2016 (4) TMI 819 - AT - Income Tax

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 contract. It will help to provide for 15 days notice period to the retainer. 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 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 reading of these 2 agreements, one of employment and another of retainer 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. - Decided against revenue TDS on service tax component - Held that - 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 tax is required to be deducted on service tax component - Decided against revenue TDS u/s 194J - franchisee fees paid by the assessee - Held that - The dominant object of the agreement is that the assessee s trademark should be exploited for the mutual benefit of the parties and the technical know-how that is being owned by the assessee. The licensee are using it for their own benefit. Regarding the consideration also, it is flowing from franchisee to the assessing and not from assessee to the franchisee. Therefore, here. The provision of the services are dominantly provided by the assessee to the 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 apply to the franchisee fees paid by the assessee - Decided against revenue

Issues Involved:
1. Limitation of the order passed by the AO.
2. Applicability of Section 194C to payments made to franchisees.
3. Short deduction of TDS on retainership fees under Section 201(1)/201(1A).
4. Non-deduction of TDS on the service tax component.

Detailed Analysis:

1. Limitation of the Order Passed by the AO:
The first ground of appeal by the revenue concerns whether the order passed by the AO was barred by limitation. The CIT(A) decided in favor of the assessee, relying on the judgment of the Hon'ble High Court in the case of M/s NHK Japan Broadcasting. Despite the revenue's contention that the issue was pending before the Hon'ble Supreme Court, the tribunal allowed this ground in favor of the assessee, confirming that the order was indeed barred by limitation.

2. Applicability of Section 194C to Payments Made to Franchisees:
The second ground of appeal dealt with whether payments made to franchisees were subject to TDS under Section 194C. The AO argued that the relationship between the assessee and the franchisees was contractual and not a joint venture, thus necessitating TDS under Section 194C. However, the CIT(A) and the tribunal relied on the Hon'ble Delhi High Court's decision in the assessee’s own case, which held that Section 194C does not apply to such payments. The tribunal confirmed the CIT(A)'s order, stating that there was no change in the facts or agreements, and thus, the payments to franchisees were not subject to TDS under Section 194C.

3. Short Deduction of TDS on Retainership Fees:
The third ground addressed the issue of short deduction of TDS on payments made to retainers. The AO contended that such payments should be subjected to TDS under Section 192 as they were akin to salaries. The CIT(A) and the tribunal, however, distinguished between 'contract for service' and 'contract of service,' concluding that the retainers were not employees but independent service providers. Consequently, TDS on retainership fees was correctly deducted under Section 194J and not Section 192. The tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal on this ground.

4. Non-deduction of TDS on Service Tax Component:
The fourth ground involved the non-deduction of TDS on the service tax component of payments. The CIT(A) ruled in favor of the assessee, referencing CBDT Circular No. 1/2014, which clarified that TDS should not be deducted on the service tax component if it is separately indicated. The tribunal agreed with this interpretation, noting that the circular did not impose any conditions for non-deduction of TDS on the service tax component. Thus, the tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:
The tribunal's judgment comprehensively addressed each ground of appeal raised by the revenue. It upheld the CIT(A)'s decisions on all counts, confirming that:
- The order passed by the AO was barred by limitation.
- Payments made to franchisees were not subject to TDS under Section 194C.
- TDS on retainership fees was correctly deducted under Section 194J.
- No TDS was required on the service tax component of payments.

The appeals for the assessment years 2003-04 to 2006-07 were partly allowed, while those for the assessment years 2007-08 to 2010-11 were dismissed, affirming the CIT(A)'s orders.

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