Guarantee fee to hotels not rent under s.194I; no TDS u/s 194C, 194I, s.40(a)(ia) disallowance deleted

ITAT Delhi allowed the assessee's appeal, holding that minimum guarantee charges/guarantee fee paid to hotel/guest house owners were not "rent" under s.194I. Relying on SC precedent, the Tribunal found no lessor-lessee relationship and no exclusive right of use of rooms in favour of the assessee; rooms remained available to the general public via the assessee's e-platform. The guarantee fee was characterized as compensation for failure to meet agreed booking/price thresholds (unsold rooms and losses on sold rooms), not consideration for use of premises. Consequently, the assessee was not liable to deduct TDS under s.194C or s.194I, and disallowance under s.40(a)(ia) was deleted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether "minimum guarantee expenses"/"guarantee fee" paid to hotels/guest houses under the assessee's minimum guarantee revenue model constitute "rent" attracting tax deduction at source under section 194I.

1.2 Whether, for the same "minimum guarantee expenses"/"guarantee fee", the assessee was liable to deduct tax at source under section 194C or section 194I, so as to justify disallowance under section 40(a)(ia).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Characterisation of minimum guarantee expenses as "rent" under section 194I and liability under section 201(1)/201(1A)

(a) Legal framework discussed

2.1 The Court examined section 194I, in particular the definition of "rent" as "any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together)" of land, building, plant, machinery, equipment, furniture or fittings, etc.

2.2 The Court relied on CBDT Circular No. 5/2002 dated 30.07.2002 (clarifying Question No. 20 of Circular No. 715) regarding TDS under section 194I on "hotel accommodation taken on regular basis" and the distinction between such cases and mere "rate contract agreements".

2.3 The Court applied the ratio of the Supreme Court in Japan Airlines Co. Ltd., holding that for section 194I the real character of the payment must be seen and that "use of land"/premises in the sense of a right to use is required; absence of exclusive right to use and absence of a lessor-lessee relationship are material.

(b) Interpretation and reasoning

2.4 The Court analysed the assessee's business model: the assessee operates an online platform (OYO) to facilitate booking of hotel/guest house rooms. Hotels continue to provide the lodging services; the assessee provides technology, sales and marketing support. The agreements are based on a "Minimum Guarantee Revenue Model", under which:

* the assessee guarantees a minimum revenue benchmark for the hotel from bookings through its platform;

* if actual revenue exceeds the benchmark, the hotel pays service fee to the assessee;

* if there is a shortfall (unsold rooms or rooms sold below agreed tariff), the assessee compensates the hotel by paying the guarantee fee.

2.5 The Court noted that earmarked rooms are to be made available for booking only through the assessee's platform; however, if the hotel independently books any such room, no minimum guarantee fee is payable for that room and such room counts towards the minimum booking obligation. This showed that the rooms remain under the hotel's control and are not "taken" by the assessee for its own use.

2.6 The Court accepted the assessee's submission that it does not obtain access or right to occupy any room for itself, even where the minimum booking is not met, and that invoices are issued in the name of the end customer. The assessee merely enables customers to book through its e-platform; it does not hold any rooms exclusively for its own use.

2.7 On the nature of the "guarantee fee", the Court held that the payments are made:

* for failure to achieve the minimum number of bookings (unsold rooms); and

* for selling rooms through the platform at a price lower than the agreed tariff (loss from sold rooms);

and that such payments are in the nature of compensation for not meeting contractual revenue/booking benchmarks and not consideration "for the use of" any room by the assessee.

2.8 Applying the statutory phrase "for the use of (either separately or together)" in section 194I, the Court held that TDS under section 194I arises only when payment is made for the payer's right to use the building/rooms etc. As the assessee had no exclusive/absolute right to use the rooms and the rooms were available to the public at large through the platform, the necessary element of "use" by the assessee was absent.

2.9 The Court rejected the CIT(A)'s findings (particularly paras 4.2.13 to 4.2.15 of the impugned order) that the assessee could "sell" rooms and had a right to use them, observing that:

* the term "sell" in the sense used by the CIT(A) does not appear in the agreement;

* the cited clause related only to calculation of minimum guarantee fee for a specified number of rooms (e.g., 18 rooms at a fixed rate whether occupied or not);

* on a bare reading of the agreement, no lessor-lessee relationship or grant of exclusive possession/use to the assessee is created.

2.10 Referring to CBDT Circular No. 5/2002, the Court held that the assessee's arrangement is akin to a "rate contract" for providing specified types of rooms at pre-determined rates during an agreed period, without any obligation on the hotel to provide specified rooms exclusively to the assessee. Thus it is not "hotel accommodation taken on regular basis" within the meaning of the Circular, but a rate-contract-type arrangement to which section 194I does not apply.

2.11 The Court also noted that in the assessee's own case for an earlier year, the CIT(A) had held that section 194I was not applicable to similar minimum guarantee charges, and the Revenue had accepted that decision. While the Court decided the issue independently on merits, this supported the assessee's stand.

(c) Conclusions

2.12 The Court held that the "guarantee fee"/"minimum guarantee expenses" paid to hotels/guest houses under the assessee's minimum guarantee revenue model is not "rent" within the meaning of section 194I because:

* it is not paid for the assessee's use of any rooms/premises; and

* the arrangement does not confer exclusive or regular accommodation rights on the assessee but operates as compensation for revenue shortfall under a rate-contract-type agreement.

2.13 Consequently, section 194I is not attracted on these payments and the assessee is not liable to deduct tax at source thereon.

2.14 As a result, the payments aggregating to Rs. 31,25,07,038 treated as "rent" by the Assessing Officer (TDS) were wrongly brought within section 194I. The demand under section 201(1) and interest under section 201(1A) were deleted and the assessee's grounds on this issue were allowed.

2.15 In view of this conclusion, the question whether TDS demand could be raised in the assessee's existing TAN after demerger was held to be academic and was not adjudicated.

Issue 2 - Applicability of section 194C/194I to guarantee fee and consequential disallowance under section 40(a)(ia)

(a) Legal framework discussed

2.16 The Court considered whether the assessee was liable to deduct tax at source on the guarantee fee under section 194C or section 194I.

2.17 Reference was made to a coordinate bench decision in the assessee's own case for AY 2015-16 (ITA No. 6370/Del/2019), wherein it was held that section 194C was not attracted to similar payments. The Revenue had accepted that view for subsequent years (AYs 2018-19 and 2019-20).

2.18 The definition of "rent" in section 194I and the analysis undertaken under Issue 1 were relied upon in determining the non-applicability of section 194I for the year under consideration.

(b) Interpretation and reasoning

2.19 The nature and terms of the guarantee fee arrangement for AY 2016-17 were found to be the same as those examined for AY 2020-21. The Court adopted its reasoning under Issue 1 and held that the payments were not "rent" under section 194I.

2.20 Following the earlier coordinate bench decision in the assessee's own case for AY 2015-16, and noting that the Revenue had accepted that decision for subsequent years, the Court held that section 194C was also not applicable to such guarantee fee payments.

2.21 Since the assessee was not required to deduct tax at source under either section 194C or section 194I, the foundational requirement for disallowance under section 40(a)(ia) was not satisfied.

(c) Conclusions

2.22 The Court concluded that the assessee was not liable to deduct tax at source on the guarantee fee under section 194C or section 194I.

2.23 Accordingly, the disallowance of Rs. 42,58,93,218 made under section 40(a)(ia) and sustained by the appellate authority was held to be unjustified and was deleted. The assessee's grounds on this issue were allowed.

2.24 Grounds relating to disallowance of employees' PF/ESI contributions were not pressed and were dismissed without adjudication on merits.

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