2016 (4) TMI 580 - AT - Income Tax

TDS u/s 194J - expenditure incurred on payments made to M/s A.B. Hotels Ltd. under the memorandum of understanding with M/s A.B. Hotels Ltd - non deduction of tds - disallowance u/s 40(a)(ia) - Held that - The assessee was not to receive any serviced from AB Hotels Ltd. AB Hotels owned the brand namely, The Great Kabab Factory , which was to be promoted by the assessee through providing franchises to various persons in India. The assessee was to charge fees from various persons who wanted to use this brand as an authorised franchise and the fee was to be shared between the assessee and M/s. AB Hotels in the manner specified above. The sharing of the revenue clearly demonstrates that no services were to be rendered by M/s.AB Hotels to the assessee. In fact it was assessee who had undertaken to promote the brand and assessee received various payments from the persons who got into franchise agreement with assessee and all such payments to the assessee were made after deducting TDS by such franchises. Thus, the year under consideration under the aforesaid MOU, assessee earned a total sum of ₹ 1,78,75,045/- and in accordance with the aforesaid letter dated 23.20.2007, an amount of ₹ 44,68,763/- paid to M/s A.B. Hotels Ltd. was in the share of revenue of M/s A.B. Hotels Ltd. and as such, tax was not required to be deducted in terms of section 194J of the Act and such disallowance made under section 40(a)(ia) is unwarranted and unsustainable in law. - Decided in favour of assessee

Summary

Issues: Disallowance of expenditure incurred on payments made to M/s A.B. Hotels Ltd. under the memorandum of understanding

The judgment involves an appeal filed by the assessee against an order by Ld. CIT(A)-XVIII, New Delhi for the assessment year 2009-10. The primary issue revolves around the disallowance of expenditure amounting to &8377; 46,69,763/- representing payments made to M/s A.B. Hotels Ltd. under a memorandum of understanding, invoking sections 194J and 40(a)(ia) of the IT Act. The assessee argued that the payments were part of a revenue-sharing arrangement and not for acquiring rights in the brand. The assessee contended that it acted as a facilitator to pass on income to M/s A.B. Hotels Ltd., and no services were rendered by M/s A.B. Hotels to the assessee. The assessee emphasized that the revenue was shared as per the MOU and subsequent agreements, and tax deduction under section 194J was not applicable. The Revenue, however, relied on the lower authorities' decisions.

The Tribunal analyzed the nature of payments made by the assessee to M/s A.B. Hotels Ltd. and concluded that the payments were not for acquiring rights in the brand but were a share of revenue under the MOU. The Tribunal noted that the brand always remained with M/s A.B. Hotels Ltd., and the assessee merely facilitated the revenue-sharing arrangement. The Tribunal highlighted that the fees received by the joint venture were to be shared between the parties as per the agreements, and no services were to be rendered by M/s A.B. Hotels to the assessee. Therefore, the Tribunal accepted the assessee's argument that the payments were a pass-through arrangement and not "Royalty," rejecting the Revenue's contention. Consequently, the Tribunal allowed the appeal, holding the disallowance under section 40(a)(ia) as unwarranted and unsustainable in law.

In conclusion, the Tribunal's decision in this judgment provides clarity on the treatment of payments made under revenue-sharing arrangements and emphasizes the importance of analyzing the nature of transactions to determine tax implications accurately. The judgment underscores the significance of legal relations and contractual terms in assessing the taxability of receipts arising from transactions, as demonstrated by the specific circumstances of the case.