Taxation Law

EIH Ltd. v. Income Tax Officer

ITAT Delhi, order dated 14 February 2017

Facts

EIH Ltd. operated a chain of hotels, including The Oberoi in New Delhi.
Hotel guests frequently paid tips to service staff:
directly in cash; or
through credit cards while settling hotel bills.
Cash tips were generally pooled and distributed among staff members.
Credit-card tips first passed through the hotel because the hotel processed the customer’s card payment.
The hotel subsequently distributed those amounts to employees.
EIH did not deduct tax under section 192 while distributing the tips.
Following a survey under section 133A, the Assessing Officer held that:
the tips were received by employees through the employer;
the amounts constituted salary or profits in lieu of salary;
EIH was required to deduct tax under section 192.
EIH was treated as an assessee in default and was charged tax and interest under sections 201(1) and 201(1A).
The company appealed to the ITAT.

Whether tips voluntarily paid by hotel guests constituted salary received from or on behalf of the employer.
Whether EIH was required to deduct tax under section 192 when distributing credit-card tips to employees.
Whether the hotel became an employer-payer merely because it temporarily collected and distributed the amounts.

Section 192 applies to payments chargeable under the head “Salary.”
Under section 15, salary must ordinarily be:
due from an employer or former employer; or
paid or allowed by or on behalf of an employer or former employer.
A voluntary payment from a customer does not become salary merely because:
it is connected with an employee’s service; or
the employer acts as the collecting and distributing intermediary.
The source and legal obligation behind the payment must be identified.
Tips may be taxable in the hands of employees as income from other sources, but that does not automatically create an employer’s section 192 withholding obligation.

The hotel guests paid tips voluntarily in appreciation of services received.
EIH had no contractual obligation to pay those amounts as part of employee remuneration.
Employees could not demand a particular amount of tips from the hotel under their employment contracts.
The hotel did not determine:
whether a guest should pay a tip;
the amount of the tip;
the total pool generated by customers.
In relation to cash tips, the amounts were paid directly by customers or pooled among staff.
In relation to credit-card tips, EIH’s involvement arose only because the card-processing mechanism credited the full customer payment to the hotel.
The hotel then separated and transferred the tip component to the employees.
This temporary receipt did not make the hotel the real source of the money.
EIH acted as a conduit or collecting agent for the staff.
The Tribunal followed the Supreme Court’s ruling in the connected hotel-tip litigation involving ITC Ltd.
It concluded that the expression “by or on behalf of an employer” could not include an amount voluntarily paid by an independent customer merely because the employer facilitated its distribution.
The employees’ taxability and the employer’s withholding obligation were separate questions.
Even if the employees had taxable income, it was not salary for the purposes of section 192.

The ITAT held that EIH had no obligation to deduct tax under section 192 from tips distributed to employees.
Tips were paid by hotel customers, not by the employer as remuneration.
EIH’s role in collecting credit-card tips did not alter their source or character.
The hotel could not be treated as an assessee in default under section 201(1).
Since there was no principal default, interest under section 201(1A) was also unsustainable.
The appeals were allowed.