TDS on hotel minimum guarantee payments denied where no contract work was carried out, ending section 40(a)(ia) disallowance.

Minimum guarantee expense paid under a hotel arrangement was examined for TDS under section 194C of the Income-tax Act. The payment was found to be a compensatory amount linked to shortfall in agreed occupancy benchmarks, not consideration for carrying out any work by the hotels for the assessee. Because the essential requirement of a contract for work was absent, section 194C did not apply and no tax was deductible at source. As a result, the related disallowance under section 40(a)(ia) was deleted in favour of the assessee.

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Issues: Whether the minimum guarantee expense paid under the hotel arrangement was liable for deduction of tax at source under section 194C of the Income-tax Act, 1961, and consequently disallowable under section 40(a)(ia) of the Income-tax Act, 1961.

Analysis: The arrangement was examined as a business model in which the assessee facilitated hotel room bookings and compensated the hotels for any shortfall in the agreed minimum occupancy benchmarks. Section 194C applies only where a payment is made for carrying out any work under a contract. On the facts found, the payment was not for execution of any work by the hotels for the assessee but was only a compensatory amount arising from the agreement. Since the essential condition of carrying out any work was absent, the TDS obligation under section 194C did not arise.

Conclusion: Section 194C was held to be inapplicable and the disallowance made under section 40(a)(ia) was directed to be deleted, in favour of the assessee.

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