Introduction
The recent ruling by the Delhi Bench of the Income Tax Appellate Tribunal (‘ITAT’) in the case of M/s Oravel Stays Pvt. Ltd. v. The A.C.I.T[i], sheds light on the intricacies surrounding tax deduction at source (‘TDS’) obligations on payments in the nature of minimum guarantee expenses. This dispute involving the operating company of OYO Rooms as the assessee, centred on the interpretation of relevant provisions of the Income-tax Act, 1961 (‘Act’). The decision provides clarity on the applicability of TDS in such scenarios, impacting businesses operating in the hospitality sector and beyond.
Facts
The assessee filed its return of income on 29.09.2015, declaring a loss of Rs. 29,82,76,660/-, which was selected for scrutiny assessment through computer-assisted scrutiny selection (‘CASS’). The dispute arose when the assessing officer (‘AO’) noted during scrutiny assessment proceedings that the assessee had not deducted TDS on minimum guarantee expenses paid to hotels, amounting to Rs. 3,61,98,948/- pertaining to the assessment year (‘AY’) 2015-16.
This led to a show cause notice (‘SCN’) under s. 40(a)(ia) of the Act, subsequently leading to the disallowance of Rs. 1,08,59,584/-. Despite the assessee’s explanation that these payments were not subject to TDS as per ch. XVII-B of the Act, the AO disallowed the expenses under s. 40(a)(ia) of the Act.
Dispute was taken to the Commissioner of Income-tax (Appeals) (‘CIT(A)’), where the assessee argued that the payments towards minimum guarantee expenses could not be considered as rent, liable for TDS under s. 194-I of the Act. While the CIT(A) agreed that the said payments were not rent and liable for TDS under s. 194-I of the Act affirmed the disallowance considering the minimum guarantee expenses as payments for carrying out work under s. 194C of the Act.
Held
The ITAT ruled in favour of the assessee, stating that the assessee was not obligated to pay TDS on the minimum guarantee expenses paid to hotels.
It was noted that the contracts primarily involved the provision of technology, sales, and marketing services by the assessee, rather than the execution of specific work by the hotels. Therefore, the provisions of s. 194C, pertaining to deductions for payments made for carrying out work, were deemed inapplicable.
The ITAT emphasized that the minimum guarantee expenses were compensatory in nature and intended to address shortfalls in room occupancy, rather than payment towards any contract or for any specific services rendered. Consequently, the ITAT directed the AO to remove the disallowed addition.
Analysis
This ruling by the ITAT provides significant clarity regarding the interpretation of TDS obligations under the Act, particularly under a contract between hospitality companies like OYO and their hotel partners. It underscores the importance of analyzing the nature of payments and the underlying contract to determine TDS applicability accurately.
The decision aligns with the evolving business models within the hospitality industry, where companies like OYO provide a suite of services beyond mere lodging. By differentiating between compensatory payments and payments under a contractual obligation, the ITAT acknowledged the multifaceted relationships between such companies and hotels, which extend beyond mere service provision.
Furthermore, the ruling highlights the need for tax authorities to carefully consider the substance of transactions and contracts, rather than relying solely on superficial classifications. This approach is consistent with judicial precedents emphasizing the substance-over-form doctrine, ensuring that tax assessments accurately reflect the economic realities of transactions.
In conclusion, the ITAT’s ruling provides valuable guidance for businesses operating in the hospitality sector and beyond, clarifying the scope of TDS obligations on minimum guarantee expenses. It underscores the importance of considering the substance of transactions and contracts in determining tax liabilities and promoting fairness and consistency in tax assessments.
End Note:
[i] [2024] 159 taxmann.com 423 (Delhi – Trib.), dated 15.02.2024
Authored by Priyavansh Kaushik, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.