ITAT: OYO Exempt from TDS on Minimum Guarantee Payments to Hotels

ITAT: OYO Exempt from TDS on Minimum Guarantee Payments to Hotels

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that assessee, is not subject to TDS under Section 194C of the Income Tax Act for the minimum guarantee payments disbursed to hotels.

The panel, consisting of Kul Bharat (Judicial Member) and N.K. Billaiya (Accountant Member), noted that the assessee engages in merchant agreements with multiple hotels to facilitate the reservation and booking of hotel rooms through its platform as part of its business operations. Under these agreements, hotels are responsible for offering lodging and accommodation services, while the assessee provides technology, sales, and marketing services to support the hotels in delivering these services through its platform.

The appellant/assessee submitted its Return of Income electronically, declaring a loss of Rs. 29,82,76,660. The return underwent scrutiny and assessment via CASS, following which statutory notices were issued and served upon the assessee.

During the scrutiny and assessment proceedings, the assessing officer observed that the assessee had failed to deduct tax at source on the minimum guarantee expense of Rs. 3,61,98,948. The assessee was requested to explain why the expense should not be disallowed under Section 40(a)(ia).

The assessee clarified that these payments are not subject to the provisions of Chapter XVII-B of the Act, and thus, no TDS had been deducted.

The Assessing Officer did not agree with the assessee's argument, maintaining that the assessee had contravened the provisions of Section 194-I and, alternatively, Section 194-C by failing to deduct tax at source. Consequently, he invoked the provisions of Section 40(a)(ia) of the Act and made a disallowance of Rs. 1,08,59,584.

When the issue was raised before the CIT(A), the assessee vehemently argued that the payments made towards the minimum guarantee expense should not be categorized as rent payments subject to TDS.

After reviewing the facts and arguments and referring to CBDT Circular No. 5/2002 dated July 30, 2002, the CIT(A) was persuaded that the payment in question did not fall under the category of rent subject to TDS. The CIT(A) upheld the assessment, stating that the provisions of Section 194C were applicable.

The ITAT observed that, as a service provider, the assessee guarantees minimum benchmarks to the service recipient. If these benchmarks are surpassed, the service recipient pays a service fee to the provider. Conversely, if there's a shortfall, the service provider must make up the difference.

The court held that, based on the business model in question, the provisions of Section 194C of the Income Tax Act, which pertain to the deduction of tax for work carried out, are not applicable. The court observed that, in this case, no actual work had been carried out, and the assessee was merely compensating for a shortfall as per the agreement. The contention that the assessee is providing a service in furtherance of its business objectives is not acceptable, as the relevant provisions of the Act applicable to the provision of services were not invoked by the Assessing Officer or the CIT(A). Therefore, the court directed the assessing officer to delete the impugned addition, and the appeal of the assessee was allowed.