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TMI Blog2012 (4) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the assessment year 2005-06 in ITA No.911/2011: "I. Whether the respondent was not liable to deduct the tax at source for the relevant year on account of the payment made by it to its franchisees under Section 194C of the Act, as held by the ITAT in the impugned order? II. Whether the assessing officer did not rightly reject the claim of the respondent making the addition of Rs. 6,38,64,018/- to income of the respondent for the relevant year on account of non-deduction of TDS in terms of section 40(a)(ia) of the Act? III. Whether the ITAT has rightly deleted the addition of Rs. 33,22,000/- made by the assessing officer on account of disallowance of bonus paid to its directors without payment of the dividend in terms of section 36(1)(ii) of the Act? IV. Whether the claim of the respondent for paying interest of Rs. 22,07,188/- in the relevant year to the Noida Authority on account of purchase of land was allowable as revenue expenditure u/s 36(1)(iii) of the Act?" 3. On 14th November, 2011, the following substantial questions of law were framed by this court for the assessment year 2006-07 in ITA No.926/2011: - "(1) Whether the respondent had failed/ negle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g business and that the land was acquired for the purpose of the business being carried on by it and therefore the proviso was not attracted. It was alternatively claimed that if the interest was not allowable under sec.36(1)(iii) in view of the proviso, it was allowable under sec.37(1) as expenditure incurred or laid out wholly and exclusively for the purpose of the business. It was claimed that though acquisition of the land may amount to acquisition of a capital asset, the interest paid did not represent capital expenditure and was allowable. 8. These submissions were rejected by the AO who disallowed the expenditure. The CIT(A) upheld the disallowance for the assessment year 2004-05. On further appeal the disallowance was deleted by the Tribunal. Following the order of the Tribunal, the CITA) allowed the claim for the assessment year 2005-06. The revenue carried the matter in appeal to the Tribunal, which, following its earlier view, confirmed the decision of the CITA). That is how the question is before us for both the years at the instance of the revenue. 9. There are three conditions for the allowance of interest under sec.36(1)(iii). They are: (i) the assessee shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was incurred in connection with the very taking over of the business from the Scindias and thus formed an integral part of the profit-earning process of the business. Such a nexus is missing in the case before us. It has not been shown that the incurring of the debt in favour of the Noida Authority was an integral part of the profit-earning process of the assessee's business, which is that of preparing students to take competitive examinations held by IIM, IIT etc., in the same manner in which the Bombay Steam Navigation Company incurred the debt in favour of the Scinidas, which was closely and inextricably linked with the taking over of the business from the Scindias and to be carried on by the Bombay Steam Navigation Company. Moreover, the debt was created by the assessee in favour of the Noida Authority for acquisition of a capital asset, viz., land, and therefore the interest on the debt cannot be allowed as business expenditure. 11. It is not necessary to discuss the authorities cited by the learned counsel for the assessee. JCT vs DCIT, (2005) 276 ITR 115 (Cal.) and Deputy CIT v. Core Health Care Ltd., (2008) 298 ITR 194 (SC) are cases in which there was an act of borrowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing but had not done so, then any payment of bonus/commission to the directors was hit by the section. He noted that no dividend was declared by the company despite substantial profits. According to him, the company was avoiding 13.5% dividend distribution tax and some more tax on income since individuals pay 5% less tax than companies, and thus the total tax avoided came to about 20% because of the payment of the bonus to the directors. He therefore disallowed the entire payment of bonus. 17. In the assessment year 2006-07, for substantially the same reasons the AO disallowed the entire bonus payment of Rs. 37,44,000 to the directors. 18. The CIT(A) in his consolidated order for the two years upheld the disallowance. In the further appeals preferred by the assessee before the Tribunal, it was held, agreeing with the assessee, that if the assessee had paid dividend on the shareholding of the directors then such payment would have been more than the bonus paid and therefore sec.36(1)(ii) was not applicable. The Tribunal referred to two directors specifically and noted that having regard to their shareholding, they would have been entitled much higher amounts as dividends than the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specified in Section 139(1) of the Act is not deductible in computing the business income of the assessee. 23. Since the facts are common for both the years, we are referring to the facts for the assessment year 2005-06. As already noted, the assessee is a company engaged in providing education and training for various preparatory examinations like IIM, IIT, fashion designing etc. These services are provided across the country through education centres run by the assessee itself or by its franchisees. While completing the assessment, the Assessing Officer noted that the assessee had debited a sum of Rs. 6,38,64,018/- to the profit and loss account as payment made to franchisees. On a perusal of the agreement betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not acting as agents for each other. According to him the franchisee was acting on behalf of the assessee as he was using the trade name of the assessee for providing education to the students. For these reasons, the Assessing Officer held that Section 194C read with 40(a)(ia) applied. He accordingly, disallowed the payment of Rs. 6,38,64,018/-. 25. For the same reasons he disallowed the payment of Rs. 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 arrangement was not a joint venture arrangement and both parties were independent contractors. The franchisee had no power to appoint the assessee in any manner nor represent the assessee. The words "any work" have been widely defined in Section 194C and the services rendered by the franchisee fell within the definition. According to the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 289 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 the agreement that it was a composite agreement providing for mutual obligations and duties, embodying a business arrangement and cannot be broken into various components as suggested by the Revenue. The Tribunal found that in the cited case also the fees collected from the students were deposited in the account of the assessee (in that case) and thereafter it was shared between the assessee and the franchisees in accordance with the terms and conditions of the license agreement. The ratio of the 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 under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that it is given to the licensee only for the permitted use, which means the running of the learning centres and for the purpose of marketing the right to use the technical knowhow 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 licensor for occupying the learning centre. The infrastructure shall not be used by the licensee for any other purpose. The licensee can market and sell only such courses as are covered by the agreement. The licensee shall only be the custodian of all technical reference material, transpiracies, coordinator guides, audit and the tapes, video tapes, CDs etc. and they will be used by the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it which may be helpful to the licensee in running the centre. Any special techniques or instructions or new services as may be developed by the licensor and considered to be helpful to the licensee shall also be provided. The licensor is obliged to join and assist the licensee in designing the course-scheduling, the technique, business ethics, conduct of classes, tests, examinations, certifications etc. The materials and services which are not covered by the technical knowhow 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, cleanliness and so forth. Generally these are treated as the obligations of the licensee. The licensee is also to comply with the laws relating to health, cleanliness, compensation to workmen and their working conditions. 33. Clause 8 provides for "limitations of license". The gist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mutual benefit of all the parties concerned. Such arrangements are not uncommon in the business world which is a well known fact. These are loosely called "franchisee agreement". In the agreement entered into by the assessee in the preset case, the words "licensor" and "licensee" are used respectively to denote the assessee and the franchisee, who has associated 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the learning centres are to be supplied by the assessee for which separate charges are to be paid by the franchisee. It is essentially a case of the assessee permitting its goodwill/knowhow/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 deposit to be made by the licensee with the assessee. The fees are to be collected by the licensees/franchisees from the students for and on behalf of the assessee. Strict control is exercised by the assessee, in terms of clause 4.6 of the agreement, over the collection and deposit of the fees. The licensee is bound to deposit the collections received on a particular day directly into the licensor's bank account on that day itself. Any collections made after the banking hours shall be deposited at the commencement of the banking hours on the following working day for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chased from a person, other than such customer." 39. A perusal of the extended definition of the word "work" shows that it covers a simple case of engaging a person to render services of the kind mentioned in the definition. Otherwise every composite transaction which also has an element of work will be covered. Clause (e) is illustrative that this is not the intention of the legislature. A case of an arrangement under which both sides have joined together by mutual arrangement and to share 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 conclusion of the income tax authorities that the activities carried on by the licencees of the assessee in running learning centres amount to the carrying out of any work for the assessee in pursuance of the contract. 40. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention 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 conclusion arrived at by the Tribunal cannot be disturbed. The Tribunal was right in law in holding that the provisions of Section 194C and section 40(a)(ia) are not applicable to the facts of the case. We accordingly, answer the substantial question of law in favour of the assessee and against the Revenue for both the years. 43. In respect of assessment year 2004-05 in ITA No.939/2010 there is another substantial question of law which has to be decided. This is in respect of the non-compete fee of Rs. 5,40,000/- payable by the assessee to Mr. Vijay Kalyan Jha and Mr. Sujit as revenue expenditure. The substantial question of law framed by this Court is somewhat restrictive in the sense that it appears to limit the scrutiny by this Court of the order of the Tribunal only on two aspects (a) the period of the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their own business or joining any other competitor in the faculty, managerial or consulting capacity for a period of 3 years ending on 31.3.2005. The Tribunal further noticed that from 1.1.2004 to 30.12.2004 Mr. Vijay Kalyan Jha was to deliver 400 hours of classes and was required to design and develop contacts with the assessee. The payment for this was fixed at Rs. 3,20,000/-. Similarly, Mr. Sujit was also to be available to the assessee for taking 425 hours of classes for the period from 1.5.2004 to 30.9.2004 and also require to design and develop contacts for the assessee, for which he was to be paid Rs. 2,02,500/-. These payments were to be made in monthly installments over a period of time. After noticing the provisions of the agreement the Tribunal held that the period involved, during which Mr. Vijay Kalyan Jha and Mr. Sujit were not to compete with the assessee in any manner was only a short period of 12 months and therefore there could be no enduring benefit enuring to the assessee. In this view of the matter, the Tribunal directed the Assessing Officer to allow the payment as revenue expenditure. 47. It may be seen from the above that the Tribunal gave two primary reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant consideration taken into account by the Tribunal. The fact that the payment was made in monthly installments is not decisive of the question; even if it had been made in a lump sum that would have made little difference to the conclusion, having regard to the short period of 12 months during which the above two persons were prohibited from competing with the assessee's business. In our opinion, it cannot be disputed any more that payment to ward off competition for a limited period should be held to be revenue expenditure and not capital expenditure. If that is so, the fact that the payment was made in a lump sum or in installments hardly matters. We are therefore, satisfied that in coming to the conclusion that the payment of Rs. 5,40,000/- was a revenue expenditure, the Tribunal has not ignored any relevant material or taken into account irrelevant material. The Tribunal was certainly entitled to take note of the entire conspectus of the facts of the case and in particular the period during which the faculty members were prohibited from competing with the assessee's business. In this view of the matter we answer the substantial question of law framed vide order dated 20.9.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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