Commissioner Of Income Tax v. Career Lai.incher India Ltd

?K IN THE I{IGH COURT OF DELHI AT NEW DELHI + ITA No.926l20ll Reserved on: 21" March, 2012Date of Decision: Igth April, 2012 COMMISSIONER OF INCOME TAX .....PetitionerThrough: Mr. Sanjeev Rajpal, Sr. StandingCounsel.Versus CAREER LAUNCIIER INDIA LTD. INDIA LTD. LTD. ....RespondentsThrough: Mr. Ajuy Vohra with Ms. KavitaJha and Mr. Vrjay Kumar Punna,Advocates. CORAM:HON'BLE MR. JUSTICE SANJIV KIIANNAHON'BLE MR. JUSTICE R.V. EASWAR R.V. EASWAR. J.: For orders See ITA 93912010. |rrtN [r.__-t ][.]R.V:EASWAR, J4ttu1 .ll q-.t- t SANJIV KIIANNAO J APRrL t9,2ot2/vld/trs Page I ofl nt.gienon Signature Not Verified Digitally SignedBy:AMULYA , NN T'X{E ]IIIGH COUR.T OF'DEI-,HI ,{T i+trT'A No,939/20110+trT'A. No.911/20nX l+lltA No.926l2011.1 ;' Rt)served on; 21'' March,, 2012Date of Decision; 19't' April, [2012] COMMISSIONER OF INCOME TAX .....Petitioner Through: Ir,4r. Sanjeev Rajpal, Sr. StandingCounsel. Versus CAREER LAI.INCHER INDIA LTD.....RespondentsThrough: Mr. Aiay Vohra with Ms. KavitaJha and Mr. Vijay Kumar Punna,Advocates. COR,AM:IION'tsI.E MR.. JIIST'NCE SANJIV KH[.{NNAHON'tsLE MR..fUSTICE R..V. EASWiIR [T.V. EASWAR. J.: These are three appeals filed by the CIT under sec.260A of [the]Income Tax A.ct, hereinafter referred tr) as "the Act", [against ][the]orders passed by the Income Tax Appellate Tribunal, [hereinafter]referred to as "the Tribunal", for the urr"pr-"nt [years'2004-05, ][Z'OOS-]06 and 2006-07. The Tribunal has passed! separate order [on26't'June]2009 for the assessment year 2004-05 in ITA No.l047lDELl2008,whereas for the assessment years 2005-06 and2006-07 it [has ][passed ][a] rT A 939 120 1 0, 9 1 I l20t | &. 926120 | | I t!J Page I of36 i:: 'l common order on 27'h December, 2010 in cross-appeals filed by theassessee and the revenue in ITA Nos.402 4 8. 4925/DEL/2009 andITA Nos. 523 & 524/DEL/2010. [ii]ITA Nos. 523 & 524/DEL/2010. [ii] 2. On 28th July, 201| this court fiamed the following substantialquestions of law in respect of the assessment year 2005-06 in ITANo.9IIl20I7: I "I. Whether the respondent was not liable to deduct thetax at source for the relevant yeier on account of thepayment made by it to its franchiseds under Section I94C' of the A6t, as held by the ITAT in the irnpugned order? II. Whether the assessing officer did not rightly rejectthe claim of the respondent making the addition ofRs.6,38,64,0I8/- to income of th.g respondent for therelevant year on account of non-cleduction of TDS interms of section aO(a)(ia) of the Act'/ m. Whether the ITAT has rightly deleted the additionof Rs.33,22,000/- made by the ['assessing ]officer odaccount of disallowance of bonusi paid to its directorswithout payment of the dividend, in tenns of section36(1Xii) of the Act? ' IV. Whether the clairn of the respondent for payinginterest of Rs.22,07,I88/- in the releyant year to the NoidaAuthority on account of purchase clf land was allowableas revenue expenditure u/s 36(lxiii) of the Act?" 3. On 14'h November, 2011, the following substantial questions oflaw were framed by this court for the asse'ssment year 2006-07 in ITA-No.926/2011: tTA 939t2010,9tu20t1 & 926t2011tr'tr' Page 2 of36 o "(1) [.Whether ]the respondent [had ][failed/ ][neglected ][to]deduct tax at source under Section 194C [and accordingly]Section aQ(A)(ia) of [the ][of ][the ][(t1".) ][Income. ][Tax Act, ]-196L is attracted? (2) Whether the Income Tax epplttate [Tribunal ][is ][right]in deleting addition of Rs.37,44,000/- [made ][by ][the]Assessing Officer on [account ]of [disallowance ][of ][bonus]paid to the Directors in terms of Sbction [36(1)(ii) ][of ][the]:Incotne Tax Act, 196l?" 4. As regards the assessment [year ][200+-05 ][(ITA ][No.939l2010), ][the]following substantial [questions ]of lu* *"r. [fi'amed ][by ][order ][clated ][20tl']Septemb er,2010: tTA 939t2010,9tu20t1 & 926t2011tr'tr' Page 2 of36 o "(1) [.Whether ]the respondent [had ][failed/ ][neglected ][to]deduct tax at source under Section 194C [and accordingly]Section aQ(A)(ia) of [the ][of ][the ][(t1".) ][Income. ][Tax Act, ]-196L is attracted? (2) Whether the Income Tax epplttate [Tribunal ][is ][right]in deleting addition of Rs.37,44,000/- [made ][by ][the]Assessing Officer on [account ]of [disallowance ][of ][bonus]paid to the Directors in terms of Sbction [36(1)(ii) ][of ][the]:Incotne Tax Act, 196l?" 4. As regards the assessment [year ][200+-05 ][(ITA ][No.939l2010), ][the]following substantial [questions ]of lu* *"r. [fi'amed ][by ][order ][clated ][20tl']Septemb er,2010: "1. Whether the Tribunal is corrpct in [allowing ][non-]compete fee of Rs.5,40,000 [payable ]by [the ][assessee ][to]Mr. Vrjay Kalyan Jha and Mr. Sujit [as ][revenue]expenditure solely on the basis of [agreement ][period ][and]" 'the mode of payment?" 2. Whether ITAT was correct in la,w in allowing [interest]of Rs.22 ,07 ,I88/- paid by the [assesdee ][to Noida ][Authority],for purchase of land as revenue expenditure?" i 5. We first take up the question of deductibility [of ][the ][interest ][paid]to Noida Authority on the unpaid installments of [the price ][payable ][for]purchase of iand. This question arises,'as already noticed, [in ][the]assessment years 2004-05 and 2005-06. : 6. The brief facts in connectiori with.the [question ][are these. ][The]assessee is a company. It carries on U,.rrirress in [providing ][education]and training for various preparatory examinations [such ][as ][IIM, ][IIT,]'lTL939l2}l0,gl1t201l &.9261201t age 3 ol'36 .i ;{tI Faslrion designing [courses ][etc. ][In ][the financial year ][2002-03 ][it ][was]allotted'institutional land [measuring ][ZO,bOO ][sq'ms. ][in ][Noida, ][near]Delhi, by the Greater Noida [Authority. The price ][of ][the ][land ][was]Rs.1.70 crores which [was ][to ][be ][paid ][in ][instahnents along ][with ][interest]at the rate of 20%per annum. [The ][urrrrrb. ][capitalised ][the ][interest ][in]its books of account,'but [in ][the returns ][ntda ][for ][these years ][clairned ][it]as deduction in computing its [income ][from ][business.] 7 . In the course of the [assessment ][procbedlngs ][the ] [required ][the]assessee to [justiff ]the claim in view [of ][the,proviso ][to ][section ][36(1)(iii)]of the inserted with [effect ][from ][t'4-2004. ][According ][to ][the].Act, ,tproviso, any interest paid on borrowings [made ][for ][expansion ][or]extension of the existing business [was ][not ][to ][be ][allowed ][as ][a]deduction for th'e period fro* [the date.of ][borrowing ][till ][the ][asset]acquired out of the'borrowed funds [was ][first ][put ][to ][use. ][The ][assessee]. [submitted ][that ][it ][was ][not a ][case ][of ][exqansion ][or ][extension ][of ][the]existing business and that the land [was ][acaluired ][for ][the ][purpose ][of ][the]business being carried on by it [and therefore ][the ][proviso was ][not]attracted. It was alternatively [claimed ][tlrat ][if ][the ][interest ][was ][not].iallowable under sec.36(1)(iii) in view [of ][the ][proviso, ][it ][was allowable]under sec.37(1) as expenditure [incured ]['or ][laid ][out wholly ][and]exclusively for the purpose of [ihe ][business. ][It ][was ][claimed ][that ][though]:\acquisition of the land may amount [to ][adquisition ][of ][a capital ][asset,]the interest paid did not represent [capital ][expenditure ][and ][was]allowable.IT A [g39 ]tzoll, 97 | t20r | & 926120 [| ][|]('Page 4.ol'36 [']I4 $: I I $: I I 8. These submissions were [rejected by.the ] [who ][disallowed ][the]' expenditure. The CIT(A) upheld the disailowance for the assesstnentyear 2004-05. On further appeal the disaflowance [was ][deleted ][by ][the]Tribunal. Following the order of [the ][Tribunal, the ][CITA) ][allowed ][the]claim for the assessment [year ]2005-06. The [revenue ][carried ][the ][malter]in appeal to the Tribunal, which, followin$ [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 revqnue.] i 9. There are three conditions for [the ]frllowance [of ][interest ][under]sec.36(1)(iii). They arc (i) the [assessee ]should [have ][borrowed capital;](ii) that the capital should have been borrowed for the [purpose ][of ][the]business and (iii) interest should have [O..gl ][paid ][on the ][borowing. ][In]tlre case of Bombay Steam Navigatio, L(!.v CtrT, [(1965) ][56 ] [52]it was held that in order to claim allowance in [respect ][of ][interest, there]should be borrowing of capital and that irnpaid [purchase ][price ][of ][an]"iasset does not amount to borrowing of cdpital, [though ][a debt rnay ][be]created. It was observed that every borror.ving [gives rise ][to ][a ][debt, but]every debt does not amount to bonowing" In [these ][premises, ][the]interest paid on the unpaid purchase pricg of [a ][capital ][asset ][was ][held]:not deductible under sec.10(2XiiD of the !922 [Act ][which ][is similar ][to]sec.36(lxiii) of the 196I Act. On the basis of [this ][judgment, ][it ][seems]to us that the claim of the assessee must fail. [The ][interest ][was ][paid to]Noida Authority not in respect of [any ][bapital borrowed ][fiom ][that]Authority, but on the price of the plot r'emaining [unpaid ][as ][per ][the]tTA 93912010, 91112011 & 92612011Page 5 of36 provisions of the lease deed. There [being ][no "capital ][borrowed", ][the]interest is not allowable [as ][a ][deduction. ][In ][this ][view ][of ][the matter, ][it ][is]-!not necessary to consider [whether ][the proviso ][to ][Section ][36(1)(iii) ][is]applicable or not. ; 10. Counsel for the [assessee ][however ][put forth ][the alternative claim,]based on the very same [judgment ]of [tlie ][Supreme ][Court, ][that ][the]interest was allowable under the [residuary ][section ][37(I) ][as]expenditure incurred wholly and [exclusively ][for ][the ][purpose ][of ][the]:business as the acquisition of the land from [Noida ][Authority ][was ][all]integral part of the conduct of the [brisiness. ][In ][Bornbay ][Steam]Navigation (supra) it was no doubt [held ][that ][the ][interest, ][if ][it ][is ][not]allowable under Section 10(2xiii) of the [1922 ][Act ][can be ][considered]for deduction under Section 10(2)(xv) of [that ][Act, ][provided ][it ][was]incurred as an integral part of the [profit-earni.ng process ][of' ][the]business and not for acquisition of an [asset ]or [a ][right ][of ][a ][permanent]character. In that case the assessee-company [was ][formed ][for ][the]Ipurpose of taking over the assets fi'om ['ihe ]Scindias [with ][which ][its]business was to be carried on. It was in that [connection ][agreed ][with]the Scindias that a part of the payrhent rtoqld [be ][made irnrnediately]and the balance of Rs.51.56 lakhs would [tie ][treated ][as ][unpaid price, to]be discharged in future with interest. The [debt ][which ][gave ][rise ][to ][the]interest liability was incurred in [connecti6n ][with ][the ][very taking ][over]of the business from the Scindias [and ][thus ][formed ][an ][integral part ][of]the profit-earning process of the businessi Sqrch [a ][nexus ][is missing in]ITA 93912010,91112011 & 92612011Page 6 of36 i i the case before us. It has not [been ][shown ]that [the ][incurring of ][the ][debt](in favour of the Noida Authority [was an ][integral patt ][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 ][Sleam ][Navigation ][Company]incurred the debt in favour of [the ][Scinidas, ][which ][was closely ][and]inextricably linked with the [taking over ][of. ][the ][business ][ftom ][the]Scindias and to be carried on by [the pombay ][Steam Navigation]Company. Moreover, the [debt was created,by ][the ][assessee ][in ][favour ][of]the Noida Authority for acquisition of [a gapital ][asset, ][viz., ][land, ][and]therefore the interest on the debt [cannot ][be ][allowed ][as ][business]expenditure. 11. It is not necessary to discusi [the authorities ][cited by ][the ][learned]counsel for the assessee. "fCT [vs ]DCIT, [(2005) ][276 ITF. ][115 (Cal.)]andDeputJ) cIT v. core xreakh cnre Ltll,(2008) [298 ] [194 (SC)]are cases in which there was an act of borrowing [of ][capital ][and ][not ][a]amere incurring of a debt otherwise [than ][by way ][of ][a.borrowing- ][The]judgment of the Punjab &Haryana High Court in CIT v. Sunil [Kwmar]lSharmu, (2002) 254 ITR 103 [has ][no doubf distinguished ][the ][judgrnent]of the Supreme Court in Bombay [Steam.,Navigation ][Co.Ltd. ][(supra)]but the decision of the High Court [was ][rendered ][in ][the ][context ][of]computation of the property income [and ]iot:income [from ][business. ][It]:did not arise under Section 36(1Xiii) :i rT A 939 120 10, 9 | [1 ]l20l | [&. ]926 [120 ]rlPage 7 of36 tlt j 12. The alternative claim of the [asse,bsee ][for ][allowance ][of ][the]interest liability under Section 37(I) is [thus ][not ][acceptecl. ][The]expenditure represents capital expenditurg. It [is ][part of ][the ][price ][paid]for the Noida.land; it is an adjunct to [the ]price [and hence ][part ][of it. ][It]is therefore not allowable as a deduction [under Section ][37(l).] 13. We accordingly answer the substantial [questions ][of ][law ][No.2 ][for]the assesstnent year 2004-05 and No.IV fgr [the ][assesstnent ][year ][2005-]06 in favour of the revenue and against [thei assessee.] i 14. The next question that is common [to ][the ][assessment ][years ][2005-]06 and 2006-07 relates to the allowance of [the ][bonus ][paid ][to ][directors]of the assessee-company. 15. In the assessment proceedings for the assessment [year ][2005-06,]the AO took the view that sec.36(1xii) was applicable [to ][the ][payment]of bonus of Rs.32 ,22,000/- to the directorp of the [company ][and ][it ][was]to be disallowed because it would have d..n [payable ]to [the ][directors]as dividends had it not been paid us borits. The [assessee ][explained]that the payment of bonus was supported tiy board resolutions, [that the]directors were full-time employees of the company drawing [salary,]that all of them were management graduates,from IIM, Banga'lore [and]therefore it would not be correct to say:that the [bonus ][would ][have]been payable as dividends so as to afir$ct section 36(lxii). [It ][was])submitted that dividends were not being [paid"in the ][guise ][of ][bonus ][and]in support of the claim it was' pointed out [that the payment ][of ][bonus]1T A 939 12010, 9 1 1 12011 & 9261201 [1]tPage B of36: was not in any way related [to ][the ][shareholding ][of ][the ][directors. ][The]relevant shareholding [details ][and ][the bonus ][payment ][in ][respect ][of ][each]director were given to the AO [which ][he ][hzib ][reproduced'in ][paragraph ][3]:of the assessment order. was not in any way related [to ][the ][shareholding ][of ][the ][directors. ][The]relevant shareholding [details ][and ][the bonus ][payment ][in ][respect ][of ][each]director were given to the AO [which ][he ][hzib ][reproduced'in ][paragraph ][3]:of the assessment order. 16. These submissions [were however rejected ][by ][the ] [who ][held]that on a pioper reading of [the section ][it ][vlas ][clear ][that ][if ][the ][company]t,could have declared dividend on [the shareholding but ][had ][not ][done ][so,]then any payment of bonus/commission [to ][the directors ][was ][hit ][by ][the]section. He noted that no [dividend ][w&s: ][declared ][by ][the ][company]despite substantial profits. According 1.p [him, ][the ][company yas]avoiding 13.5% dividend distribution [tax ][and ][some ][lnore ][tax ][on]j' income since individuals pay 5% less tax than companies, and thr"rs thetotal tax avoided came to about 20% [because ][of ][the payment ][of ][the].|:bonus to the directors. He [therefore ][disallor,ved ][the ][entire payment ][of]bonuS. 17 . In the assessment [year ][2006-07, ]substantially the same"fot reasons the AO disallowed [the ][entire ][bonus ]ilayment [of ][Rs.37 ][,44,000]to the directors .r 18. The CIT(A) in his [consolidated ][orderfor ][the ][two ][years ][upheld]Ithe disallowance. In the further [appeal$ ][preferred ][by ][the ][assessee]before the Tribunal, it was held, [agreeing ][with ][the ][assessee, ][that ][if ][the]assessee had paid dividend [on ][the ][shareHplding ][of ][the ][directors ][then]luch payment would have [been ][more'1 ][than ][the ][bonus ][paid ][and]tT A 939 12010, 9 1 | 1201 r & 9261201 [|]Page 9 of36 I;',' -+* IT{ II t7 therefore sec.36(1)(ii) was not [applicab\e. ][The Tribunal ][referred ][to]two directors specifically and [noted ][tllat ][having ][regard ][to ][their]shareholding, they would [have ][been ][entitled much higher ][amounts ][as]dividends than the amounts [paid ][to ][them'as ][bonus. ][It ][also recorded ][a]that none of the directors [woutd ][have ][received ][bonus ]finding .asdividend in case bonus was not [paid. ]It [alio ][noted that the ][payrnent ][of]bonus was supported by [a ]board [resolution.] '! D. The revenue's contention [that ][the ][Tribunal ][erred ][in ][allowing ][the]bonus payment to the directors [cannot be accepted. ][It ][has ][not ][disputed]the facts viz., (a) that the payment was supported [by ][board ][resolutious]and (b) that none of the directors would hlve [received ][a lesser ][amount]of dividend than the bonus paid to [thbm,. ][having ][regard ][to ][their]shareholding. Further, the directors are'full-time [ernployees ][of ][the]company receiving salary. They [are ][j ]all [graduates ][from ][IIM,]Bangalore. Taking all these facts into cohsideration, it [would ][appear]that the bonus was a reward for their work, in [addition ][to ][the ][salary]paid to them and was in no way related to their [shareholding. ][The]bonus payment cannot be [characterised. ][ut. ][u ][dividend ][payrnent ][in]disguise. The Tribunal has found [,l1"! ], [having ][regard ][to ][the]of each of the [directors, ]shareholding they [would ][have ][got ][much]higher amounts as dividends than as bonus [and there was ][no ][tax]avoidance motive. The [quantum ]of [the ][bbnus payment ][was linked ][to]the services rendered by the directors. It [cannot therefore ][be said ][that] rr A 939 1201 0, 9 1 1 l20l | & 926120r [I]Page l0 of36 ti the bonus would not have been [payable ]fo [the ][directors ][as ][profits ][or]dividend had it not been [paid ][as ][bonus/commission.] ; rr A 939 1201 0, 9 1 1 l20l | & 926120r [I]Page l0 of36 ti the bonus would not have been [payable ]fo [the ][directors ][as ][profits ][or]dividend had it not been [paid ][as ][bonus/commission.] ; 20. The issue has been [considered ][by ][this ][Court ][in ] [Metplast]Pvt Ltd vs DCtrT [(2012) ][341 ] [563 ][inrthe ][light ][of ][the ][judgrnent ][of]the Bombay High Court rn [tr-oyal ][Motor ][Service ][Co" ][Ltct ][vs CIT](1946) 14 ITR 647.Itwas obsen'ed [that ]}he [judgrnent ][of ][the ][Bombay]High Court (supra) does [not ][assist ][the ][revenue and ][that ][so ][long ][as ][the]bonus or commission is [paid ][to ][the directprs ][for ][services ][renclered ][and]as part of their terms of employ-.ntlit [has ][to ][be ][allowed ][and]sec.36(1)(ii) does not apply ,:I 21. Having regard to the above legil [position and ][the ][factual]. findings recorded by the Tribunal, [we ]. [are unable ][to ][say ][that ][the]Tribunal erred in holding that [the ][bonus payment ][was ][allowable]u/s.36(1)(ii) of the Act. The substantial [questions ][of ][law ][are ansrvered]in the affirmative, against the revenue [and ]in [favour of ][the ][assessee ][for ][.]both the years.I{i 22. The next issue, whioh is [common ][to ][the ][assesstnent ][years 2005-]06 and 2006-07 relates to the applicability [of ][Section ][aO(a)(ia) ][of ][the]Act. According to the Section [any ][intere$t, ][commission or ][brokerage,]rent, royalty, fees for professional [services ][or ][fees ][for ][technical]services payable to a resident or [alnount! ][payable ][to ][a contractor ][or]sub-contractor, being resident, for [carrying' ][out ][any ][work ][including]supply of labour for carrying [out ][any wori<, on ][which tax ][is ][deductible]rT A 939 12010, 9 1 1 1201 | & 926120 [| ][|]Page I I of36 Its t? i at source under Chapter XVII-B [and ][such ][tax ][has ][not ][been deducted]of, after deduction, .has not [been ][paid ].on [o, ][before ][the ][due ][date]specified in Section.139(1) of [the ][Act ][is ][not ][deductible ][in ][cornputing]the business income of the assessee. 23. Since the facts are common for [Uodii ][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]."nir"s run by the assessee itself or FV its [fianchisees. ][While]completing the assessment, the Assessing Officer [noted ][that ][the]assessee had debited a sum of [<6,38,64,018/- ][to ][the ][profit ][and ][loss]account as payment made to franchisees. On [a ][perusal ][of ][the]agreement between the assessee [and one ][of ][its ][fi'anchisees, ][which ][was]apparently taken as a specimen agreement, the Assessing Officer [took]tthe view that the payment made by the [assessee ][came ][within ][the]provisions of Section 194(C) of the Act as a [payment made for]carrying out a work in pursuance of [a ][contract and accordingly ][the]assessee to have deducted tax [Yfrom. ]the [payment ][at ][the]ought applicable rates. He further [took ][the ][view'that ][since ][the ][assessee]failed to deduct the tax as contemplated by [Sectio ][n ][794C, ][the ][amount]:,cannot be allowed as a deduction in view of the [embargo placed by]Section 'a0(a)(ia). ' -, ' -, ' ,1..", 24. The assessee's submission [was ][that ][the ][agreement ][was ][not ][a]pure and simple agreement for [carrying ][out ][any ][work within ][the]meaning of Section [I94C, that ][it ][was ][an agreement ][for ][permitting ][the]payee to utilize the name [and ][copyright ][gf ][the ][assessee ][in ][the ][study]material and in rururing [the ][coaching ][centres, ][that ][there ][were ][mutual]rights, duties and obligations [envisaged ][by ][the ][agreetnent, ][that ][a]holistic appraisal of the [agreement ][would ][show ][that ][it ][is ][a ][business]atrangement and contemplates [a ][sharing ][of ][the profits ][fronr ][the]. business between the assessee and the franchisee, that the fi'anchiseewas neither a contractor nor [a ][sub-contractor ][for ][carrying ][out ][any]' work for the assessee and that in these cirf,umstances the assessee wasnot responsible for deducting [any ][tax ][uirder Section ][I94C. ][It ][was]therefore submitted that the Section [40(a)(ia) was ][not ][applicable ][and]the.payrnent should be allowed [as ][a ][dreduction ][in ][computing ][the]business income of the assessee. [Tl{ese ][submissions ][were ][not]Officer. [He held that ][the ][words "any ][worl("]accepted by the Assessing appearing in section 194C were [defined{n ][an ][inclusive ][manner. ][He]opined that the agreement [entered ][into ][between ][the ][assessee ][and ][the]franchisee was a contract [enforceable ][in ][liw ][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 alsorelied on the Clause in the [agreement ][that the ][entire fees ][were]collected fi'om the students by [the ][franchisee ][and ][deposited ][in ][the]:balk account of the assessee, [which ][militated ][against ][the ][claim ][of ][the]It .,tT A 939 12010, 9 1l l20l | [&. ][9261201 \]Page l3 of36i r.t I; rl I assessee that the arrangement was a [composite ][arrangement ][providing]tfor mutual duties and obligations. [He ][also ]fggatived [the ][assessee's]claim that the parties to the agreement were not [acting ][as agents ][for]each other. According to him the fianchisee [was acting on ][behalf ][of]the assessee as he was using the trade of the assessee forproviding education to the students. For [these reasons, ][the ][Assessing]Officer held that Section I94C read *itn [a0(a)(ia) ][applied. ][He]-. 1accordingly, disallowed the payment of {ti38,64,0181-. i 25. For the same reasons he disallowed the [payment ][of]<II,24,07,0791' made by the assessee in tlie [assesslnent ][year ][2006-07 ][.,] : :26. The assessee appealed to the ClT(Appeals) [who ][disposed ][of ][the]appeals by a common order dated 16.1'1 .2009. The [ClT(Appeals)]examined the agreement between the assbssee [and ][the ][fianchisee ][and]:noted that the franchisee has to provide various [services ][to ][the]assessee in accordance with the agreeinent and [that ][the ][assessee]retained overall control of the educational centres. [The ][arrangement]was not a joint venture arrangement and both [parties ][were]indepenclent contractors. The franchisee frua [,ro ][power ][to ][appoint ][the]assessee in any manner nor represent the [assessee. ]The [rvords "any]work" have been widely defined [in. ]Seotioi [and ][the ][services]rendered by the franchisee fell within theldefinition. [According to ][the]ClT(Appeals) the franchisee carried out [specific ][work for ][the ][assessee]in terms of the agreement and also [collecte{ ][the ][fees ][on behalf ][of ][the]:lrTlg3gt2ol;,glrl2oll &9261201r I [: ]Page 14 of36 li!'' :\20 assessee and deposited thgm in .th.'' [assessee's ][bank ][account.]Thereafter, the assessee made [payment; ][to ][the ][franchisee ][and ][this]payment was for the work carried out [by the franchisee ][in ][tertns ][of ][the]contract. Accordingly, he held that [the Assessing ][Officer ][was ][right ][in]disallowing th'e payments. He thus [disrriissed ][the ][assessee's appeals]on this point for both the years.I li!'' :\20 assessee and deposited thgm in .th.'' [assessee's ][bank ][account.]Thereafter, the assessee made [payment; ][to ][the ][franchisee ][and ][this]payment was for the work carried out [by the franchisee ][in ][tertns ][of ][the]contract. Accordingly, he held that [the Assessing ][Officer ][was ][right ][in]disallowing th'e payments. He thus [disrriissed ][the ][assessee's appeals]on this point for both the years.I 27. The assessee carried the matter in further [appeal ][before ][the]Tribunal, which also passed a cotnmon orfler for [both ][the ][years ][on27tt']December,2010. The Tribunal had before it [the ][sample ][agreement]dated 1.10.2007 between the assessee and hzl/s Sphere [Acaderny ][of]Ahrnedabad. It appears that a statement Was tnade before [the ][Tribunal]on behalf of assessee that all the agreemtlnts [with ][the ][franchisees ][are]identically worded. In view of the statenrent, the Tribunal [proceeded]to decide the appeals on the basis of the aforesaid [agreement, ][taking ][it]as representative of all the agreements e4tered into by the [assessee]with the franchisees. Before us also, the,argurnents [proceeded ][on ][the]Uasis of a specimen agreement dated 1.10.2005 [entered ][into ][between]the assessee and \4/s Career Solutions,of'Trivandrul [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. .I 28. The Tribunal, after noting the various [clauses ][of ][the ][agreement,]held that the tenor and purport of [the ][various ][terms ][of ][the ][agreement]tT A 939 12070, 9 11 1201 1 & 9261201 [1]Page l5 of36 '' : were that it was not a case where [the ][licerlsee ][was ][doing ][any ][work for]the assessee even within the wider meaniirg [of ][the ][tenn "any ][work" ][as]defined in Section l94C or the meaning of [the ][word ]["work" ][as]understood in cotnmon parlance. AccorSing [to ][the Tribunal ][it ][was]only a case of the assessee running a siudy [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]contract. In coming to this conclusion [,ihe ]Tribunal referred [to ][the]judgment of this Court rn CIT v NXIT Litnitetl (2009) 318 ITR 289and found that the facts were similar and though there were sornedifferences in.the terms of the agreement between the cited case audthe assessee's case, read as a whole, it was clear from the agreementthat it was a composite agreernent providing for mutual obligationsand duties, embodying a business arrangement and cannot be [broken]into various components as suggested by.the Revenue. The Tribunalfound that in the cited case also the feesjcollected from [the ]['students]were deposited in the account of the assbssee (in that [case) ][and]thereafter it was shared between the assbssee and the fianchisees inaccordance with the terms and conditions gf the license agreement.The ratio of the [judgment ]of this Court [jin:NIIT's ][case ][(supra) ][was]found applicable to the present case. In;this view of [the ][tnatter, ][the]rT A 939 12010, 9 | 1 l20rr & 9261201 [1]Page l6 of36 Tribunal agreed with the assessee's [conti:ntion that ][the payment ][was]not made by the assessee to [the ][licenseeifianchisee ][for ][any ][worlt ][and]therefore neither Section 194C nor Sectibn [40(a)(ia) was ][applicable.]The Assessing Officer was [according'ly, ][directed ][to ][allow ][the]payments. ' Tribunal agreed with the assessee's [conti:ntion that ][the payment ][was]not made by the assessee to [the ][licenseeifianchisee ][for ][any ][worlt ][and]therefore neither Section 194C nor Sectibn [40(a)(ia) was ][applicable.]The Assessing Officer was [according'ly, ][directed ][to ][allow ][the]payments. ' I29. It is against the aforesaid decisiop of [the ][Tribunal ][that ][the]Revenue has come in appeal under Sectioh [260A ][before ][us. ][We ][have]gone through the model or specimen'agreement dated [1.10.2005]'between the assessee and NzVs Career Solutions of Trivandrunl, a copyof which was filed before us in the [course ]of [the ][hearing. ][The]agreement is a comprehensive agreement. It provides for [several]aspects of the arrangement. The preamblp narrates [that the ][assessee ][is]engaged in the business of offering professional learning [to ][the]members of the public for becoming proficient in [competitive]entrance examinations, personality development related [programmes]as per norms and methods developed by it [and ][that the ][assessee ][also]owns or has access to various copyrighted tnaterial, [preparatory].information and substantial body of technicai knowhow relating to thelocation, design and operation of professional learning [centres. ][It]further states that the assessee [(describbd ]in [the ][agreement ][as ][the]licensor) has established a high [position iegarding ][quality ][of ][services]available at the learning centres run by it [hnd recognizes ][the benefit to]be run it. The licensee or the franchisde, it [is ][further ][stated ][in ][the]preamlle, "recognizes the benefit to [be ][derived ][from ][being identified]tT A 939 /2010, 9 1 1 1201 1 & 926/201 [1]E'Page l7 of36 I' ,,: with and licenses by the licensor [and ][bei,ng ][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 tra{e [names, designs, ][copyright],and technical knowhow in connection with the operation of theprofessional learning centres. The ,preamble [thus ][gives ][the]background of the main object of [the- arrangetnent 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 loowhow [and ][copyrighted]material available with the assessee by:lunning learning [centres in]lrdifferent parts of the country. t' t'30. We may now take a brief survey- of the [various terms ][and]conditions of the agreement. The territories of [the ][franchisees ][were]defined and they were prohibited from [bperating ][beyond ][the ][marked]territories. It was agreed (clause 3) that the [grant ]of [the ][license ][is]limited in the sense 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 ][urt.tt"". ][It ][was also ][agreed]that after the terrnination of the agreement, [tlre ][licensee ][shall not ][malce]tT A 939 120t0, 9 lt 1201 1 & 9261201 [1]lage tB of:6 I ',7Y : t' t'30. We may now take a brief survey- of the [various terms ][and]conditions of the agreement. The territories of [the ][franchisees ][were]defined and they were prohibited from [bperating ][beyond ][the ][marked]territories. It was agreed (clause 3) that the [grant ]of [the ][license ][is]limited in the sense 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 ][urt.tt"". ][It ][was also ][agreed]that after the terrnination of the agreement, [tlre ][licensee ][shall not ][malce]tT A 939 120t0, 9 lt 1201 1 & 9261201 [1]lage tB of:6 I ',7Y : any clairn to the trademark "Career [Launcher ][India ][Ltd." ][or ]["CL" ][and]the similar trade nelmes or use in [sirnilar ][tt'ademark or trade nafile ][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,]Icoordinator guides, audit and the tapes, vijleo [tapes, ][CDs ][etc. ][and ][they]will be used by the assessee for [the pu{pcse ][of ][conducting the ][classes]Iin the iearning centre. The licensee [shall ][keep ][them ][in ][trust ][for ][the]licensor i.e. the assessee. It was also [provided that ][the ][licensee ][will]:implement the fee structure laid [down ]by [the ][licensor, ][which ][shall ][be]subject to audit by the licensor. It was further [provided ][that ][the]tlicensee will receive and collect all fees on [behalf ][of ][the ][licensor ][and]shall deposit such collections into [th'd licensor's ][bank ][account]specified by it and such deposit shall be made [directly into ][the ][bank]account of the licensor on the day [oni, ][which ][they ][are ][collected.]Collections made after the banking [hours ][bf ][the day shall ][be ][deposited]into the account on the very next [day. ][Another ][impoftant obligation]of the licenseb was to maintain a record [of ][the ][costs ][of ][materials,]wages and direct operating expenses [whiCh shall ][be made ][available to]ithe licensor in a form and at a frequency.. [determined ][by ][the ][licensor.]IrT A 939 12010, 9 | | l20t | & 92612011Page l9 of36 t The licensee was obliged to [also ]submitia [profit ][and loss ][statetnent]and a balance sheet of its business [to ][the ][licensor ][for ][the ][preceding]financial year within a period of 90 [days ][fiom ][the ][end ][of ][the ][year.]The licensee was obliged [to ][make ][availabie ][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. ][T'he]licensor was also at liberty to [inspect ][tlre ][premises ][of ][the ][learning]centre run by the licensee. . . ": t The licensee was obliged to [also ]submitia [profit ][and loss ][statetnent]and a balance sheet of its business [to ][the ][licensor ][for ][the ][preceding]financial year within a period of 90 [days ][fiom ][the ][end ][of ][the ][year.]The licensee was obliged [to ][make ][availabie ][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. ][T'he]licensor was also at liberty to [inspect ][tlre ][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]knowhow 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]ithe first receipt. Clause 5.6 is irnportant [and ]it [provided ][for ]["recurring]fianchise fees" in addition to the [deposit ]mentioned [above. ][This]clause provides that the licensee shall.pay [rgcurring ][franchise ][fees to]tlre licensor at 25% of the net revenue [parned ]from [the ][operations.]The net revenue meant [gross ]revenue [minus ][service ][tax ][as ][applicable.] 32. Clause 6 made detailed provisions legarding [the ][services ][to ][be]provided by the licensor. The licensor shall [provide ][all ][confideutial,]all procedural manuals to the licensee. It [shall ][also ][give ][marketing] tTA 93912010.9l1/20r1 & 92612011 Page 20 of36 and advertising advice and research [data, ][developed ][by ][it ][which ][may]be hetpful to ['the ]licensee in running the [centre.. ][Atty ][special]techniques or instructions or new service$:as [may ][be ][developed ][by ][the]licensor and considered to be helpful tp the [licensee ][shall ][also ][be]piovided. The licensor is obliged to [join ]and assist the [licensee in]designing the course-scheduling, the {echnique, [business ][ethics,]conduct of classes, tests, examinationS, 1. certifications etc. [The]materials and services which are notl [covered ]by [the ][technical]{knowhow fee were to be charged extra. lp particular, [the ][licensee ][had]to separately pay the licensor. for app,lication 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 makedetailed provisions relating to design g.ttd d6cor of the building,equipment, signs, manuals, cleanliness aiid so forth. Generally theseare treated as the obligations of the licensee. The licensee is also toi'comply with the laws relating to health, lileanliness, compensation [to]workmen and their working conditions. :i i33. ['Clause ]B provides for "limitations of license". The gist of it isthat the licensee cannot have any right or interest in [the ][licensor's]trademarks, designs, copyrights, trade, names or the [goodwill]belonging to it and that the licensee shAll [;maintain confidence ][and]Isecrecy of their secrets and procedures. [I'Clause ][10 ][provides ][for ][the]obligation of the assessee to take out a golicy of insurance [to ][cover]tTA 93912010,91112011 & 92612011Page 2l of36 itself against certain kinds of loss/damage as specified [by the ][licensor]in the project implementation manual. fh" h""nsor's [name ][is ][to. be]added as additional insured in the insur'bnce policy. Copies [of ][the]insurance policies have to be provided by,the licensee [to ][the licensor.] i33. ['Clause ]B provides for "limitations of license". The gist of it isthat the licensee cannot have any right or interest in [the ][licensor's]trademarks, designs, copyrights, trade, names or the [goodwill]belonging to it and that the licensee shAll [;maintain confidence ][and]Isecrecy of their secrets and procedures. [I'Clause ][10 ][provides ][for ][the]obligation of the assessee to take out a golicy of insurance [to ][cover]tTA 93912010,91112011 & 92612011Page 2l of36 itself against certain kinds of loss/damage as specified [by the ][licensor]in the project implementation manual. fh" h""nsor's [name ][is ][to. be]added as additional insured in the insur'bnce policy. Copies [of ][the]insurance policies have to be provided by,the licensee [to ][the licensor.] 34. There are various other provisioiis made in [the ][agreement]regarding indemnifiiation, consequences of default, change in [the]ownership of licensee etc. Clause 13 provides for an [administrator to]be appointed by the licensor at the profesqional learning centre run bythe licensee in the event of non-payment,of any monies due fiorn thelicensee, default in payment of any othqr charges, non-adherence orviolation of any terrns and conditions agreed uporl and prolongeddisruption of the infrastructure which in the opinion of the licensor isnot [justified. ]The licensee, in case an drdministrator is appointed bythe licensor is obliged to provide him adgquate working space and isalso liable to bear the cost of the posting of the adininistrator. Thelicensee shall reimburse the licensori the salary paid to theadrninistrator. Claus'e 17 provides for "arlitration and [jurisdiction".]The annexures to the agreement contain the details which are requiredto be mentioned therein by the various clabses of the agreement. i 35. There can be no {ispute with regard to the [general ]propositionthat in ascertaining the true effect of a document it has to be read as at.'whole and in the context of the sunoil"aittg circumstances. Theassessee is undoubtedly in the businesb of irnparting [coaching ][or] rrA 939/201 0, 91112011 & 9261201 1 Page22 of36 iij 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.knowhow ][or ][a ][trademarlc or]trade name or reputation. It is noteworth;r [that the income ][declared by]the assessee was <4,80,26,060/- for [the ][aSsessment ][year ][2005-06 ][and]<6,84,27,84I1- for the assessment [year ][2096-07 ][. ][The income ][declared]by the assessee itself is an indication of its [success ][and ][popularity ][in]the field. It is not therefore surprising thlt 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 ][tire]parties concerned. Such arrangementg pare not uncomlnon in [the]business world which is a well known fact. [These ][are ][loosely ][called]"fianchisee agreement". In the ugr""-"ni entered into by the [assessee]in the preset case, the words "licensoi!' and "licensee" [are ][used]respectively to denote the assessee and the [franchisee, ][who ][has]associated itself with the assessee's suicess story and [has ][opened]learning centres using the trade name of lne [assessee. ][The ][substance]of the agreement however, is that it is [aibusiness ][arrangement under]twhich both parties hope to benefit. It wjould be myopic [to view ][the]agreement divorced from the nature of [the ][assessee's ][activities ][and the]business realities. rT A. 939 12010, 9rl l20l 1 & 926/201 [|]Page 23 of36 , rT A. 939 12010, 9rl l20l 1 & 926/201 [|]Page 23 of36 , 36. Let us examine the real nature [of ][the ][agreement between ][the]assessee and the franchisees and [considtr ][the ][question whether ][the]agreement or contract is for "catrytig [out ][any ][work" ][by ][the]franchisee, so as to atlract the [provisions ][of ][section ][l94C ][relating ][to]tax deduction at source and consequently [the ][disallowance ][under]Section a0(a)(ia) of the Act. On [a ][careful',consideration ][of ][the ][issr-re, ][it]seems to us that it would not be [possible,to ][view ][the ][agreetnent ][as ][a]contract for carrying out any work by [the franchisee. ][The ][terrns ][of]contract which we have referred to show [that the ][arrangement ][consists]of mutual obligations and rights. It is not a [simple ][case ][of ][an]agreement under which a person is [engaged ][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 knowhow belonging [to ][the]assessee in the business of running learning [centres,.where ][students]are coached for writing competitive examinations, is [perrnitted-to ][be]made use of by the franchisees in diffd.rent [places ]for [a ][tlonetary]consideration. In the case of a contract;for [the carrying out ][of ][any]work as is envisaged by Section 794C, [there ][cannot ][be ][any ][use ][of ][a]person's trade name or goodwill or knirwhow by [the ][other. ][The]contract envisaged by the Section would [be ][one under ][which ][one]renders cefiain services to the other [person ][for]person merely consideration. It is no