HIGH COURT OF DELHI Liability of NIIT to deduct tax at source u/s 194-I of IT Act, 1961 qua payments made to its franchisee under infrastructural claims.

Liability of NIIT to deduct tax at source u/s 194-I of IT Act, 1961 qua payments made to its franchisee under infrastructural claims.


Where the broad objective of the agreement between the NIIT and the franchisee was to share the revenue from the business of running education centre jointly and not to hire the premises provided by the NIIT, the NIIT was not liable to deduct the taxes under section 194-I in respect of the amount shared by it and remitted to the franchisee for infrastructure claim.

HIGH COURT OF DELHI

CIT

v.

NIIT Ltd.

ITA No. 1107/2008

September 22, 2009

RELEVANT EXTRACTS:

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6. In the facts of the present case, we find that the order of the Tribunal is correct and must be upheld. The relations between the parties in the present case are not of a lessor and lessee as has been sought to be contended by the Revenue. A reference to the clauses of the agreement which has been placed on record shows that a limited license is granted by the assessee company to Sh. Ashok Arora and Sh. Ashish Bhatia(i.e the licencee) for use by the licensee of the trademark and trade name of the assessee company for the education centre. The assessee company granted the license for the purpose of the Agreement within the specified territory the use of it .s confidential technical know how contained in its manuals and any improvements and developments to such know how. The licensee was given the right to operate the education centre in relation to marketing of NIIT courses specified in the agreement. Various other terms and directions could be issued by the licensor to protect its technical knowhow and its trademark/trade name. The agreement further provided for sharing of the fees received from the students. The charges which were payable to the assessee company by the licensee were not fixed and were variable as per the number of students. The assessee company instead of giving a deposit which it would have done if it was a tenant in fact receives a security deposit from the licensee. There are other clauses with regard to the term of the license agreement, its renewal, indemnification, effect of default and so on. The assessee never got possession of the premises and there is no minimum guarantee in the agreement.



7. Reading of the agreement therefore clearly shows that the agreement was in fact a franchises agreement and it cannot be said that by the agreement, rent was in fact being paid by the assessee company to the licensee. No doubt, the charges have been broken up under two heads viz that of, marketing claim and infrastructure claim. However, the agreement is an agreement as a whole and such a composite agreement cannot be broken up as is sought to be done and contended by the Revenue. The provision of section 194I cannot be read to break up composite contracts and when that is not the intention of the parties themselves. If, the interpretation of the Revenue is accepted then, in a case where there is a partnership and one of the partner brings in his capital in the form of his premises from where the partnership business is carried on, then, payment made to such partner by the firm can be stretched to be included in the definition of rent under Section 194 I, and which surely cannot be the intention of the legislature.



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 provisions regarding conduct of the business were stipulated in the franchisee. The dominant intention of the parties of the agreement was to conduct the business not mere letting out of the building, furniture and fixture. The amount to be shared with the Franchisee was variable and it was not fixed. There was no minimum guarantee amount which the assessee was to make. The composite arrangement in the essence of the agreement for conducting the business. The essence of agreement is to conduct the business of running education centre jointly. Mere certain rights of the assessee to protect the business interest stipulated in the agreement would not change the essence of the agreement. The share of the Revenue with the Franchisee is on account of composite services provided by the Franchisee. In view of these facts, we hold that the broad objective of the agreement between the assessee and the Franchisee was to share the revenue and certainly it was not hire the premises provided by the assessee. Therefore, the assessee is not liable to deduct the taxes under section 194-I of the act in respect of the amount shared by the assessee and remitted to the Franchisee for infrastructure claims.



9. None of the judgments cited by the revenue have any bearing with the facts of the present case. Those judgments only deal with the meaning of ‘rent’, however, the definition has to be necessarily applied in the context of the facts of each case, and on so doing in the facts of the present case, we find that there is no payment of rent by the assessee company to the licencees/franchisees.



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