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TMI Blog2024 (10) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. Whatever expenses claimed as share of surplus with the collaborator, it is only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator does not render any service to the assessee. As sharing of revenue and its impact of taxability vis- -vis application of TDS provision depends upon the method of accounting adopted by the respective assessee s. In this case, the franchise agreement and method of sharing the revenue based on computation sheet clearly shows that assessee records all the revenue and share the surplus with the franchisee/ collaborator after adjusting the expenditure. In this case, the assessee follows the JV model and incurs all the expenditure and shares only the surplus with the franchisee that means it is clearly shares the surplus and all the facilities are operated and controlled by the assessee. The issue is whether the provisions of TDS will apply in this case. In our considered view, as per the facts on record, merely shares the revenue and the collaborator does not render any service to the assessee, hence the provisions of TDS has no application. In the given case, the assessee is claiming expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt accrued. However, what is important for appreciation is whether the said accrual of right 'to receive the payment for converted into income or not. It is only the income based on services provided which is taxable and not the right to receive the payment for services to be performed or its receipt. The receipt becomes income when services to be given against the receipts are performed or goods are sold. Even readiness of the goods for the purpose of sales does not convert such advance receipts into sales, till the goods are actually dispatched or corresponding services are provided. Undisputedly, in this case the services were to be provided, as on the cut-off date being 31/03/2009 and therefore advance received though nonrefundable did not partake the character of accrued income because of pending obligation of the assessee against the same in a particular defined time. Character of money received changes with the circumstances attached thereto. 1.3 The Hon'ble Delhi High Court in the case of Uttam Singh Duggal Co. (P) Ltd Vs CIT (1981) 127 ITR 21 (Delhi) held that an amount received in advance converts into an income only when the work corresponding to the amounts rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO observed from the record that assessee follows three types of business model which are : (a) VLCC (assessee) executed MoU with the Joint Venture Partner (JVP) wherein both come to terms with regard to investment in machinery, interior, rent of the place, franchisee fee, etc.. The centre is managed by VLCC and JVP in the ratio of 60 : 40 or 50 : 50, as the case may be. The sales of centre are included in the accounts of VLCC. Part of the sales on which services remain to be rendered are shown as unexecuted packages at the end of the year. (b) In the second model, franchise agreement is executed between VLCC and JVP wherein sales are declared in the accounts of JVP. Operating surplus or net cash surplus are determined which is to be shared between VLCC and JVP, in this case part of the sales on which services remain to be rendered are shown as liability towards customers in the name of the unexecuted packages at the end of the year by the JVP. (c) In the third model, a partnership firm is formed between VLCC and JVP. The sales are recorded in its books and unexecuted packages are claimed in the return of partnership firm. AO observed that four such partnership firms based on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003-04 930.69 9655.09 940.25 14 6945.53 3,86,04,813 2005-06 925.95 11778.91 1298.42 11 11406.44 5,62,70,556 2006-07 1298.42 15267.19 1272.11 8 15293.50 12,93,14,650 2007-08 1272.11 18538.46 1591.65 9 18218.93 14,74,57,970 2008-09 1591.65 20404.70 1627.67 8 20368.68 14,34,81,040 6. The AO observed that the above table shows how the accounts are operated so that assessee pays less tax in any particular year and do not pay the tax in perpetuity. Further, he observed that the amounts paid by the clients are not refundable for the programmes for which the payment was collected for 365 days or expiry of the current financial year, whichever is earlier. Therefore, AO observed that the amount taken from customers is non-refundable as evident from the declaration/consent from which has to be signed by every client before availing any package. The same is reproduced by the AO. For the sake of brevity, it is reproduced below :- I further undertake that the validity of program /package is for the total 365 days and the amount paid therefore is nonrefundable as well as non transferable. I accept and agree that no money will be refunded by VLCC on closure slimming clinic/center, due to force m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share the profits/ losses therefrom in un agreed ratio. The assessee is in possession of various processes, systems and procedures, technical know-how in relation to the location, design and operation of healthcare centres as well as the trademarks/trade names in connection thereto. The collaborator on its part has pooled in equipments, hardware, premises necessary for establishing and operating the healthcare centre with the assessee. While the Task of day-to-day management and operation of the healthcare centre is with the assessee, the collabonitur has to cooperate and co-ordinate with the assessee in smooth administration and overall management of the centre, development and maintenance, including interiors of the premises and obtain requisite permissions/sanctions from the statutory bodies to carry out activities at the centre. The profits/losses arising from operating the healthcare centre are to be shared amongst the assessee and the collaborator in an agreed ratio, In the case of loss arising from operation of healthcare centre, the collaborator has to bear the loss in the same agreed ratio and has to compensate/reimburse that loss to the assessee. No party is rendering ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt various opinion taken from the experts in this regard. 9. The AO observed that as per the reply filed by the assessee, it was submitted that after establishing/developing the centre, its management and control gets fully rested with the assessee. The AO verified the above submission with the records available on record, he observed that on perusal of the franchisee agreement, it shows that the third party was an independent business entity with no partnership at interlacing with the assessee. As a matter of fact from the said agreement, third party established and managed its entire business set up with all risks and obligations. He observed that assessee did not gain any control in the said set up or premises but merely used the experience, skills, services and set up of said third party. AO reproduced the relevant clauses of the franchisee agreement in particular Clauses E F. He also reproduced the obligations of franchisee at page 8 of the assessment order. The AO observed that based on the above clauses of the franchisee agreement, the assessee was availing specific services, skills, experience, requisite set up of the said party called as franchisee. The assessee is not res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement and control gets fully vested in the assessee. While the task of day-to-day management and operation of healthcare centre is with the assessee, the collaborator has to co-operate and co-ordinate with the assessee in smooth administration and overall management of the centre, development and maintenance including obtaining requisite permissions / sanctions from the statutory bodies to carry out the activities at the centre. The Collaborator gets its share as a percentage of profit or loss of the centre which is mutually decided between the parties. Since the entire fee is received by the assessee and credited to the profit and loss account, the assessee gives the share to the collaborators which is claimed as expense under the head 'Share of profit to Collaborators'. b) Franchisee - In case of franchisee centres, the other party runs the centre on its own. A copy of the franchisee agreement entered into with Kaveri Super Market Private Ltd. for Trichy Centre as submitted to the assessing officer is enclosed. The assessee provides technical support and its brand name to the other party for which franchisee fees is received from the said party. The assessee does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e centre and to share the profits I losses therefrom in an agreed ratio and there is no provision of services at all by one to another. It is further submitted that the assessee has provided a copy of the joint venture agreement i.e. Infrastructure and Facility Management Agreement with M/s Kasganj Ispat Udyog (P) Ltd. for running the centre at Bhopal and a franchisee agreement with Kaveri Super Market Private Ltd. for Trichy Centre to the assessing officer during the course of assessment proceedings. The assessing officer confused the franchisee model with JVP model. The assessing officer has mentioned in detail about the terms and conditions of franchisee agreement in the assessment order while disallowing the share of profit paid to Collaborators /JVP. Thus the assessing officer misunderstood the facts of the two business models and made the addition without properly understanding and appreciating the business models. The assessing officer made most of his allegations on the basis of agreement of the assessee with its franchisee which are not at all applicable to the amount of Rs. 2,39,80,342/- claimed by the assessee as expense on account of 'Share of Profit of Collaborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT is into the business of providing computer education and training and enters into the contract with franchisees in metro cities. (The franchisee model of NIIT is the JVP model of the assessee.) These franchisees provide land, building, other fittings and fixtures and marketing of computer course wares as per the terms of agreement. The entire fee is deposited in the account of NIIT which in turn makes payment to the franchisees under two heads - marketing claims and infrastructure claims. Revenue treated the payment of infrastructure as rent and therefore liable to TDS u/s 194-1. The Hon'ble Tribunal held that the dominant intention of the parties of the agreement is to do business and not to let out the building and furniture and the sum shared between them is not fixed nor any minimum amount is guaranteed by the assessee and above all, it was a composite contract for providing training. Since the broad objective was to share the profit and not to hire premises, the NIIT is not liable to deduct tax at source u/s 1941 of the Act. The Hon'ble Delhi High Court approved the decision of Tribunal and dismissed the appeal of the revenue. A copy of the said judgment is enclosed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooling their respective resources to run the healthcare centre and to share the profits I losses therefrom in an agreed ratio. Since the collaborator has to share the losses also, it cannot be termed as a payment of rent or contract or services and therefore no tax is required to be deducted at source on such payments. Since these payments were made for the purpose of business of the assessee, the said amount are fully allowable as expense and therefore the addition so made should be deleted. 11. After considering the detailed submissions of the assessee, ld. CIT (A) deleted the addition with following observations :- 6.3 The nature of arrangement by the appellant with the Joint Venture Partners has been examined. It is understood that the share of profit of the Joint Venture Partners as per 'Infrastructure and facility management agreement' is worked out at 40% of 'Surplus' (total revenues as reduced by certain deductions). The A.O. has held this amount as non allowable u/s 40(a)(ia). It is also understood that the A.O. formed this view because it treated the payments made to the Joint Venture Partners in the nature of rent on which TDS provisions of section 194-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to our notice findings placed at pages 13 14 of the order. Ld. DR opposed the brief conclusion of the ld. CIT (A) and he submitted that ld. CIT (A) has not given clear finding and he wondered how a share of profit can be allowed as deduction in the nature of rent. 14. On the other hand, ld. AR for the assessee submitted that franchise agreement is having different model of business. In this regard, he brought to our notice page 24 of the paper book where computation sheet is placed on record wherein assessee shares the revenue based on the surplus derived after allowing the operational expenses, cost of additional capital outlay for equipment. Based on the agreement entered with the franchisee, assessee shares 40% or 50% with the franchisee partner and the basis of sharing of the revenues are demonstrated at pages 24 25 of the paper book. Further, he submitted that the issue of sharing of revenue with franchisee partners are in fact covered issue and he relied on the decision of Hon ble Delhi High Court in the case of CIT vs. NIIT Ltd. 2009-TIOL-533-Hon'ble High Court-DEL-IT. He heavily relied on the findings of the ld. CIT (A) and submitted that the findings are just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is under dispute. In our view, the Assessing Officer has mixed up with the methods adopted by the assessee. Whatever expenses claimed as share of surplus with the collaborator, it is only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator does not render any service to the assessee. 18. As per the computation model submitted by the assessee in the paper book, it shows that assessee records the whole revenue and after adjusting operational expenses and cost of capital outlay and the services, the same is shared with the franchisee partner/collaborator. Therefore, it is only a revenue sharing model and there is no involvement of any rental income as observed by the ld. CIT (A).Further, at the time of hearing, ld. AR relied on the decision of CIT vs. NIIT Ltd. (supra) wherein Hon ble High Court held as under :- 8. We find that the Tribunal has given the following valid finding and which we uphold : The appellant is entered into the agreement with the Franchisees for running the education centre at various Metro Cities. The fees was shared between the assessee and the Franchisee as per the clauses of the agreement. The details of provis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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