TDS on Tours & Travels Business

Querist : Anonymous (Querist) 19 March 2010 This query is : Resolved
A travel company has booked a hotel for 400 persons, a cook for 10 days and labourmen for 10 days, hire buses of other company and paid Rs. 1.5 lacs, 1 lac, 1 lac and 50000 respectively.

Does it effect the TDS?

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A V Vishal (Expert) 19 March 2010
The CBDT has issued a circular No. 5 of 2002, dated 30th July, 2002 reported in (2002) 257 ITR (St.) 4 clarifying the applicability of the provisions of section 194-I in respect of payments made to a hotel for hiring of rooms.

It appears that this circular is a fallout of the decision of the Andhra Pradesh High Court which was rendered on 28th July, 2002 in the case of Krishna Oberoi v Union of India (2002) taxman 709 (AP) wherein the court had held that room charges paid to a hotel is rent u/s 194I. It was also pointed that an amendment or a clarification is required to mitigate the hardship caused to the hotel industry by this provision.

The CBDT, in the circular no. 715 dated August 8, 1995, had clarified that payments for hotel accommodation, taken on regular basis is in the nature of rent subject to TDS u/s 194I. The CBDT has now clarified and interpreted as to what constitutes hotel accommodation, taken on regular basis. The Board has emphasized that the provisions of section 194I do not normally cover any payment for rent made by an individual or Hindu Undivided Family except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or Hindu Undivided Family exceed the monetary limits specified under clause (a) or clause (b) of section 44AB.

It has clarified that where an employee or an individual representing a company makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.

The Board has also considered the meaning of rent for the purpose of section 194I and has clarified that rent means any payment, by whatever name called, under any lease.or any other agreement or arrangement for the use of any land.and it is of the view that the meaning of rent is wide in its ambit and scope and for this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on regular basis. The Board has then clarified the expression regular basis by stating that where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on regular basis. It is also of the view that where a room or a set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement then also it would be construed to be accommodation made available on regular basis.

The Board has then gone further to define rate contract agreements (RCA). It states that there are instances where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers and such agreements. Such agreements, usually entered into for lower tariff rates, are in the nature of rate contract agreements. In the CBDT's view a rate contract, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. The circular further states that where an agreement is in the nature of rate contract, it cannot be said to be accommodation taken on regular basis, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. A rate contract is different for this reason from other agreements, where rooms are taken on regular basis. Therefore the provisions of section 194I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.

The object of a circular is to clarify the stand of the Department on an issue so that it is interpreted uniformly and to mitigate the hardship caused by a provision of the law. It cannot be said whether this circular will achieve the said objective. The Board has treated its earlier stand in the expression hotel accommodation, taken on regular basis as the letter of law and tried to define and clarify the scope of this expression. The intention of the Board appears to be noble, that of mitigating the hardship caused to the hotel industry. But in the process the Board has coined and defined a new legal term rate contract agreement. The Board has stated that a rate contract agreement cannot be said to be accommodation taken on regular basis, as there is no obligation on the part of the hotel to provide a room or a specified set of rooms and therefore is different from other agreements, where rooms are taken on regular basis.

This means that if a rate contract agreement carries an obligation to provide rooms, then it will fall within the term taken on regular basis and therefore covered by section 194I.

The Board is still of the view that where earmarked rooms are let out for a specified rate and specified period and where rooms are not earmarked but the hotel is under a legal obligation to provide such types of rooms during the currency of the agreement it would be construed to be accommodation made available on regular basis liable for TDS.

TDS on hire charges of taxi/car charges can be covered under both section.Its all depends upon some issues

194 C
194 I
Taxi on specific job:when ever taxi or any other vehicle booked for a specific Job like giving a contract to take employees from home to office and office to home .In these type of work a specific job has been assigned to vehicle and vehicle has not been hired as such so it should be covered u/s 194C and not under section 194I
Control of owner of vehicle:In most of the time vehicles are hired with driver and control of the vehicle remain with the owner of the vehicle through driver,but this is not the deciding factor at all though its a point to be considered,whenever the control of vehicle remains with the the owner of the vehicle then it generally means that vehicle is specific job and not hired as such ,so deduction should be under 194C .but some times vehicle with drivers are also hired without specific jobs in that case person who has hired the vehicle can travel on it any where thought there may be some restriction but point is that no specific job has been assigned ,so in this case it will be covered under section 194-I
Contract agreement:The main paper which will decide the issue is contract agreement and issue will be decided mainly on the basis of the term of agreements and if there are slight differences from contract that can be ignored.
Running & maintenance :If running & maintenance expenses like petrol,repair etc has been incurred by the person who has hired the vehicle then we can say that it should be covered under section 194-I

Relevant circular on this issue:Circular : No. 558, dated 28-3-1990.

2. A question has arisen whether the provisions of section 194C are applicable to the payments made by a State Road Transport Corporation to private bus owners from whom buses are hired for plying on specified routes. Placing reliance on the answer given to question No. 5 in Boards Circular No. 98, dated 26-9-1972, wherein it was clarified that a transport contract cannot ordinarily be regarded as a works contract, it has been argued that a hire contract entered into by a bus owner with the State Road Transport Corporation cannot be regarded as a contract for carrying out any work and as such no deduction in respect of income-tax is required to be made from the payments made under the contract.

3. The matter has been examined in consultation with the Ministry of Law. The Board have been advised that the applicability of provisions of section 194C will have to be examined with reference to the terms and conditions of each contract. In a case where the Board had occasion to examine this issue, the terms and conditions governing the contract between the owner of the buses and the State Road Transport Corporation were, inter alia, as follows :

(i) The owner of the bus shall give his bus on hire to the corporation for plying on notified routes.

(ii) The owner shall provide a driver, with a valid licence and P.S. Badge for the vehicle supplied by him, who shall follow the instructions of the authorised officials of the Corporation.

(iii) The owner shall make available the bus for 14 hours a day and complete the schedules given to him for the day.

(iv) The owner shall keep the bus road-worthy in terms of Chapter V of the Motor Vehicles Act, 1939 and rules made thereunder from time to time by carrying out necessary maintenance and repairs.

(v) The Corporation shall provide a conductor for the operation of services with necessary equipment for issuing tickets to the passengers as well as luggage.

(vi) The owner shall submit his claim twice in a month, once for the period from 1st to 15th and the other for the remaining part of the month, accompanied by a certificate issued by the Traffic Supervisor of the depot with regard to the distance operated during the respective periods.

(vii) The corporation shall pay the owner at the rate of Rs. .....as fixed cost per day in addition to Rs. .....per km. operated as variable cost, etc., etc.

On the basis of these terms and conditions, the Board have been advised that although the contract may appear to be a single hire contract, it is actually a service contract (for carrying out any work) entered into between the State Road Transport Corporation and the owner of the bus for plying certain buses on certain routes and subject to certain conditions. In such cases, the provisions of section 194C are applicable and tax will have to be deducted at source from the payments made to the private bus owners. It may, therefore, be kept in mind that the applicability of provisions of section 194C in such cases may be considered on merits in the light of the aforesaid observations, and to this extent the clarification given in question No. 5 in Boards Circular No. 98, dated 26-9-1972 stand modified.

Rate under both The section:

u/s 194 C basic rate 2 % minimum limit per contract 20000 or 50000 per annum.

u/s 194 I basic rate 10%(2% from 01.10.2009) minimum amount 120000 per annum.