2009 (3) TMI 8 - HC - Income Tax

Hotel services not subject to tax deduction under Income Tax Act; Circular No. 681 quashed

The court ruled that services provided by hotels, such as accommodation and amenities, do not fall under the definition of 'carrying out any work' as per ... Carrying out any work - section 194C - deduction of tax at source - Explanation III to section 194C - CBDT circular No.681Carrying out any work - section 194C - Explanation III to section 194C - CBDT circular No.681 - deduction of tax at source - Whether the services rendered by the petitioners' hotel to their customers constitute 'carrying out any work' within the meaning of section 194C of the Income Tax Act and whether CBDT circular No.681 dated 8-3-1994 is valid insofar as it applies section 194C to such payments. - HELD THAT: - The Court applied the Apex Court's reasoning in Birla Cement Works that the phrase 'carrying out any work' in section 194C is to be understood in a limited sense - referring to operations which produce a product or result - and not as an omnibus category covering all service contracts. The historical practice and earlier CBDT circulars treated pure service and professional contracts as outside section 194C; Parliament later expanded the scope by specifically inserting Explanation III to section 194C to include four categories (advertising, broadcasting/telecasting, carriage other than railways, and catering) from 1-7-1995. The hotel's provision of rooms and ancillary facilities/amenities (multilingual staff, reception, restaurants, laundry, health club, business centre, etc.) does not culminate in production of a distinct product or result of the kind covered by section 194C as limited by judicial interpretation and is not among the categories added by Explanation III. Given that limitation, the CBDT circular No.681 is contrary to the statutory scope of section 194C insofar as it requires customers to deduct tax under section 194C for payments to hotels for such services; the Court also noted inconsistency in CBDT's position (reference to circular No.715) but based the decision on statutory interpretation and precedent. [Paras 17, 18, 19, 23, 24]The services provided by the petitioners' hotel do not constitute 'carrying out any work' under section 194C; CBDT circular No.681 dated 8-3-1994 is quashed to the extent it applies section 194C to payments by customers for the hotels' facilities and amenities.Final Conclusion: Writ petition allowed; circular No.681 dated 8-3-1994 quashed insofar as it directed deduction under section 194C from payments by customers to the petitioner hotel for availing its facilities and amenities; no order as to costs. Issues Involved:1. Validity of CBDT Circular No. 681 dated 8th March 1994.2. Applicability of Section 194C of the Income Tax Act, 1961 to services provided by hotels.Detailed Analysis:Validity of CBDT Circular No. 681 dated 8th March 1994:The primary issue in this judgment is the challenge against the validity of CBDT Circular No. 681, which stated that all service contracts, including those provided by hotels, are covered under Section 194C of the Income Tax Act, 1961. This section mandates the deduction of income tax at source for payments made to contractors for carrying out any work.Applicability of Section 194C of the Income Tax Act, 1961 to Services Provided by Hotels:1. Background and Scope of Section 194C:- Section 194C was introduced to ensure tax deduction at source for payments made to contractors and sub-contractors for work done. Initially, the term 'work' was not defined within the section.- Circular No. 86 (29th May 1972) and Circular No. 93 (26th September 1972) clarified that Section 194C applied to 'work contracts' and 'labour contracts' but excluded 'contracts for sale of goods' and professional services.2. Circular No. 681 and its Implications:- The CBDT issued Circular No. 681 on 8th March 1994, expanding the scope of Section 194C to include various types of contracts such as transport, service, advertisement, broadcasting, telecasting, labour, material, and work contracts.- This circular led to disputes and multiple writ petitions challenging its validity, particularly concerning its applicability to professional fees, transport contracts, and advertising agencies.3. Judicial Precedents:- Several High Courts, including Bombay, Calcutta, Karnataka, Gujarat, Madras, Orissa, and Delhi, ruled against the expansive interpretation of Section 194C as proposed by Circular No. 681.- The Supreme Court in Birla Cements Works v. CBDT (248 I.T.R. 216) clarified that 'carrying out any work' under Section 194C is limited to activities that culminate in a product or result. It does not include mere transportation of goods or other services that do not result in a tangible outcome.4. Explanation III to Section 194C:- To address ambiguities, Parliament inserted Explanation III to Section 194C via the Finance Act, 1995, effective from 1st July 1995. This explanation explicitly included advertising, broadcasting, telecasting, carriage of goods and passengers (excluding railways), and catering within the scope of 'work.'5. Services Provided by Hotels:- The court examined whether the services provided by hotels, such as multilingual staff, 24-hour reception, telephones, restaurants, bank counters, beauty salons, barber shops, car rentals, shopping centers, laundry, health clubs, and business centers, constitute 'carrying out any work' under Section 194C.- It was determined that these services do not culminate in a product or result and thus do not fall under the definition of 'work' as intended by Section 194C.6. Conclusion:- The court concluded that the services rendered by hotels do not involve 'carrying out any work' as per Section 194C. Therefore, the impugned Circular No. 681, to the extent it applies to hotel services, is contrary to the provisions of Section 194C.- The petition was allowed, and Circular No. 681 was quashed insofar as it mandated tax deduction at source for payments made by hotel customers for availing facilities and amenities.Final Judgment:- The rule was made absolute, quashing Circular No. 681 dated 8th March 1994, to the extent it applied Section 194C to payments made by customers to hotels for availing their services. No order as to costs was made.