amount from hotel/ guest house etc. for specified period? Whether this will attract TDS u/s 194I?
2. What if there is contract between travel agent/ company with any Hotel / Guest house for taking rooms on rent which are not lien marked?
3. What if the hotel payment is done by employee or another person and the cost is then reimbursed by company?
4. And so on...

To clarify more, department has issued another circular after seven years for only above question. Relevant text of same is reproduced below.

Circular No. 5/2002

Point 2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB.

Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.

Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. “‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . .” [Emphasis supplied].

The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.

Point 3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers.

Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period.

Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual.

In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.

After going through above discussions, now it is clear that TDS will only be applicable on payment of Room Rent to Hotels where the rooms are taken on Regular Basis, however, where the arrangement is only for Rate-contract, this will not be construed as Rooms taken on a regular basis and therefore TDS shall not be applicable in such situation.

Hope we have greater clarify on payments of Room Rent to Hotels etc.  The author can be reached at ashishb.ca@gmail.com. Reader’s comments and query are welcomed!!