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TMI Blog2016 (4) TMI 819X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 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 the assessee as unless it is verified whether the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component. 4. The revenue has raised the following grounds in ITA No.5821/Del/2013 for the Assessment Year 2004-05:- 1. On the facts and in the circumstances of the case as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 service tax, it cannot be concluded that the deductee has not earned any income from service tax component. 6. The revenue has raised the following grounds in ITA No.5823/Del/2013 for the Assessment Year 2006-07:- 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'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 to the payments made to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 694242/- and interest thereon of ₹ 6,66,473/- was worked out u/s 201(1) and interest u/s 201(1A) of the Act respectively. 10. Against this assessee preferred appeal before the learned Commissioner of Income-tax (Appeals) 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. He further submitted that there is no change in the facts and circumstances of the case as well as the agreements of the assessee entered in to with the franchise centers. 12. We have carefully considered the rival contentions. In assessee s own case Hon ble Delhi High Court was of the view that provision of section 194C does not apply to the payment of franchise fees as under :- 22. The next issue, which is common to the assessment years 2005-06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits 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 for the assessee and that in these circumstances the assessee was not responsible for deducting any tax under Section 194C. It was therefore submitted that the Section 40(a)(ia) was not applicable and the payment should be allowed as a deduction in computing the business income of the assessee. These submissions were not accepted by the Assessing Officer. He held that the words any work appearing in section 194C were defined in an inclusive manner. He opined that the agreement entered 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 arrangement providing for mutual duties and obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents entered into by the assessee with the franchisees. 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 the licensee was doing any work for the assessee even within the wider meaning of the term any work as defined in Section 194C or the meaning of the word work as understood in common parlance. According to the Tribunal it was only a case of the assessee running a study centre through various licensees or franchisees and sharing the profits with them. It opined that the agreement has to be read as a whole and on doing so it became clear that the agreement is not for making any 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 contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licensee or the franchisee, it is further stated in the preamble, recognizes the benefit to be derived from being identified with and licenses by the licensor and being able to utilize the Trade Names, Designs and Copyrighted material, which the licensor is in possession and that the licensor wishes to make its learning commercially available to the public at large . With this understanding between them, it was the desire 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 was to exploit the know-how and copyrighted material available with the assessee by running learning centres in different parts of the country. 30. We may now take a brief survey of the various terms and conditions of the agreement. The territories of the franchisees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable 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 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. The fee was to be non-refundable and non-adjustable and was valid for a period of 3 years from the date of the first receipt. Clause 5.6 is important and it 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 licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herence or violation of any terms and conditions agreed upon and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, in case an 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 proposition that in ascertaining the true effect of a document it has to be read as a whole and in the context of the surrounding circumstances. The assessee is undoubtedly in the business of imparting coaching or learning for the purpose of competitive examinations such as those conducted by the IIT, IIM etc. It has developed expertise in the same which has fructified into some kind of a know-how or a trademark or trade name or reputation. It is noteworthy that the income declared by the assessee was ₹ 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 goodwill or know-how by the other. The contract envisaged by the Section would be one under which one person merely renders certain services to the other person for consideration. It is no doubt true that the word work has been defined in a broad and inclusive manner in the Section. Nevertheless its essential feature remains the same namely that it should be a work carried 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 opposed to a simple contract for carrying out a work. The agreement provides for the supervision and control by the assessee of the manner in which the learning ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement 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 failed to appreciate that merely because some work is to be carried out by the licensees in conducting the learning centres it cannot be said that the agreement embodies a contract for carrying out a work. The inclusive definition of the word work given in clause (iv) of the Explanation below section 194C gives a clue to the interpretation of the word, notwithstanding that it is an inclusive definition. The clause is as under : (iv) work shall include (a) advertising; (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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt we find that there are observations therein to the effect that a franchisee agreement cannot be broken up into several parts to bring it within the TDS provisions and that the dominant intention of the parties to the agreement should be respected and given effect to, as gathered from the composite agreement. It is significant to note that in that 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 responsibility of the franchisees to set up infrastructure facilities such as class room, equipment, furniture, administrative set up etc. and also to operate and manage the education centre on day-to-day basis etc. In that case it was also one of the terms of the franchisee agreement that fees collected from the students by the franchisees were to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 short deduction of tax amounting to ₹ 3564000/- on amount paid on retainer ship fees of ₹ 2.40 lacs u/s 201(1) and interest thereon of ₹ 342140/- u/s 201(1)(A) 16. Ld. DR relied on theon the orders of lower authorities. It was submitted by him that that the retainer ship contracts are contracts of employment as they are required to attend office for 25 days in a month and are receiving the fixed monthly remuneration. He reiterated the contentions of the assessing officer. 17. Against 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in a given eventuality, it would be characterized as employer-employee relationship. It is dependent upon several factors taken together which would result into such relationship. 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 nature of the job e.g. whether it is professional or skilled work; (g) nature of establishment; (h) the right to reject, are also required to be scanned before arriving at the conclusion of employer- employee relationship. On the perusal of the distinction between the service provided by the retainer as well as the employees. The employees are governed by the issue of appointment letter Sample copy of which is produced in paper book at page No. 28. On perusal of appointment letter issued to the various employees. The salient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nization 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. 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 no tedious is required to be made in case of service tax component. 20. Ld. DR relied on the order of assessing offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as in law. The ld CIT(A) has erred 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 franchisees. 2. 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 retainership fee. 3. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred 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. 30. The revenue has raised the following gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the rectification made by AO. 36. In the result we dismiss the appeal of the revenue for AY 2007-08 in ITA no 5824/Del/2013. 37. Now we take up appeal no 5825 5826/Del /2013 for AY 20088-09 and 2009-10. Grounds raised in these appeals are identical to grounds of appeal raised in ITA No 5820/Del/2013. 38. Ground No of these appeals are against the applicability of provision of section 194J of the act on payments made to retainers. We have already decided this issue in that appeal no 5820/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 5825 5826/Del/2013 for AY 2008-09 and 2009-10. 40. Now we address the appeal no ITA No 5827/Del/2013 for AY 2010-11 of the revenue where in following grounds of appeals are raised. 41. Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 preamble, recognizes the benefit to be derived from being identified with and licenses by the licensor and being able to utilize the Trade Names, Designs and Copyrighted material, which the licensor is in possession and that the licensor wishes to make its learning commercially available to the public at large . With this understanding between them, it was the desire 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating expenses which shall be made available to the licensor in a form and at a frequency determined by the licensor. The licensee was obliged to also submit a profit and loss 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 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. The fee was to be non-refundable and non-adjustable and was valid for a period of 3 years from the date of the first receipt. Clause 5.6 is important and it provided for recurring f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions made in the agreement regarding indemnification, consequences of default, change in the ownership of licensee etc. Clause 13 provides for an administrator to be appointed by the licensor at the professional learning centre run by the licensee in the event of non-payment of any monies due from the licensee, default in payment of any other charges, non-adherence or violation of any terms and conditions agreed upon and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, in case an 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 proposition that in ascertaining the true effect of a document it has to be read as a whole and in the context of the surrounding circumstances. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 carrying out of any work as is envisaged by Section 194C, there cannot be any use of a person's trade name or goodwill or know-how by the other. The contract envisaged by the Section would be one under which one person merely renders certain services to the other person for consideration. It is no doubt true that the word work has been defined in a broad and inclusive manner in the Section. Nevertheless its essential feature remains the same namely that it should be a work carried 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest and for mutual gains. It is a simple case of the assessee permitting the use of its trade name or reputation by the licensees for a consideration. There are several other clauses in the contract, which we have already referred to, which have been incorporated in the interest of both the parties 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. [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 geographical location. The Dominant Object of the parties is, If the preamble is any guide, 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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