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Customer need not deduct tax
March, 12th 2009

A customer need not deduct income tax while paying for services provided by a hotel, Bombay High Court held recently. Section 194 C of the Income Tax Act says that any person, while making payment to a contractor for any work, must deduct the inc ome tax (which the contractor owes).

But a division bench of Justices Ranjana Desai and J P Deodhar held that the provision could not be extended in the case of payments for hotel services. Otherwise, even a person who pays a barber for a hair-cut would be needed to deduct tax first, court observed.

Section 194 C does not include service contracts, and Supreme Court had earlier made it clear that nobody is expected to deduct tax at source in making payments to lawyers, doctors, chartered accountants, etc.

But a circular issued by Central Board of Direct Taxes in March 1994 had sought to bring all service-related payments under the section. It was challenged by East India Hotels, a group which has hotels all over the country.

Services rendered by hotels by making certain facilities/amenities do not involve carrying out any work which results in production of anything and therefore it won't be covered by section 194, court said.

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