Concession By CBDT On TDS Under Section 194-I Of Income Tax Act
As our hotel members are aware, TDS is deducted on charges paid on hotel rooms by companies and travel agents/tour operators whenever the total amount for the financial year starts to exceed the amount of Rs. 1.20 lakhs. Such companies, including airlines, whose employees stays in the hotel deduct TDS @ 20% while making the payment to the hotel.
FHRAI has always held the position that room charges paid in hotels by guests do not come in the category of rent and do not attract TDS under section 194-I of Income Tax Act. Although Central Board of Direct Taxes (CBDT) had given a clarification in 1995 that TDS is to be deducted only when the hotel room is hired on a regular basis, nevertheless in practice they continued to take the interpretation that it is to be deducted in all cases.
FHRAI filed a writ petition in the Delhi High Court on this matter and obtained a stay or interim order from the Court, dated 12th April, 1999. The stay is still continuing and our members are benefiting from it. We also continued to press with the CBDT for taking a more legally sound position on this matter. Based on our representations and comprehensive meetings held with them they have now liberlised their interpretation of section 194-I applicable to hotels. We were ably assisted in this exercise by Mr. Lalit Bhasin and his legal firm, Bhasin & Co., New Delhi. We are reproducing below the full orders of the CBDT as conveyed to their field officers.
Circular No.5/2002
F.No. 275/27/2001-IT/(B)
Government of India, Ministry of Finance
Department of Revenue, Central Board of Direct Taxes
New Delhi. The 30th July, 2002
To
All Chief Commissioners of Income Tax
and Director Generals of Income Tax
Sub: Tax deduction at source under 194-I of the Income -tax Act, 1961 and Circular No. 715 dated 8.8. 1995-Clarification regarding scope of section 194-I of the IT Act.
Circular No. 715 dated 8.8. 1995 has been issued by the Central Board of Direct Taxes, to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-1 of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below:
Q.No. 20 Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?
Ans: Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS u/s 194-I (emphasis supplied)
In this context, doubts have been raised as to what constitutes "hotel accommodation taken on regular basis" for the purpose.
2. The Board have considered the matter. First, it needs to be emphasized 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 arrangements 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.
3. However, often, there are instances, where corporate employees, tour operators and travel agents enter into agreement with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such arrangements, 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 word, 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.
Yours faithfully,
Sd/-
(Anand Jha)
Deputy Secretary to the Government of India.
Please note that according to this new interpretation issued by the CBDT, TDS is to be deducted only when a hotel room is taken on a regular basis which means that earmarked rooms are let out for a specified rate and specified period.
The clear interpretation in our view is that a room would be considered to have been taken on a regular basis if somebody sets up an office in it or takes it for a residence for an extended period. However, the length of such a period has still not been clearly defined. Moreover, the last line of para 2 where it says that the set of a rooms would be considered to be taken on a regular basis if the hotel has a legal obligation to provide such types of rooms during the currency of agreement is confusing. However, later in para 3 they have clarified that arrangements for rates of rooms by tour operators/travel agents and companies on yearly contracts are to be considered in the nature of rate contract and not taking the rooms on regular basis. Our legal advice is that this recent legal interpretation means that in all cases where individuals from companies, tour operators and travel agent stays in hotels for a few days at a time on a transitory basis and the total bill for the company or tour operator or travel agent may exceed Rs. 1.20 lacs during the year no TDS is to be deducted in such cases.
We, however, advise that individual hotels and hotel companies may like to go through the orders of the CBDT and may like to take their own action accordingly.
As for individuals or HUF whose monetary limits exceed the amount mentioned under clause (a) and (b) of section 44 AB you may like to see this section yourself. This applies to individuals whose turnover from business exceeds Rs. 40 lacs in the previous year or whose turnover from a profession, (e.g. lawyers, chartered accountant etc.) exceeds Rs. 10 lacs in the previous year.
Such businesses will be obliged to deduct TDS under section 194-I of Income Tax Act but the interpretation of having taken the room on a regular basis will apply to them as it applies to companies, travel agents and tour operators as explained above. As stated earlier, we are continuing to have a stay order from Delhi High Court for our members. However, considering the reliefs given by CBDT with their circular dated 30th July, 2002, it is possible that the stay may now be vacated. We shall inform you about it accordingly. Even after that you will continue to get relief under the new orders of the CBDT. If you still face any problems, please do let us know.
CAclubindia
