The Tax Deduction at Source (TDS) on payment for hotel accommodation has always been a controversial issue. The assessee comes across a situation where he pays for the hotel accommodation taken for the guests of the entity in usual course of business. The applicability of TDS on the said expenditure has always been a point of debate. Before we move on to the TDS applicability, let us visualize most common situations relating to arrangement with hotels for accommodation:
• Specific room hired in a hotel with fixed tariff
• Room hired in a hotel as and when required at pre-decided rates.
In situation 1, the specific room is hired irrespective of occupancy. Thus the room is earmarked and different guests check in and check out throughout the period.
In situation 2, room tariff is pre decided with hotel and the room is made available as and when required subject to availability. The contracts entered into for the said arrangement is a ‘rate contract agreement’.
The Central Board of Direct Taxes (CBDT) issued a Circular No. 715 on 8th August 1995 addressing TDS queries under various categories. The said circular also contained the reply to question no. 20 relating to applicability of TDS on payments made for hotel accommodation.
The relevant extract of the circular is:
Question 20: Whether payments made to the 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 nature of rent subject to TDS under section 194-I The said circular introduced a term ‘accommodation taken on regular basis’ which lead to confusion. In light of the said circular assessees started deducting tax at source on expenditure relating to hotel accommodation under section 194-I.
On 28th June 2002, High Court of Andhra Pradesh ruled in favour of Revenue on the issue relating to applicability of TDS on hotel accommodation. The crux of the judgement was that:
Word ‘rent’ has been defined in a wider sense to include not only consideration paid under a lease or sub-lease or tenancy but also the consideration paid under any other agreement or arrangement for the use of the land or building etc. and therefore consideration paid by the customers to the hotel on account of room charges has to be regarded as ‘rent’ within the meaning of that term for the purpose of TDS under section 194-I.
Thus the issue got somewhat clear as to applicability of TDS on hotel accommodation as the decision by Hon. High Court of Andhra Pradesh was in line with the Circular No. 715 dt. 8th August 1995.
The position post this judgement was that TDS will be applicable to both the situations considered above viz. Situation 1 and Situation 2.
Right after the judgement by Hon. High Court of Andhra Pradesh, CBDT came up with a Circular No.5 on 30th July 2002. The said circular was issued to clarify the confusion raised by Circular No.715 of 8th August 1995.
According to Circular No.5 of 30th July 2002:
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.
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.
Thus as clarified in the said circular, TDS on rent will be applicable to hotel accommodation taken on regular basis as mentioned in situation 1 above and not to the occasional or casual booking as covered under situation 2 as it is an arrangement under rate contract agreement.
Compiled by: CA Sagar S.Tilak
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