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No more 'taxing' time for city hotels
March, 09th 2009

Providing respite to city hotels, especially five-stars and business hotels, the Bombay high court, in a landmark judgment, has ruled that Tax Deducted at Source (TDS) would not be applicable to the services they provide. The verdict, by a division bench of Justices Ranjana Desai and J P Devadhar, quashed a circular issued by the Central Board of Direct Taxes (CBDT) and set to rest a 15-year-old controversy.

"The verdict will provide a huge relief to hotels,'' Hotel Restaurant Association of Western India (HRAWI) secretary S M Korde told TOI.

The 1994 circular said customers (usually corporates), while paying hotels for rooms and availing of facilities and amenities, would have to deduct tax at source under the Income Tax (I-T) Act. The TDS required to be cut was around 10%. Corporates form around two-thirds of the business of five-star hotels.

"The rule ensured that the daily cash flow was blocked and the hotels could claim any refunds only later,'' Korde said. The HRAWI said the Bombay high court judgment would help hotels across India. A petition filed by the association's parent body is pending in the Delhi high court. Korde added that the judgment would be cited as a precedent to get a favourable order.

The petition challenging the circular was filed by East India Hotels Ltd. It runs the Oberoi and the Trident on Marine Drive and has a chain of five-star hotels in other parts of the country. Besides rooms, the company said it provided a range of amenities to its clients, including highly trained and experienced multi-lingual staff, 24-hour service for reception, information and telephones, house-keeping, select restaurants, bank counters, beauty salons, barber shops, car rental
services, shopping centres, health clubs and business centres. The issue was whether these services came under the definition of "carrying out work'' under Section 194 C of the I-T Act, which the CBDT insisted it did.

But the high court did not agree. "Services rendered by a hotel to its customers by providing certain facilities and amenities do not constitute work (as defined by the Act),'' the judges said.

The controversy over the provision has a long history. Initially, the contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects and consultants were kept out of the ambit of the Act. In 1994, the CBDT said all types of contracts, including transport, service, advertisement, broadcasting, telecasting, labour, material and work contracts, would be liable to pay TDS.

When the courts held that such an interpretation was illegal, in 1995, the law was changed to include four types of service contracts within the purview of Section 194 C: advertising, broadcast, transport and catering contracts. The court held that the service provided by hotels did not fall under any of these categories.

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