Income Tax Appellate Tribunal - Delhi
United Hotels Ltd. vs Income Tax Officer on 11 November, 2004
Equivalent citations: (2005)93TTJ(DELHI)822
ORDER
Pradeep Parikh, A.M.
1. The assessee is in appeal before us against the order of the learned CIT(A), dt. 26th Feb., 2001, for financial year 1997-98. The grievance of the assessee is against treating the reimbursement of salaries of Rs. 39,55,161 paid to the deputed staff of group hotels as fees for professional and technical services and thereby holding the assessee to be in default for not deducting tax at source. The assessee is also aggrieved against charging of interest under Section 201(1A) of the IT Act, 1961 (the Act).
2. On verification of the annual TDS return in Form No. 24 along with the P&L a/c and its annexures, it was observed by the AO that an amount of Rs. 39,55,161 had been debited in the P&L a/c as "deputed staff salaries". The amount was stated to have been paid to Taj Palace Hotel and Taj Mahal Hotel as reimbursement towards the salaries of certain personnel of those hotels who were deputed in the hotel of the assessee to render certain services. Nine employees were deputed from Taj Palace Hotel and seventeen were deputed from Taj Mahal Hotel. The employees ranged from the category of telephone operator to chief engineer including account executive, housekeeper, chef, front office cashier, account assistant, etc. The AO was of the view that by deputing these personnel, the two hotels had rendered professional and technical services to the assessee. According to him, such services fell within the definition of "professional and technical services" as provided in Section 194J, Section 44AA and Expln. 2 to Clause (vii) of Sub-section (1) of Section 9 of the Act. Therefore, according to him, the assessee was liable to deduct tax at source under Section 194J of the Act from the payment of Rs. 39,55,161 of the Act. The explanation of the assessee was that the concerned personnel were the employees of the respective hotels and their salaries were paid by those hotels only, from which tax was duly deducted at source under Section 192 of the Act. It was also explained by the assessee that hotel industry was not covered under Section 44AA or under Section 194J and that the assessee had not availed of the services envisaged under Section 194J of the Act. The concerned staff was merely deputed in the assessee's hotel for some time and hence what the assessee had paid was mere reimbursement of their salaries which in fact had been paid by their employers. The AO, however, was not convinced with the explanation and hence raised the demand of Rs. 1,97,758 being the amount of tax which should have been deducted by the assessee. A demand of Rs. 58,338 was also raised as interest under Section 201(1A) for the above non-deduction of tax. Almost the same contentions were made by the assessee before the CIT(A) but the same did not find favour with him and accordingly he upheld the order of the AO passed under Sections 201 and 201(1A) of the Act.
3. The learned counsel for the assessee took us through the various clauses of the hotel operation agreement (agreement, for short) entered into between the assessee and Indian Hotels Co. Ltd. (IHC, for short). It was shown that the agreement was in force since August, 1990, in respect of the Ambassador Hotel at Delhi. Never before, such a dispute had been raised by the Department. The learned counsel then took us through the other clauses, particularly to Sections 1 and 2 in Article VII of the agreement. Section 1 provided that IHC were to receive 5 per cent of the gross income of the hotel per annum as technical consultancy fees. Section 2 provided that the assessee was to reimburse to IHC certain expenses like travelling, telephone, telegraph, payroll costs, etc. It was contended that whereas the assessee had deducted tax at source under Section 194J from the technical fees paid by it to IHC (5 per cent of the gross revenues), reimbursement of abovementioned expenses did not warrant similar treatment as there was no element of profit embedded therein. In support of these contentions, the learned counsel relied on the decisions in CIT v. Tata Engineering & Locomotive Co. Ltd. (2000) 245 ITR 823 (Bom), 69 ITR 95 (Bom)(sic), CIT v. Dunlop Rubber Co. Ltd. (1983) 142 ITR 492 (sic-493) (Cal), CIT v. Industrial Engineering Projects (P) Ltd. (1993) 202 ITR 1014 (Del), Sedco Forex International Drilling Inc. v. Dy. CIT (2000) 67 TTJ (Del) 670 : (2000) 72 ITD 415 (Del), Chifford Chance, United Kingdom v. Dy. CIT (2002) 76 TTJ (Mumbai) 725 : (2002) 82 ITD 106 (Mumbai) and the decision of the Authority for Advance Ruling in Danfoss Industries (P) Ltd., In re (2004) 138 Taxman 280 (AAR). The alternative contention of the learned counsel was that as per the Explanation inserted w.e.f. 1st June, 2003, to Section 191 of the Act, the deductor could be called upon to pay the tax only if the deductee had not paid the tax on the income received by him. In the instant case, the payee was, of course, IHC who had shown it as income in its accounts. But that would have netted out as IHC had paid the salaries to the deputed employees from which tax was deducted. Thus, ultimately the tax on the payment made by the assessee was paid to the Government treasury and hence, there was no question of paying the tax for the second time on the same income. For these contentions, the learned counsel relied on the decisions in CIT v. Rishikesh Apartments Co-operative Housing Society Ltd. (2002) 253 ITR 310 (Guj), Associated Cement Co. Ltd. v. ITO (2000) 68 TTJ (Bom) 220 : (2000) 74 ITD 369 (Bom) and Asstt. CIT v. Dwarkadas Ghasiram (HUF) (1995) 53 TTJ (Ind) 20.
4. In his counter-reply, the learned counsel contended that both the authorities below had proceeded on the belief that the amount of Rs. 39,55,161 was the only consideration paid to IHC. In fact, the employees who were deputed, represented as the assessee's employees before the customers of the assessee's hotel. In short, the personnel were the de facto employees of the assessee, actually the employees of IHC, but certainly not the consultants to the assessee. Finally, it was contended that the impugned amount was not a part of the consideration for technical services to which the provisions of Section 194J could be made applicable.
5. We have duly considered the rival contentions and the material on record. Section 194J of the Act casts an obligation on a person, subject to the conditions mentioned therein, to deduct tax at source from the payments made to a resident by way of fees for professional services or for technical services. In the Explanation to Section 194J, professional services have been defined to mean services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession or interior decoration or advertising or such other profession as is notified by the Board for the purposes of Section 44AA or Section 194J. The professions which are further notified under Section 44AA are the profession of Authorised Representative, film artist (actor, lyricist, story writer, screenplay writer, dialogue writer and dress designer), company secretary and information technology. "Fees for technical services" have been defined to have the same meaning as in Expln. 2 to Clause (vii) of Sub-section (1) of Section 9. As per the said Explanation, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "salaries".
6. In the light of the above provisions, let us consider the facts of the case. Clause (a) of the Explanation to Section 194J postulates that the person rendering professional services must have received the fees in the course of carrying on any of the professions mentioned therein. In the present appeal, it is not the case of the Revenue that the persons deputed in the assessee's hotel were carrying on any profession. If an accounts executive was deputed, he was doing the duty as was assigned to him by his employer. It cannot be said that he was carrying on the profession of accountancy and that what he received were fees in the course of carrying on such profession. In fact, what he received was merely salary from the employer for doing the duty assigned to him by the employer. Similarly, if an engineer was deputed, the engineer was not rendering any technical consultancy to the assessee. He was merely doing his duty as an employee, It was IHC who was rendering professional and technical services to the assessee, and for which, IHC was paid fees equivalent to 5 per cent of the gross revenues as per the agreement. There was no contract between the assessee and the deputed personnel by which the former could demand the services of the latter, and the latter could claim fees from the former. Further, the agreement clearly distinguishes expenses to be reimbursed to IHC from the fees to be paid to IHC. In other words, expenses specified in the agreement are distinct and separate from the fees and they are to be reimbursed to IHC over and above the fees that become payable to IHC. We may further clarify that the expenses which the IHC may incur for the assessee are separately chargeable and not embedded in the fees to be paid. If the expenses were not separately chargeable, but were embedded in the fees and if they were not capable of being segregated, then perhaps, tax would have to be deducted from the entire amount. In that case, it would be a composite amount consisting of fees for services rendered and expenses incurred, incapable of being separated.
7. So far as fees for technical services are concerned, there is another aspect to it also. The meaning assigned to the expression "fees for technical services" is the same as is given in Expln. 2 to Section 9(1)(vii) as we have noted earlier. The case of the Revenue is that the persons who were deputed were technically qualified to do the job they were performing and hence the amount which was reimbursed to IHC was nothing but fees for technical services. For a moment, if this argument of the Revenue is accepted, even then it cannot fall within the scope of "fees for technical services". This is because Expln. 2 clearly excludes consideration which would be income of the recipient chargeable under the head "salaries". In the present case, it is not in dispute that what is reimbursed by the assessee is the actual salary of the deputed personnel. Undoubtedly, for each deputed person, the amount received by it is income chargeable under the head "salary" and therefore, it cannot be termed as "fees for technical services".
8. From the foregoing discussion, it is amply clear that what Section 194J envisages is that what the recipient receives must not be salary--whether professional services are rendered or whether technical services are rendered. So far as professional services are concerned, the amount must have been received in the course of carrying on the specified profession. So there is no question of deducting tax at source under Section 194J from the salary paid to an accounts executive, legal officer, etc, of the company. Likewise, amount received by a technical personnel must not be chargeable to tax under the head "salaries". In the present case, what has been paid to the deputed personnel is a salary and hence, the assessee was not liable to deduct tax at source from the payment of Rs. 39,55,161 made by it to IHC as reimbursement of salaries in respect of various personnel deputed to the hotel of the assessee.
9. The alternative contention of the learned counsel also has to be accepted in view of the clear provisions of the Explanation to Section 191 of the Act. Assuming, without admitting, that the assessee was liable to deduct tax at source under Section 194J, still no demand for non-deduction of tax could have been raised against the assessee. This is because the deductor will be liable only if the recipient has not paid the tax on the amount received by him.
10. In the instant case, it is not disputed that the deputed persons, wherever liable, have paid the tax on the salaries received by them and hence, no further tax can be collected from the assessee.
11. In the light of the foregoing discussions, we hold that the order passed under Sections 201 and 201(1A) is bad in law and the CIT(A) had also erred in confirming the same. Needless to add, since the assessee was not liable to deduct tax under Section 194J, there is no question of levying any interest also under Section 201(1A) of the Act.
12. In the result, the appeal of the assessee is allowed.