2024 (2) TMI 835 - AT - Income Tax

Tribunal Rules Section 194C Inapplicable; Payments Deemed Compensatory, Not Contractual; Disallowance Overturned.

M/s Oravel Stays Pvt Ltd Versus The A.C.I.T Special Range – 7 New Delhi

The Tribunal allowed the appeal, determining that section 194C of the Income-tax Act, 1961, did not apply as the appellant's payments were compensatory ... TDS u/s 194C - Disallowance u/s 40(a)(ia) - Non deduction of TDS on minimum guarantee expense - HELD THAT:- Facts on record show 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. 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. On such business model, provisions of section 194C of the Act 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”. Facts on record show that no work has been carried out. Therefore, in our considered opinion, provisions of section 194C of the Act have no application. The assessee is merely compensating the shortfall pursuant to the agreement. Contention of the ld. DR that in furtherance of its business objectives/model, the assessee is providing service, cannot be accepted as neither the AO nor the ld. CIT(A) have invoked the relevant provisions of the Act applicable for provisions of service. On the facts of the case, we hold that section 194C of the Act is not applicable. The Assessing Officer is directed to delete the impugned addition. Assessee appeal allowed. Issues involved:The appeal pertains to the disallowance of expenses under section 40(a)(ia) of the Income-tax Act, 1961 for the assessment year 2015-16.Summary:The appellant contested the disallowance of Rs. 1,08,59,584 under section 40(a)(ia) of the Act related to minimum guarantee expenses of Rs. 3,61,98,948. The Assessing Officer observed non-deduction of tax at source on these expenses and issued notices for explanation. The appellant argued that these payments were not governed by TDS provisions. However, the Assessing Officer disallowed the amount, stating non-compliance with TDS provisions. The CIT(A) upheld the disallowance under section 194C, despite the appellant's argument that the expenses were compensatory and not contractual. The Tribunal found that the appellant's business model involved compensating shortfalls in room occupancy, not carrying out work under section 194C. Therefore, the disallowance was deemed incorrect, and the Assessing Officer was directed to delete the addition.Judgment:The Tribunal allowed the appeal, concluding that the provisions of section 194C were not applicable in this case, as the appellant was compensating for shortfalls in room occupancy, not carrying out work under a contract. The disallowance under section 40(a)(ia) was deemed incorrect, and the Assessing Officer was directed to delete the addition.