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2016 (4) TMI 819 - ITAT DELHI

2016 (4) TMI 819 - ITAT DELHI - TMI - TDS u/s 192 OR 194J - payment made to the retainers - Held that:- The contract of retainers are valid for one year from the date of effective commencement of the provision of services. The remuneration provided in the agreement is without any provision for provident fund, gratuity, etc. on cancellation of contract of retainer ship the lump-sum amount stands forfeited without any recourse even on a pro rata basis. If the assessee misses to cancel this contrac .....

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h would be subject to the rules and regulations of the organization is laid down in relation to conduct, discipline and other matters. Admittedly, there is such condition in the service contract. However, these conditions are necessary for the purpose of maintaining the standard of services of the organization to the outside customers. Therefore, this terms and conditions cannot say that it puts the retainer in the control of the assessee in the same manner as it puts on its employees. On readin .....

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2014 wherein it has been provided that that wherever the service tax component comprising the amount payable to a resident is indicated separately the tag shall be deducted at source on the amount paid or payable without including such service tax component. The above circular has not laid down any condition, as per para No. 3 of that circular. In view of this, we hold that that no tax is required to be deducted on service tax component - Decided against revenue

TDS u/s 194J - franchi .....

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franchisee and for which the consideration is received. The provisions of section 194, J are applicable in case, when the assessee makes any payment to a resident assessee for the specified services. Here, in this case the payment is received by the assessee from franchisee owners. It is only in the modus operandi of the collection of the fees wherein assessee transfers the money to the franchisee. We confirm the finding of 1st appellate authority holding that provisions of section 194J do not .....

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ssioner of Income-tax (Appeals)-XXX, New Delhi for the Assessment Years 2003-04 to 2010-11. 2. Firstly we take up appeal no 5820, 5821, 5822 and 5823 /del/2013 for AY 2003-04 to 2006-07 as these appeals contain identical grounds 3. The revenue has raised the following grounds in ITA No.5820/Del/2013 for the Assessment Year 2003-04:- 1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assesses that the order pas .....

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ts made to franchisees. 3. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainer ship fee. 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of th .....

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tion relying upon the judgment of Hon'ble High Court in the case of M/s NHK Japan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable lo the payments made to franchisees. 3. On the facts a .....

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r the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component. 5. The revenue has raised the following grounds in ITA No.5822/Del/2013 for the Assessment Year 2005-06:- 1 . On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assessee that the order passed by the AO has become barred by limitation relying upon the judgment of Hon' .....

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ll as in law, the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee. 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of the assessee as unless it is verified whether the deductee has duly deposited the ser .....

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pan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 3. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred i .....

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deductee has not earned any income from service tax component. 7. These appeals contain identical grounds and therefore for the sake of brevity grounds raised in appeal no 5820/Del/2013 for AY 2003-04 are taken first. 8. The ground No.1 is against the issue of limitation which is conceded by the AR of the appellant. Therefore the ground regarding the validity of the order is allowed. Therefore ground no 1 of the appeal is allowed. 9. Ground No.2 of the appeal is that payment made to the franchi .....

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tionship between the assessee and the franchise are in the nature of contract and not a joint venture as claimed by the assessee. It is further stated the licensee has provided services to the various customers on behalf of the assessee and therefore it is in the nature of service contract. It was also contention of the AO that the assessee is crediting the sum in the name of the licensee and the payment has been reflected by the franchisee in the profit and loss account and therefore there is n .....

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s) who held that no tax deduction at source is required to be made on payment made to franchise in view of the decision of the Hon ble Delhi High Court in assessee s own case reported at 358 ITR 179. Therefore against this ground the revenue is in appeal. 11. The LD DR relied on the order of the AO. The ld. AR submitted that this matter is covered in favour of assessee in assessee s own case for the Assessment Year 2005-06 by decision of Honourable Delhi high court which ld. CIT (A) has followed .....

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tion 40(a)(ia) of the Act. According to the Section any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work including supply of labour for carrying out any work, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date sp .....

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ees. While completing the assessment, the Assessing Officer noted that the assessee had debited a sum of ₹ 6,38,64,018/- to the profit and loss account as payment made to franchisees. On a perusal of the agreement between the assessee and one of its franchisees, which was apparently taken as a specimen agreement, the Assessing Officer took the view that the payment made by the assessee came within the provisions of Section 194(C) of the Act as a payment made for carrying out a work in purs .....

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for permitting the payee to utilize the name and copyright of the assessee in the study material and in running the coaching centres, that there were mutual rights, duties and obligations envisaged by the agreement, that a holistic appraisal of the agreement would show that it is a business arrangement and contemplates a sharing of the profits from the business between the assessee and the franchisee, that the franchisee was neither a contractor nor a sub-contractor for carrying out any work fo .....

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into between the assessee and the franchisee was a contract enforceable in law and it is in the nature of a service contract. According to the Assessing Officer, the assessee and the franchisee cannot be said to be partners in any business. He also relied on the Clause in the agreement that the entire fees were collected from the students by the franchisee and deposited in the bank account of the assessee, which militated against the claim of the assessee that the arrangement was a composite arr .....

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same reasons he disallowed the payment of ₹ 11,24,07,079/- made by the assessee in the assessment year 2006-07. 26. The assessee appealed to the CIT(Appeals) who disposed of the appeals by a common order dated 16.11.2009. The CIT(Appeals) examined the agreement between the assessee and the franchisee and noted that the franchisee has to provide various services to the assessee in accordance with the agreement and that the assessee retained overall control of the educational centres. The ar .....

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nd deposited them in the assessee's bank account. Thereafter, the assessee made payment to the franchisee and this payment was for the work carried out by the franchisee in terms of the contract. Accordingly, he held that the Assessing Officer was right in disallowing the payments. He thus dismissed the assessee's appeals on this point for both the years. 27. The assessee carried the matter in further appeal before the Tribunal, which also passed a common order for both the years on 27th .....

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Before us also, the arguments proceeded on the basis of a specimen agreement dated 1.10.2005 entered into between the assessee and M/s Career Solutions of Trivandrum and it was agreed by both the sides that this agreement may be taken as representative of all the agreements between the assessee and its various franchisees. 28. The Tribunal, after noting the various clauses of the agreement, held that the tenor and purport of the various terms of the agreement were that it was not a case where th .....

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ny payment to the licensee for any work done for the assessee and that it was a case of sharing of fees for carrying out respective obligations under a contract. In coming to this conclusion the Tribunal referred to the judgment of this Court in CIT v. NIIT Ltd. [2009] 318 ITR 289/ 184 Taxman 472(Delhi) and found that the facts were similar and though there were some differences in the terms of the agreement between the cited case and the assessee's case, read as a whole, it was clear from t .....

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judgment of this Court in NIIT's case (supra) was found applicable to the present case. In this view of the matter, the Tribunal agreed with the assessee's contention that the payment was not made by the assessee to the licensee/franchisee for any work and therefore neither Section 194C nor Section 40(a)(ia) was applicable. The Assessing Officer was accordingly, directed to allow the payments. 29. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal u .....

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xaminations, personality development related programmes as per norms and methods developed by it and that the assessee also owns or has access to various copyrighted material, preparatory information and substantial body of technical know-how relating to the location, design and operation of professional learning centres. It further states that the assessee (described in the agreement as the licensor) has established a high position regarding quality of services available at the learning centres .....

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sire of the licensee to be licensed on a limited basis to use the trade names, designs, copyright and technical know-how in connection with the operation of the professional learning centres. The preamble thus gives the background of the main object of the arrangement between the assessee and its licenses/franchisees. If the preamble is any guide, it seems to us that the parties proceeded to enter into a business arrangement between themselves for their mutual benefit and the methodology adopted .....

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eans the running of the learning centres and for the purpose of marketing the right to use the technical know-how and the copyrighted material owned by the assessee. It was also agreed that after the termination of the agreement, the licensee shall not make any claim to the trademark "Career Launcher India Ltd." or "CL" and the similar trade names or use in similar trademark or trade name or to confuse the public. Clause 4 provided for the obligations of the licensee. The lic .....

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ee for the purpose of conducting the classes in the learning centre. The licensee shall keep them in trust for the licensor i.e. the assessee. It was also provided that the licensee will implement the fee structure laid down by the licensor, which shall be subject to audit by the licensor. It was further provided that the licensee will receive and collect all fees on behalf of the licensor and shall deposit such collections into the licensor's bank account specified by it and such deposit sh .....

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ss statement and a balance sheet of its business to the licensor for the preceding financial year within a period of 90 days from the end of the year. The licensee was obliged to make available all the material stocks and collateral stocks, student attendance records, feedback reports, books of accounts, etc. for the audit to be conducted by the licensor. The licensor was also at liberty to inspect the premises of the learning centre run by the licensee. 31. Clause 5 provided for "financial .....

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provided for "recurring franchise fees" in addition to the deposit mentioned above. This clause provides that the licensee shall pay recurring franchise fees to the licensor at 25% of the net revenue earned from the operations. The net revenue meant gross revenue minus service tax as applicable. 32. Clause 6 made detailed provisions regarding the services to be provided by the licensor. The licensor shall provide all confidential, all procedural manuals to the licensee. It shall also .....

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ces which are not covered by the technical know-how fee were to be charged extra. In particular, the licensee had to separately pay the licensor for application forms, procedures, publicity material, prospectus, student ID cards, guides and charts, technical reference material, student guide folders etc. Clause 7 provides for "operational standards". The various sub-clauses make detailed provisions relating to design and décor of the building, equipment, signs, manuals, cleanlin .....

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recy of their secrets and procedures. Clause 10 provides for the obligation of the assessee to take out a policy of insurance to cover itself against certain kinds of loss/damage as specified by the licensor in the project implementation manual. The licensor's name is to be added as additional insured in the insurance policy. Copies of the insurance policies have to be provided by the licensee to the licensor. 34. There are various other provisions made in the agreement regarding indemnifica .....

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administrator is appointed by the licensor is obliged to provide him adequate working space and is also liable to bear the cost of the posting of the administrator. The licensee shall reimburse the licensor the salary paid to the administrator. Clause 17 provides for "arbitration and jurisdiction". The annexures to the agreement contain the details which are required to be mentioned therein by the various clauses of the agreement. 35. There can be no dispute with regard to the general .....

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ee was ₹ 4,80,26,060/- for the assessment year 2005-06 and ₹ 6,84,27,841/- for the assessment year 2006-07. The income declared by the assessee itself is an indication of its success and popularity in the field. It is not therefore surprising that others wanted to associate themselves with the assessee's business. It is equally understandable that the assessee was willing to enter into some arrangements with such persons so that the learning centres, as they are called in the agr .....

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ted itself with the assessee's success story and has opened learning centres using the trade name of the assessee. The substance of the agreement however, is that it is a business arrangement under which both parties hope to benefit. It would be myopic to view the agreement divorced from the nature of the assessee's activities and the business realities. 36. Let us examine the real nature of the agreement between the assessee and the franchisees and consider the question whether the agre .....

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ons and rights. It is not a simple case of an agreement under which a person is engaged to carry out any work for the other. The essence of the contract appears to us to be one under which the trade name or reputation or know-how belonging to the assessee in the business of running learning centres, where students are coached for writing competitive examinations, is permitted to be made use of by the franchisees in different places for a monetary consideration. In the case of a contract for the .....

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d out by one person for another. The terms of the contract between the assessee and its franchisees in the case before us do not satisfy this condition. The income tax authorities have erroneously interpreted the contract as one for carrying out a work by the franchisee for the assessee. It is not a simple case of the assessee engaging certain other person to conduct the learning centres for which they were to be paid. The agreement is much more complex and reflects a business arrangement, as op .....

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ntially a case of the assessee permitting its goodwill/know-how/trade name to be utilized by the franchisees. 37. In consideration of the assessee permitting the use of its trade name by the franchisees for the purpose of running the learning centres, the franchisee/licensee is obliged to pay under clause 5.6 of the agreement, recurring franchise fees to the licensor at 25% of the net revenue which means gross revenue the service tax as applicable. This is in addition to the non-refundable depos .....

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t the commencement of the banking hours on the following working day for the bank. The licensee is to issue receipts on behalf of the licensor. There was some debate before us as to whether this clause would militate against the contention of the assessee that the contract is not one for carrying out any work. It appears to us that the clause has been incorporated into the agreement only as a measure of exercising control over the collections made by the licensees and it does not in any manner d .....

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to the contract. They ensure proper compliance of the arrangement and the mutual rights and obligations. These clauses, in our view, have been included only to protect the interest of both the sides and to ensure smooth functioning of the business arrangement. 38. The income tax authorities, we cannot help observing, have not been able to show clearly how the contract between the assessee and the franchisees can be interpreted to be one for carrying out any work by the licensees. They have faile .....

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(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased .....

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are the profits of the joint enterprise carried on by them is not covered by the definition. They mutually undertake the profit making activity with a stipulation to divide the gains of their collective efforts. The work is undertaken jointly by them for third parties who pay consideration which is shared. Parties do not work for each other. Therefore, the mere fact that the definition of the word "work" is an extended or inclusive definition does not automatically justify the conclusi .....

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the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be applicable." 41. We are not referring in detail to the judgment of this Court in NIIT Ltd. (supr .....

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at case the assessee (NIIT) was engaged in the business of providing computer education and training through its own centres and also through franchisees, who were providing NIIT courses under licenses from the assessee. The other terms of the franchisee agreement, which have been referred to in the judgment, show that as in the present case, in that case also the NIIT was to provide the relevant course material and expertise in providing computer education to the franchisees, that it was the re .....

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the franchise/license agreement. On these facts, it was held by the Division Bench of this Court that the dominant intention of the parties, gathered from a composite reading of the entire agreement as a whole, was to conduct business and share the profits. The ratio of this judgment equally applies to the facts of the present case despite the fact that a different TDS provision has been invoked by the income tax authorities in the present case. 42. For the above reasons we hold that the conclu .....

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o franchisee by assessee. It is not disputed by revenue that there is no change in the facts and circumstances of the case or in agreements entered in to by the assessee with the franchisee, Therefore in view of above respectfully following the decision of Honourable high court we confirm the order of CIT (A) and cancel the demand raised on the assessee on account of non-deduction of tax on Franchisee fees of ₹ 3,37,01,080/- u/s 201 (1) of the Act of ₹ 694242/- and interest thereon o .....

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u/s 194J of the Act as professional fees. According to the AO the payment made as retainer ship should have been subjected to TDS u/s 192 of the Act as according to him it is a contract of employment and not a contract for service. The reasons for reaching at this conclusion was that retainers are attending office for 25 days in a month, receiving fixed monthly remuneration and are also subject to some control by the assessee as it exercise on regular employees. Based on this the AO worked out .....

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gainst this, learned AR submitted that that the contract is not for the employment but for providing the services. He further referred to page No. 42 of the paper book, which is part of the submissions made by the assessee before the assessing officer. He submitted that though the employees are entitled for leave of 30 days in a year, while retainers are not allowed for any leave. He further reiterated that that the scope of the work entrusted to an employee which is controlled by the assessee a .....

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ellation of their employment contract whereas the retainer ship contracts if cancelled the retainers will lose all the amounts and no notices prescribed for him to cancel the contract. Therefore, his main argument is that there are many distinctions between the contract of employment and contract for retainer ship. Based on this, it was argued that that the most important fact is that in case of an employee. The master and servant relationship subsists while in case of a retainer. There is no re .....

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T 87. 18. We have carefully considered the rival contentions. To resolve the controversy raised in these appeals, necessarily, it will be required to be seen whether the agreement between the assessee and the concerned retainers was a 'contract for service' or a 'contract of service'. In case, it is 'contract for service', the income of the retainers would fall under the head 'income from business or profession' whereas under 'contract of service, it would par .....

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tionship. Besides the control/supervisory test and the organization test, the question whether the relationship between the parties is one of the employer and employee is a pure question of fact. It was also noticed that control test and the organization test are not the only factors whereas several other factors such as (a) who is the appointing authority; (b) who is pay master; (c) who can dismiss; (d) how long alternative service lasts; (e) the extent of control and supervision; (f) the natur .....

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us employees. The salient conditions of the employment is related to the probation period, which is 6 months. The employees are entitled to leave of 30 days in a year and the retirement age is also fixed at 58 years. The employees are further required to devote their full time to the business of the company and in case, if they wish to take any other work for remuneration or working in advisory capacity, then they are required to obtain prior permission in writing from the employer. It also prov .....

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he employees are required to give back all material related to the business of the company and they are not supposed to retain or make copies of the any of the items. With the employees. The company also enters into an innovation and confidentiality agreement. The assessee is also provided at page No. 34 of the paper book, which is one of the simple retainer agreement entered into between the assessee and the retainers. The salient conditions of that agreement is that it provides for specified s .....

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iner. In case of absence in excess of specified number bay number of days in the month. A specified sum per day would be deducted from the payment to be made to the contract. There is no provision for change in the services by either party s entered into by this agreement. Of course the contract of service of retainer ship also provide that the retainer would be required to meet the deliverables as required by the organization which would be subject to the rules and regulations of the organizati .....

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r ship we are of the view that the retainer ship contracts are not employment contracts and employer, employee relationship does not subsist in case of retainer ship contracts. Therefore, we are of the view that payment made to the retainers is not subject to TDS u/s 192 of the act but u/s 194J of the Act. Hence, we confirm the findings of CIT (A) on this count. In the result ground no. 3 of the appeal is dismissed. 19. Ground No. 4 of the appeal is against the order of CIT (A) in holding that n .....

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taxman 818. 22. We have carefully considered the rival contentions. CBDT has issued a circular No. 1 2014 on 13/01/2014 wherein it has been provided that that wherever the service tax component comprising the amount payable to a resident is indicated separately the tag shall be deducted at source on the amount paid or payable without including such service tax component. The above circular has not laid down any condition, as per para No. 3 of that circular. In view of this, we hold that that no .....

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ow ground no 1 of these appeal related to the validity of the orders of assessing officer. 26. Identically we dismiss ground no 2 , 3 and 4 of these appeals. 27. In the result appeal nos 5821 5822 and 5823 are partly allowed. ITA No 5824 , 5825 and 5826/Del/2013 for AY 2007-08, 2008-09 and 2009-10 28. The revenue has raised the following grounds in ITA No.5824/Del/2013 for the Assessment Year 2007-08:- 1. On the facts and in the circumstances of the case as well in law, the ld CIT(A) has erred i .....

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in directing the AO to file rectification application before him. The ld CIT(A) should have directed the assessee to file rectification application before the AO as it is normal procedure. 29. The revenue has raised the following grounds in ITA No.5825/Del/2013 for the Assessment Year 2008-09:- 1. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to f .....

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ted the assessee to file rectification application before the AO as it is normal procedure. 30. The revenue has raised the following grounds in ITA No.5826/Del/2013 for the Assessment Year 2009-10:- 1. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT ( .....

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ll the grounds of these years are identical and therefore we take up the appeal of the revenue for AY 2007-08 and give our reasons for our decisions and then apply it to the other two appeals. 32. We take up ground no 1 of this appeal in which the issue is whether on the payment of franchisee fees the provision of section 194C of the Act applies or not. This grounds is identical to appeal no.5820/Del/2011 of A.Y. 2003-04 wherein we have held that provision of section 194C does not apply to the f .....

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820/Del/2013 for AY 2003-04 wherein we have held that on the payments of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Therefore following our decision in that appeal we also hold for this year that of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Hence we confirm the order of CIT (A) and dismiss ground no 2 of the appeal. 35. Now we address the ground no 3 of the appeal which is aga .....

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20/Del/2013 for AY 2003-04 wherein we have held that on the payments of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Therefore following our decision in that appeal we also hold for this year that of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Hence we confirm the order of CIT (A) and dismiss ground no of the appeal. 39. In the result we dismiss the appeal of revenue in ITA No 582 .....

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ing this year AO is of the view that provision of section 194 J of the Income tax Act applies on these payments. 42. Learned DR relied on the orders of assessing officer holding that franchisee fees payment is covered for 4 tax deduction at source under section 194J of the act. 43. Learned AR relied on the decision of Hon ble Delhi High Court in case of CIT vs NIIT limited reported at 318 ITR 289. It was submitted that that there is no rendering of services in the franchise agreement. His main c .....

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igh court in 358 ITR 179 in assessee s own case has considered the franchise agreement in detail citing various clauses of the agreement. For deciding the issue of applicability of section 194J it is important to understand the findings given by the honourable highcourt which are as under :- 29. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal under Section 260A before us. We have gone through the model or specimen agreement dated 1.10.2005 between the ass .....

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essee also owns or has access to various copyrighted material, preparatory information and substantial body of technical know-how relating to the location, design and operation of professional learning centres. It further states that the assessee (described in the agreement as the licensor) has established a high position regarding quality of services available at the learning centres run by it and recognizes the benefit to be run it. The licensee or the franchisee, it is further stated in the p .....

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now-how in connection with the operation of the professional learning centres. The preamble thus gives the background of the main object of the arrangement between the assessee and its licenses/franchisees. If the preamble is any guide, it seems to us that the parties proceeded to enter into a business arrangement between themselves for their mutual benefit and the methodology adopted was to exploit the know-how and copyrighted material available with the assessee by running learning centres in .....

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and the copyrighted material owned by the assessee. It was also agreed that after the termination of the agreement, the licensee shall not make any claim to the trademark "Career Launcher India Ltd." or "CL" and the similar trade names or use in similar trademark or trade name or to confuse the public. Clause 4 provided for the obligations of the licensee. The licensee had to provide at its own cost the equipment, furniture and fixtures at the premise approved by the licenso .....

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e licensor i.e. the assessee. It was also provided that the licensee will implement the fee structure laid down by the licensor, which shall be subject to audit by the licensor. It was further provided that the licensee will receive and collect all fees on behalf of the licensor and shall deposit such collections into the licensor's bank account specified by it and such deposit shall be made directly into the bank account of the licensor on the day on which they are collected. Collections ma .....

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of 90 days from the end of the year. The licensee was obliged to make available all the material stocks and collateral stocks, student attendance records, feedback reports, books of accounts, etc. for the audit to be conducted by the licensor. The licensor was also at liberty to inspect the premises of the learning centre run by the licensee. 31. Clause 5 provided for "financial consideration". It stated that in consideration of the licensor agreeing to provide the technical know-how .....

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es that the licensee shall pay recurring franchise fees to the licensor at 25% of the net revenue earned from the operations. The net revenue meant gross revenue minus service tax as applicable. 32. Clause 6 made detailed provisions regarding the services to be provided by the licensor. The licensor shall provide all confidential, all procedural manuals to the licensee. It shall also give marketing and advertising advice and research data developed by it which may be helpful to the licensee in r .....

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to separately pay the licensor for application forms, procedures, publicity material, prospectus, student ID cards, guides and charts, technical reference material, student guide folders etc. Clause 7 provides for "operational standards". The various sub-clauses make detailed provisions relating to design and décor of the building, equipment, signs, manuals, cleanliness and so forth. Generally these are treated as the obligations of the licensee. The licensee is also to comply .....

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of insurance to cover itself against certain kinds of loss/damage as specified by the licensor in the project implementation manual. The licensor's name is to be added as additional insured in the insurance policy. Copies of the insurance policies have to be provided by the licensee to the licensor. 34. There are various other provisions made in the agreement regarding indemnification, consequences of default, change in the ownership of licensee etc. Clause 13 provides for an administrator t .....

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bear the cost of the posting of the administrator. The licensee shall reimburse the licensor the salary paid to the administrator. Clause 17 provides for "arbitration and jurisdiction". The annexures to the agreement contain the details which are required to be mentioned therein by the various clauses of the agreement. 35. There can be no dispute with regard to the general proposition that in ascertaining the true effect of a document it has to be read as a whole and in the context of .....

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06-07. The income declared by the assessee itself is an indication of its success and popularity in the field. It is not therefore surprising that others wanted to associate themselves with the assessee's business. It is equally understandable that the assessee was willing to enter into some arrangements with such persons so that the learning centres, as they are called in the agreement, can be opened in several places of the country with the blessings or association of assessee for the mutu .....

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ssee. The substance of the agreement however, is that it is a business arrangement under which both parties hope to benefit. It would be myopic to view the agreement divorced from the nature of the assessee's activities and the business realities. 36. Let us examine the real nature of the agreement between the assessee and the franchisees and consider the question whether the agreement or contract is for "carrying out any work" by the franchisee, so as to attract the provisions of .....

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the other. The essence of the contract appears to us to be one under which the trade name or reputation or know-how belonging to the assessee in the business of running learning centres, where students are coached for writing competitive examinations, is permitted to be made use of by the franchisees in different places for a monetary consideration. In the case of a contract for the carrying out of any work as is envisaged by Section 194C, there cannot be any use of a person's trade name or .....

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efore us do not satisfy this condition. The income tax authorities have erroneously interpreted the contract as one for carrying out a work by the franchisee for the assessee. It is not a simple case of the assessee engaging certain other person to conduct the learning centres for which they were to be paid. The agreement is much more complex and reflects a business arrangement, as opposed to a simple contract for carrying out a work. The agreement provides for the supervision and control by the .....

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In consideration of the assessee permitting the use of its trade name by the franchisees for the purpose of running the learning centres, the franchisee/licensee is obliged to pay under clause 5.6 of the agreement, recurring franchise fees to the licensor at 25% of the net revenue which means gross revenue the service tax as applicable. This is in addition to the non-refundable deposit to be made by the licensee with the assessee. The fees are to be collected by the licensees/franchisees from t .....

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pts on behalf of the licensor. There was some debate before us as to whether this clause would militate against the contention of the assessee that the contract is not one for carrying out any work. It appears to us that the clause has been incorporated into the agreement only as a measure of exercising control over the collections made by the licensees and it does not in any manner discredit the claim of the assessee that the contract is not one for carrying out any work. Both the parties-the a .....

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auses, in our view, have been included only to protect the interest of both the sides and to ensure smooth functioning of the business arrangement. [Underline supplied by us] 45. On perusal of findings given by Hon ble, High Court the franchisee agreement is the agreement between the licensor assessee to the licensee - franchisee for use of trademark and other know how available with the assessee. Further the use of these license granted by the assessee to the franchisee is for limited geographi .....

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"financial consideration". It stated that in consideration of the licensor agreeing to provide the technical know-how belonging to the licensor and the trade name for use at the professional learning centre, the licensee agrees to pay the licensor at the signing of the agreement a certain amount of fee as mentioned in Annexure 5 to the agreement. As per Clause 5.6 is important and it provided for "recurring franchise fees" in addition to the deposit mentioned above. This clau .....

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