TDS on Hotels – Activities of Hotels are not Works Contract

[C.A. DEV KUMAR KOTHARI]

ACTIVITIES OF HOTEL ARE GENERALLY NOT WORKS CONTRACT BUT THEY INVOLVE SELLING OF GOODS AND RENDERING SERVICES ASSOCIATED WITH FACILITIES PROVIDED AND NOT SIMPLYING DOING A WORK UNDER WORKS CONTRACT.

Relevant links:

Section 194C of the Income Tax Act, 1961

The East India Hotels Ltd. & Jaswant Singh Bhatia Versus CBDT and UOI In appeal No. - 2104 OF 1994 [2009 -TMI - 32651 - BOMBAY HIGH COURT]

Various circulars under section 194C

Various judgments referred by Bombay High Court.

Activities in any hotel- general visualization:

As businessman or as a customer of hotel we can visualize a hotel as a building or group of buildings having facilities which constitute hospitality besides simple boarding and lodging. A person setting up a five star hotel will setup hotel with more facilities in comparison to a three star hotel. While setting up a hotel some spaces are provided to other agencies also to cater to the needs of the customers of hotel. Hotel functions round the clock, therefore some staff are also provided residential facilities in hotel complex or in nearby area to ensure easy and timely service. A bank, a shopping centre, a foreign exchange dealer a travel agent within the premise of hotel are extended facilities to customers/ guests. In some categories of hotels certain facilities are essential.

We can say that in case of a hotel a composite nature of activities are carried and the end result includes providing space and facilities, selling space for advertisement or other use, selling foods and eatables, providing services to guests and customers with selling of goods.

Contract between hotel and guest:

When a guest stay at hotel, or customer as a casual visitor visit restaurant, bar or other facility in a hotel, he enter into an implied contract which is governmed by general rules of the hotel, general trade practices, and the tariffs and other rates fixed by hotel for its customers. The general understanding is that the guest or customer can avail different facilities of hotel, subject to availability on payment of fixed charges. There can be further negotiations as to price or discount, however, in absence of any such negotiation, the customer is bound by the price lists. It can be said that the arrangement with a hotel is to avail certain facilities and not for carrying out any work. It is not a case that a customer comes to Hotel gives material and ask to process the same and produce eatables for him from his material. The customer may or may not buy anything from hotel. If he purchases some thing either as a packaged goods or under a service arrangement in his hotel room by way of room service or in a restaurant or bar then he enter into arrangement to buy such stuffs and avail some services like room service or servicing in restaurant or bar. In any such cases it cannot be said that there exists any works contract'.

Hotel is a manufacturing, trading and service centre:

We can also say that any hotel is a centre of various activities involving manufacture or process of goods, selling of goods with services, and providing facilities which depend on nature of hotel.

The quality of service

Quality of service provided to the guests depends on the category of hotel, and charges levied. For example, the services for a five star hotel would be much better than the services in one star hotel. The extent of facilities, sizes of accommodations, open space available, extent and quality of furnishing would also depend on the category of hotel and charges levied.

Direct services in hotel business

In case of hotel business, we find that the following services are directly related to providing furnished accommodation with facilities to the guests.

i) Air-conditioning.

ii) Heating of water and providing hot water in bathrooms

iii) Kitchen, dining space and bar in relation to fooding etc.

iv) laundry.

v) Telephone including inter-com,

vi) TV, musical instruments and computers in rooms.

vii) Gymnasium, yoga rooms.

viii) Beauty parlor and saloons.

The above services are directly useful for the guests while they stay in the hotel for business or leisure purposes. These are specifically related with comfortable living.

Indirect services

To facilitate and provide convenience to the guests, other services which hotels may render or make arrangement for are as follows:-

Banking facility - bank branch, ATM or counters.

Air and rail travel agents facilities,

Quality goods shops,

Foreign exchange facilities.

Taxi cab, motor cab service.

Sight seeing services.

These services are very much required by the guests and in any case they are part and parcel of hotel activity of international and national standards. They constitute part of hospitality and facilitation of guests.

Thus we find that a hotel provide facilities and services to its customers who can be a guest or a casual visitor or a person taking some space from hotel.

No work contract:

When a guest enter into a hotel and sign room booking register he enter into a contract for temporarily staying at hotel for the estimated number of days of stay indicated by him while booking room. He can make variation in the same by negotiation. He can avail various services associated with the agreement to say in the room. It is up to him whether he avail all available services of not. For example, there is facility of AC, hot water, swimming pool, gymnasium, room service etc. He may avail all such services or may not avail one or more of such services although there is no extra charge for the same and there is no reduction for nonuse of any such service. Therefore, it cannot be said that the hotel has entered into any works contract with the customer.

Suppose a company has arrangement with a hotel to provide room accommodation as well as other facilities to its officers as and when required, subject to availability and prior booking. The hotel provide room space and facilities, there is no works contract involved in providing room and facilities. Hotel provide meal, there is supply of goods and not a works contract. The officer may not eat food at hotel or its restaurant, he is free to eat meals elsewhere. Therefore, there is no a case of a works contract when a company simply make some prior arrangement for room booking for its officers. There is also not a case of lease or renting of premises because the hotel does not give over possession of space to its guests or customers. The possession and control remain with the hotel.

No works contract- recent judgment:

In the case of The East India Hotels Ltd. & Jaswant Singh Bhatia Versus CBDT and UOI In appeal No. - 2104 OF 1994 [2009 -TMI - 32651 - BOMBAY HIGH COURT] considered the matter relating to existence of any 'works contract' attracting provisions of Section 194C of the Income-tax act, 1961. The challenge before the court was of validity of a circular of the CBDT in which it was stated that there is works contract with hotel and payments to hotel is subject to requirement of TDS under section 194C on that basis. The court held that the CBDT circular No.681 dated 8/3/94 is not valid in this respect. The circular provides that all service contracts are covered under section 194C including services provided by hotels. The petitioner who run hotels questioned the validity of circular by way of writ petition as to whether the services rendered by the petitioner to its customers is covered under section 194C - as facilities/amenities made available by petitioner do not constitute 'work' within the meaning of section 194C. The court examined the nature of activities, and facilities provided by hotel and the nature of arrangement between hotel and its customers, and held that such arrangements cannot be called 'works contract' even if a wider interpretation is placed. Consequently, the circular No.681 to the extent it holds that the services made available by a hotel are covered under section 194C were held to be bad in law

Without going into intricacies of different nature for works contract, the relevant protion of judgment in relation to hotel is analyzed below:

Services made available are not of works nature:

The services rendered by a hotel to its customers by making available certain facilities /amenities like providing multilingual staff, 24 hour service for reception, telephones, select restaurants, bank counter, beauty saloon, barber shop, car rental, shopping centre, laundry /valet, health club, business centre services, etc. do not involve carrying out any work which results into production of the desired object and, therefore, would be outside the purview of section 194C of the Act.

About supply of labor:

The fact that the contracts for supply of labour to carry out any work has been specifically brought within the purview of section 194C and the fact that four categories of service contracts have been specifically brought within the purview of section 194C by inserting Explanation III to section 194C, it cannot be inferred that the services rendered by a hotel to its customers are also covered under section 194C of the Act. In other words, as the services rendered by a hotel to its customers by providing certain facilities / amenities do not constitute 'work' within the meaning of section 194C, the impugned circular No.681 issued by the CBDT to the extent it applies to a customer availing the services rendered by the hotel must be held to be contrary to section 194C of the Act.

Wider nature of scope but it is subject to context

It is true that the word 'work' in section 194C is not restricted to 'works contract' only as held by the Apex Court in the case of Associated Cement Co. Ltd. [2008 -TMI - 5403 - SUPREME Court]. However, as held by the Apex Court in the case of Birla Cement Works [2008 -TMI - 5985 - SUPREME Court] the word 'work' in section 194C has to be understood in a limited sense and would extend only to the service contracts specifically included in the said section by way of Explanation III. Therefore, the argument of the revenue that the service contracts between the petitioner No.1 hotel and its customers is covered under section 194C of the Act cannot be accepted because, neither such a contract constitutes 'work' within the meaning of section 194C of the Act nor those contracts are covered under service contracts specifically included by way of Explanation III to section 194C of the Act.

If the contention of the revenue that the word 'any work' in section 194C is very wide enough to include all types of work is accepted, then it would mean that even the hair cutting work done by a barber would be a 'work' covered under section 194C and the person making payment to the barber would be covered under section 194C. Such a wider interpretation is uncalled for, especially when the revenue itself had considered since inception that section 194C is restricted to the works done by contractors /sub-contractors. Apart from the above, the CBDT by its circular No.715 dated 8/8/1995 has clarified that the payments made by persons other than individuals and HUF's for hotel accommodation taken on regular basis will be in the nature of 'rent' subject to TDS under section 194I of the Act. Thus, there is inconsistency in the stand of the CBDT as to whether the services rendered by a hotel to its customers is covered under section 194C or under section 194I of the Act.

The facilities / amenities made available by the petitioner No.1 hotel to its customers do not constitute 'work' within the meaning of section 194C of the Act. Consequently, the circular No.681 dated 8/3/1994 to the extent it holds that the services made available by a hotel to its customers are covered under section 194C of the Act must be held to be bad in law.