Minimum room occupancy guarantee payments by OYO not liable to TDS u/s 194C

Minimum hotel room occupancy guarantee payments by OYO not liable to TDS u/s 194C – ITAT 

In a recent judgment ITAT has held that minimum hotel room occupancy guarantee payments by OYO rooms was not liable to TDS u/s 194C as payment to contractor 

ABCAUS Case Law Citation:
ABCAUS 3870 (2024) (02) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the disallowance u/s 40(a)(ia) the Income Tax Act, 1961 (the Act) in respect of minimum guarantee expense.

The appellant assessee was a Private Limited company engaged in running a hospitality business as OYO Rooms. For the Assessment Year in question, it electronically filed its Return of Income declaring huge loss. Return was selected for scrutiny assessment through CASS and accordingly, statutory notices were issued and served upon the assessee.

During the course of scrutiny assessment proceedings, the Assessing Officer (AO) noticed that the assessee has not deducted tax at source on minimum guarantee expense. The assessee was asked to show cause why this expense should not be disallowed u/s 40(a)(ia) of the Act.

The assessee, in its submissions explained that those payments were not governed by provisions of Chapter XVII-B of the Act and therefore, no TDS has been deducted.

The contention of the assessee did not find any favour with the Assessing Officer who was of the firm belief that the assessee had violated the provisions of section 194-I of the Act and, alternatively, section 194-C of the Act by not deducting tax at source and invoking provisions of section 40(a)(ia) of the Act, he made the impugned disallowance.

The CIT(A) drawing support from the CBDT Circular No. 5/2002 dated 30.07.2002 and referring to question No. 20 therein, was convinced that the impugned payment was not rent liable for TDS u/s 194-I of the Act. However, the CIT(A) confirmed the assessment holding that provisions of section 194C squarely apply to such payments.

Before the ITAT, the assessee stated that minimum guarantee expense is not any payment towards any contract but it is in the nature of compensatory payment for shortfall in room occupancy. It was stated by the assessee that it guarantees the hotels for certain minimum occupancy of the rooms and if the occupancy is not achieved, the assessee would compensate the shortfall.

The Tribunal observed that the assessee for the purpose of carrying on its business operations enters into merchant agreement with various hotels for facilitating reservation/booking of hotel rooms through the platform of the assessee. As per the terms of the said agreement, the hotel conducts its operations in terms of providing lodging and accommodation services whereas the assessee provides technology, sales and marketing services to the hotels relating to provision of lodging and accommodation services through its platform.

Further, it was noted that the assessee being a service provider assures the minimum benchmarks which the service recipient will receive or expect to receive from service provider. In case such benchmarks is exceeded, then the service fee is payable by the service recipient to service provider and in case of shortfall, the service provider is required to meet the same.

The Tribunal also noted that as per provisions of section 194C provides that any person responsible for paying any sum to any resident for carrying out any work in pursuance of a contract between the contractor and a specified person shall deduct tax on the sum paid or credited to the account of the contractor, sine qua non for applicability of this provision is “Carrying out any Work”.

The Tribunal opined that record showed that no work has been carried out. Therefore, provisions of section 194C of the Act have no application. The assessee was merely compensating the shortfall pursuant to the agreement.

The Tribunal rejected the contention of the Revenue that in furtherance of its business objectives/model, the assessee is providing service, as neither the Assessing Officer nor the CIT(A) have invoked the relevant provisions of the Act applicable for provisions of service.

Accordingly, the ITAT held that section 194C of the Act is not applicable. The Assessing Officer was directed to delete the impugned addition.

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