Commissioner Of Income Tax v. Career Laltncher India Ltd.ltd

IN THE HIGH COURT OF DELHI AT NEW DELHI ITA No.911/2011 % Reserved on: 21" March, 2012Date of Decision: 19'h April, 2012 COMMISSIONER OF INCOME TAX .....PetitionerThrough: Mr. Sanjeev Rajpal, Sr. StandingCounsel.Versus CAREER LAUNCIIER INDIA LTD. ....Respondents Through: Mr. Ajuy Vohra with Ms. KavitaJha and Mr. Vijay Kumar Punna,Advocates. CORAM:IION'BLE MR. JUSTICE SANJIV KIIANNAHON'BLE MR. JUSTICE R.V. EASWAR R.V. EASWAR, J.: For orders see ITA 939/2010. lrl'[{l'"-l [{l'"-l R.V.EASWAR, J APRIL 19,2012/vld/hs SANJIV KIIANNA, J ITA 9l r/2011 Page I ofl Signature Not Verified +IT'A No.939/2011.0+IT^A No.911/20Xi.+IT^A No.911/20Xi.+IT'A No.926l20ntr '|. Reserved on; 21'' March, 2012%, Date of Decision; 19't' April, 2012 COMMISSIONER OF INCOME TAX .....Petitioner Through: Mr. Sanjeev Rajpal, Sr. StandingCounsel. Versus CAREER LALTNCHER INDIA LTD.LTD. INDIA LTD.LTD.....RespondentsThrough: Mr. Ajuy Vohra with Ms. KavitaJha and Mr. Vijay I(umar Pttnna,Advocates. COITAM:HON'tsL,E MR. .TUSTICE SANJTV KHIANNAHOI{'tsLE MR.. JUSTICE R..V. EASWAR. R"V. EASWAR. J.: These are three appeals filed by thb CIT und er sec.260A of [the]Income Tax Act, hereinafter referred tp as "the Act", against theorders passed by the Income Tax Appellate Tribunal, hereinafterreferred to as "the Tribunal", for the assebsment [years ]2004-05,2005-06 and 2006-07. The Tribunal has passed;a separate order on 26tl' June2009 for the assessment year 2004-05 [lin ]ITA No.l047lDELl2008,wirereas for the assessment years 2005-06 and 2006-07 it has passed [a] rr A 939 /201 0. 9 1 | /20 | | & 926 /20 I I Page I of36 common order on 27't'December,2010 in cross-appeals filed by theassesSee and the revenue in ITANos.4024 & 4925|DEL/2009 andITA Nos . 523 &, 5241DF,L12010.,i i 2.On 28th July, 20II, this court fiarned the following substantialquestions of law in respect of the assessment year 2005-06 in ITANo.9lIl20II:No.9lIl20II: "I. Whether the respondent was not liable to deduct thetax at source for the relevant on account of they.ir payment made by it to its franchisebs under Section I94Cof the Act, 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.6,38,64,078/- to income of the respondent for therelevant year on account of non-deduction of TDS interms of section a0(a)(ia) of the Act? m. Whether the ITAT has rightly deleted the additionof Rs.33,22,000/- made by the assessing officer onaccount of disallowance of bonusi paid to its directorswithout payment of the dividend in terms of section36(lxii) of the Act? IV. Whether the claim of the rbspondent for payinginterest of Rs.22,07,L88/- in the ieleyantyear to the NoidaAuthority on account of purchase of land was allowableas revenue expenditure u/s 36(1)(iii) of the Act?" 3. On 14tl'November, 20L1, the follor,ving substantial questions oflaw were framed by this court for the asse$sment year 2006-07 in ITANo.92612011: - : rT A 939 /20 t0. 9 | | 1201 | & 926120t 1,(nri.;ri.; Page 2 of36 ,.^ [. ] .. ': a ,,(1) Whether the respondent had failed/ neglected todeduct tax at source [under Section ]l94C [and accordingly]Section O(A)(ia) of [the ][of ][the ][(ti,..) ][Income ][Tax ][Act,]l96t is attracted? Whether the Income Tax [Appellate ][Tribunal ][is ][right](2) in deleting addition of [Rs.37,44',000/- ][made ][by ][the]Officer on [account ][of ][disallowance ][of ][bonus]Assessing paid to the Directors in [terms ][of ][Spction ][36(1)(ii) ][of ][the]Income Tax Act, 196I?" 4. As regards the assessment [year ][2004-05 ][(ITA ][No.939/2010), ][the]j.foilowing substantial [questions ][of ][law ][wei'e ][fiamed by ][order ][clated ][20tr'], a An { n20t0: Septetnber, , "1. Whether the Tribunal is [correct'in ][allowing ][non-]compete fee of Rs.5,40,000 [payable ][by ][the ][assessee ][to]Mr. Vrjay I(alyan Jha and Mr. [Sujit ][as ][revenue]expenditure solely on the basis [of ]['agreement ][period ][and]the mode of payment?" Whether the Income Tax [Appellate ][Tribunal ][is ][right](2) in deleting addition of [Rs.37,44',000/- ][made ][by ][the]Officer on [account ][of ][disallowance ][of ][bonus]Assessing paid to the Directors in [terms ][of ][Spction ][36(1)(ii) ][of ][the]Income Tax Act, 196I?" 4. As regards the assessment [year ][2004-05 ][(ITA ][No.939/2010), ][the]j.foilowing substantial [questions ][of ][law ][wei'e ][fiamed by ][order ][clated ][20tr'], a An { n20t0: Septetnber, , "1. Whether the Tribunal is [correct'in ][allowing ][non-]compete fee of Rs.5,40,000 [payable ][by ][the ][assessee ][to]Mr. Vrjay I(alyan Jha and Mr. [Sujit ][as ][revenue]expenditure solely on the basis [of ]['agreement ][period ][and]the mode of payment?" 2. Whether ITAT was correct in [law ][in ][allowing ][interest]of Rs.22 ,07,188/- paid [by the ][asses$ee ][to ][Noida ][Authority]for purchase of land [as ]revenue [expenditure?"] 5. We first take up the [question ][of deductibility ][of ][the intcrest ][paid]to Noida Authority on the unpaid instalhdents [of ][the price ][payable ][for]of land. This [question ][arises,t ][u, ][already noticed, ][in ][the]purchase 1assessment veafs 2004-05 and 2005-06. I 6. The brief facts in conne.tion [with, ][the ][question ][are ][these. The]assessee is a company. It carries on [business ][in ][providing ][education]and training for various preparatory [exalmipations ][such ][as ][IIM, ][IIT,]IT|g3gl2}l0.91ll2011 &92612011 Page 3 of 36 I Fashion designing courses etc. In the. financial [year 2002-03 ][it ][was]allotted institutional land measuring 20,000 [sq.ms. ]in [Noida, ][llear]Delhi, by the Greater Noida Authority. ['Th. ]price of [the ][land ][was].JRs.1.70 crores which was to be paid in instahnents [along ][with ][interest]at the rate of 20% per annum. The assess6e capitalised [the interest ][in]its books of account, but in the returns filBd for these [years ][clairned ][it]as deduction in cornputing its income from business. 7. In the course of the assessment procdedings the AO required [the]assessee to [justifii ]the claim in view of thei,proviso to section 36(lXiii)of the Act inserted with effect from' T",4-2004. According to [the]proviso, any interest paid on borrowings made for expansion orextension of the existing business *ul. not to be allowed as airdeduction for the period from the date [tbf ]borrowing till the assetacquired out of the borrowed funds was first put to use. The assesseesubmitted that it was not a case of expansion or extension of theexisting business and that the .land was acquired for the purpose of thebusiness being carried on by it and therefore the proviso wad notatlracted. It was alternatively claimed that if the interest was notallowable under sec.36(1)(iii) in view of the proviso, it was allowableunder sec.37(1) as expenditure incurred or laid out wholly andexclusively for the purpose of the business. It was claimed that thoughacquisition of the land may amount to acquisition of a capital asset,the interest paid did not represent capital expenditure and wasallowable.tr A 939/2010. [glt ]/2ot | & 926/201 |Page 4 of36 8. These submissions were rejected Uy, ttre AO who disallowed theexpenditure. The CIT(A) upheld the disallowance for the assessmentyear 2004-05. On flirther appeal the disailowance was deleted by theTribunal. Following the order of the Tribrlnal, the CITA) allowed theclairn for the assessment year 2005-06. Tlie revenue carried the malterin appeal to the Tribunal, rvhich, following its earlier view, confirmedthe decision of the CITA). That is how !|re question is before us forboth the years at the instance of the revenrie. 8. These submissions were rejected Uy, ttre AO who disallowed theexpenditure. The CIT(A) upheld the disallowance for the assessmentyear 2004-05. On flirther appeal the disailowance was deleted by theTribunal. Following the order of the Tribrlnal, the CITA) allowed theclairn for the assessment year 2005-06. Tlie revenue carried the malterin appeal to the Tribunal, rvhich, following its earlier view, confirmedthe decision of the CITA). That is how !|re question is before us forboth the years at the instance of the revenrie. g. There are three conditions for the lallowance of interest under,jsec.36(1)(iii). They are: (i) the assessee should have bomowecl capital;(ii) that the capital should have been borrowed for the purpose of thebusiness and (iii) interest should have bedn paid on the borrowing. Inthe case of Eonrybuy Steum Navigation Ltd. v CtrT, (1965) 56 ITR 52it was held that in order to clairn allowance in respect of interest, thereshould be borrowing of capital and that unpaid purchase price of anasset does not amount to borrowing of c4pital, though a debt may becreated. It was observed that every bortorving gives rise to a debt, butevery debt does not amount to bonowing,. In these premises, theinterest paid on the unpaid purchase price of a capital asset was heldnot deductible under sec.10(2xiii) of the 1g22Act which is similar toIsec.36(1)(iii) of the 1961 Act. On the basis of this [judgrnent, ]it seemsto us that the claim of the assessee must fail. The interest was paid toNoida Authority not in respect of any capital borrowed frorn thatAuthority, but on the price of the plot r'bmaining unpaid as per therT A 939 /20t0, 9 1 | /201 | & 926t20t 1Page 5 of36 1 provisions of the lease deed. There being" no "capital [borrowed", ][the]duction. In'this view of the matter, it isnot 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 the Supreme Court, [that ][the]interest was allowable under the resicluary section 37(1) [as]expenditure incurred wholly and exclusively for the purpose of [the]business as the acquisition of the land from Noida Authority [was ][an]integral part of the conduct of the business. In Bombay SteamNavigation (supra) it was no doubt held ithat the interest, if it is notallowable under Section 10(2xiii) of the 1922 Act can be consideredfor deduction under Section 10(2)(xv) of that Act, provided it wasincurred as an integral part of the pr'bfit-earning process of thebusiness and not for acquisition of an asset or a right of a permanentcharacter. In that case the was formed for theassessee-company purpose of taking over the assets from the Scindizrs with which itsbusinesb was to be carried on. It was in that connecticin agreetl withtlre Scindias that a part of the payment rt ollld be made irnmediatelyand the balance of Rs.51.55 lakhs would tie treated as unpaid price, tobe discharged in future with interest. The'debt which gave rise to theinterest liability was incurred in connecticin with the very taking over.'of the business from the Scindias and thus fprrned an integral part ofthe profit-earning process of the business. Strch a nexus is rnissing inrr A 939 t2010, 9 | | l20r 1 & 9261201 1Page 6 of36 L, i L, i the case before us. It has not been shown that the incurring [of ][the debt]in favour of the Noida Autirority [was ][an integral part ][of ][the ][profit-]earrung process of the assessee's businesd, rvhich is that of [preparing]students to take competitive examinations [held ][by ][IIM, IIT ][etc., ][in ][the]same manner in which the Bombay S{parn Navigation [Company]incurred the debt in favour of the Sciniclas, which was closely [and].inextricably linked with the taking over of [the ][business ][from ][the]Scindias and to be carried on by the pombay Steam Navigation.lCompany. Moreover, the debt was created by the [assessee ]in favoul [of]the Noida Authority for acquisition of a bapital asset, viz., land, andtherefore the interest on the debt cannot be allowed as businessIexpenditure. 11. It is not necessary to discuss the authorities cited by the learnedcounsel for the assessee. "fCT vs DCIT, (2005) 276 ITF. 1t5 (Cal.)and Depwty CIT v. Core l:Ieatrtlt Care Ltd., (2008) 298 ITR 194 (SC)are cases in which there was an act of boi'rowing of capital and not amere incurring of a debt otherwise than by way of a borrowing. Thejudgment of the Punjab & Haryana High Court rn CIT v. Swnil X{umarSharma, (2002) 254 ITR 103 has no doubt distinguished the [judgment]of the Supreme Court in Bombay Steam'Navigation Co.Ltd. (sr"rpra)but the decision of the High Court was, rendered in the context ofcomputation of the property income and r,lot:income from business. Itdid not arise under Section 36(1Xiii) rT A 939 120 10, 9 1 1 l20r | & 926 /20 | 1Page 7 of36 I 12. The alternative of the assessee for allbwance of the.claim interest liability under Section 37(l) i:s thus not accepted. Theexpbnditure represents capital expenditure. It is part of the [price ][paid]for the Noida land; it is an adjunct to the price and hence part of it. ltis.therefore not allowable as a deduction under Section 37(I). 13. We accordingly answer the substantial questions of law No.2 fortlre assessment year 2004-05 and No.IV for the assessment year 2005-06 in favour of the revenue and against the assessee. 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 directorsof the assessee-company 15. In the assessment proceedings for tl3e assessment year 2005-06,the AO took the view that sec.36(lxii) was applicable to the paymentof bonus of Rs.32,22,0001- to the directors of the company and it wasto be disallowed because it would have b,ben payable to the directorsas dividends had it not been paid us bon rs. The assessee explainedthat the payment of bonus was supported by loard resolutions, that thedirectors were full-time employees of the company drawing salary,that all of them were managernent graduates:from IIM, Bangalore andtherefore it would not be correct to say*that the bonus would helebeen payable as dividends so as to attract,section 36(lxii). It wassubmitted that dividends were not being paid in the guise of bonus andI'in support of the claim it was pointed out that the payrnent of bonustT A 939 /2010, 9 1 1 1201 1 & 926/201 |Page B of36 i was nbt in any way related to the sharehclding of [the ][directors. ][The]relevant shareholding details and the [bonus ][payment ][in ][respect ][of ][each]director were given to the AO which he has reproduced [in ][paragraph ][3]of the assessment order. i was nbt in any way related to the sharehclding of [the ][directors. ][The]relevant shareholding details and the [bonus ][payment ][in ][respect ][of ][each]director were given to the AO which he has reproduced [in ][paragraph ][3]of the assessment order. 16. These submissions were however rejected by [the ]AO [who ][held]that on a proper reading of the section it [rn ][as ][clear ][that ]if [the ][company]could have declared dividend on the shareirolding but had not [done ][so,]then any payment of bonus/commission to the directors was hit by [the]section. He noted that no dividend was declared by [the ][company]despite substantial profits. According to him, the company [was]avoiding 13.5% dividend distribution tax and soilre more tax onincome since individuals pay 50% less tax than companies, [aird ][thus ][the]total tax avoided came to about 20% because of the payment of thebonus to the directors. He therefore disalior,ved the entire payment ofIbonus. i 17 . In the assessment year 2006-07, [,for ]substantially the sanereasons the AO disallowed the entire bonus payment of Rs.37,44,000to the directors. 18. The CIT(A) in his consolidated order for the two years upheldthe disallowance. In the further appeald preferred by the [assessee]before the Tribunal, it was held, agreeing'with [the ][assessee, ][that ]if [the]assessee had paid dividend on the shareh.olding of the directors thensuch payment would have been rnoreiithan the bonus [paid ][and]trA 93912010,91112011 & 9261201rPage 9 of36 i therefore sec.36(1)(ii) was not applicablp. The [Tribunal ][referred ][to]two directors specifically and noted that having [regard ][to ][their]shareholding, they would have been [entitled much higher ][amounts ][as]dividends than the amounts paid to them;as bonus. It [also recorded ][a]finding that none of the directors would have [received bonus ][as]dividend in case bonus was not paid. It also noted [that the ][payrnent ][of]bonus was supported by uboard resolutiori. 19. The revenue's contention that the Ttibunal erred in [allowing ][the]bonus payment to the directors cannot be accepted. It has not [disputed]the facts viz., (a) that the payment was sufported by board resolutionsand (b) that none of the directors would hlve received a lesser amountof dividend than the bonus paid to them, having regard to theirshareholding. Further, the directors are full-tirne ernployees of thecompany receiving salary. They are [i ]all graduates from IIM,Bangalore. Taking all these facts into consideration, it would appearthat the bonus was a reward for their work, in addition to the salarypaid. to them and was in no way related. to their shareholding. Thebonus payment cannot be characterised,, as, a dividend payrnent indisguise. The Tribunal has found ,T"l having regard to the; shareholding of each of the directors, !t.y would have got muchhigher amounts as dividends than as bonus and there was no taxavoidance motive. The quantum of the bbnus payment was linked tothe services rendered bv the directors. It cannot therefore be said that rr A 939 /20 r0. 9 1 1 /201 | & 926/201'l the bonus would not have been [payable ][to ][the directors ][as ][profits ][or]' dividend had it not been paid as bonus/cornmission. 20. The issr-re has been considered [by ][this ][Court ][in ]'AMD [Metplast]Pvt. I-td vs DCtrT (2012) 341 ITR [563 ][in;the ][light ][of ][the ][judgrnent ][of]the Bombay High Court in tr oysl Motqr Service [Co. ][tr-td ][vs CIT](1946) 14 ITR 647.It was observed that the [judgment ]of [the Bombay]High Court (supra) does not assist [the revenue ][and ][that ][so ][long ][as ][the]bonus or commission is paid to the directors for [services ][renclered and]as par1 of their terms of employment it has to [be ][allowed ][and]sec.36(1)(ii) does not apply. g rr A 939 /20 r0. 9 1 1 /201 | & 926/201'l the bonus would not have been [payable ][to ][the directors ][as ][profits ][or]' dividend had it not been paid as bonus/cornmission. 20. The issr-re has been considered [by ][this ][Court ][in ]'AMD [Metplast]Pvt. I-td vs DCtrT (2012) 341 ITR [563 ][in;the ][light ][of ][the ][judgrnent ][of]the Bombay High Court in tr oysl Motqr Service [Co. ][tr-td ][vs CIT](1946) 14 ITR 647.It was observed that the [judgment ]of [the Bombay]High Court (supra) does not assist [the revenue ][and ][that ][so ][long ][as ][the]bonus or commission is paid to the directors for [services ][renclered and]as par1 of their terms of employment it has to [be ][allowed ][and]sec.36(1)(ii) does not apply. g g2I. Having regard to the above legal position and [the ][factual]findings recorded by the Tribunal, wo .are unable [to ][say ][that ][the]Tribunal erred in holding that the bonus payment was allowableu/s.36(1)(ii) of the Act. The substantial [qrfiestions ]of [law ][are ][answered]in the affirmative, against the revenue anQ,in favour of [the ][assessee ]forboth the [years.] 22. The next issue, which is common to the [assessment ][years 2005-]06 and 2006-07 relates to the applicability cif Section aO(a)(ia) of theAct. According to the Section [any interest, ][comlnission or ][brokerage,]rent, royalty, fees' for professional services or fees for technicalservices payable to a resident or amounts qaVable to a contractor orsub-contractor, being resident, for [carrying: ]out [any ][work ][including]supply of labour for carrying out any work, bn which [tax ][is deductible]tTA 93912010,911/2011 & 926/2011,Page ll of36ll i'3i I, at source under Chapter XVII-B and such tax has not been deductedor, after deduction, has not been paid .on or before the due datespecified in Section 139(1)'of the Act is pot deductible in cornplrtingthe business income of the assessee. 23. Since the facts are common for the years, we at'e referring9ot1t to the facts for the assessment year 2005-06. As already noted, theassessee is a company engaged in providing education and training forvarious preparatory examinations like IIN-I, IIT, fashion designing etc.These services are provided across the, country through educationcentres run the assessee itself fianchisees. Whileby or by its completing the assessrnent, the Assessing Officer noted that theassessee had debited a sum of <6,38,64,018/- to the profit and lossaccount as payment made to franchise;es. On a. perusal of theagr""m"it betrn een the assessee and one r:f its franchisees, which, wasapparently taken as a specimen agreement, the Assessing Officer tookthe view that the payrnent made by thp assessee carre within theprovisions of Section I94(C) of the Abt as a payment madg forcarrying out a work in pursuance of a coniract and accordingly theassessee ought to have deducted tax [i,from ]the payment at theapplicable rates. He further took the view that since the assesseefailed to deduct the tax as contemplated l3y Section I94C, the amountcannot be allowed as a deduction in vierv of the embargo placed bySection a0(a)(ia). IT A 939 12010, 9 tl 1201 r & 926/201 1 .lK \ IT A 939 12010, 9 tl 1201 r & 926/201 1 .lK \ 24. The assessee's submission'was that the agreelnent was [not ][a]pure anci simple agreement for carrying out any [work within ][the]meaning of Sectio n I94-C,that it was an i,gr""m.nt for [perrnitting ][the]payee to utilize the name and copyright of the [assessee ]in [the ][study]material and in running the coaching oentres, [that ][there ][were ][mutual]rights, duties and obligations envisaged by the agreement, that [a]holistic appraisal of the agreement woulcl show that it is a businessarrangement and contemplates a sharing of the profits frotn [the]business between the assessee and the frpnchisee, that the franchiseewas neither a contractor nor a sub-conti:actor for carrying out [any]work for the assessee and that in these ciri:umstances the [assessee ][was]not responsible for deducting any tax under Section 194C. It wastherefore submitted that the Section 40(a')(ia) was not applicable andthe payment should be allowed as a o-eduction in computing thebusiness income of the assessee. These submissions' \ryere notaccepted by the Assessing Officer. He held that the words "?ny worl<"appearing in section 1 94C were defined ['in ]an inclusive manner. Heopined that the agreement entered into bptWeen the assessee and thefranchisee was a contract enforceable in liiw and it is in the uature [of ][a]service contract. According to the Assess'ing Officer, the assessee andthe franchisee cannot be said to be partners in arry business. He alsorelied on the Clause in the agreement that the entire fees werecollectecl fiom the students by the fran,;hisee and deposited in thebank account of the assessee, which rnilitated against the claim of [the]rT A 939 12010, 9 11 /20r | & 926/201 [1]Page l3 of36 e r- ', assessee that the arrangement was [a ][composite ][arrangement ][providing]for mutual duties and obligations. He [also ][negatived ][the ][assessee's]claim that the parties to the agreement \ iere not [acting ][as agents ][for]each other. According to him the fianch{see [was acting ][on ][behalf ][of]the assessee as he was using the trade name of [the ][assessee ][for]providing educatiItion to the sd,tul.rrtr. For these reasons, [the ][Assessing]Officer held that Section 194C read [\;+ith ][a0(a)(ia) ][applied. ][He]accordingly, disallowed the payment of {6,38,64,018/-. i 25. For the same reasons he disallowed the [payment of]<1I,24,07,07g1-made by the assessee in the assessment [year ][2006-07.] 26. The assessee appealed to the ClT(Appeals) who [disposed ][of ][the]appeals by a comffIon order dated 16.11 .2009. The ClT(Appeals)examined the agreernent between the assessee and the fianchisee [and]noted that the franchisee has to provide various services to [the]assessee in accordance with the agreement and that the [assessee]retained overall control of the educational centres. The arrangementwas not a joint venture arrangemenif and both [parties ][were]indepenclent contractors. The franchisee,{rad no power to appoint [the]assessee in any manner nor represent the [aSSeSSee. ]The [rvords ]["any]work" have been widely defined in. Seotio n 794C [and ][the ][services]rendered by the franchisee fell'within the,definition. According [to ][the]ClT(Appeals) the franchisee carried out specific [work for ][the ][assessee]in terms of the agreement and also [colleoted ][the ][fees ][on ][behalf ][of ][the]tTA 939/2010,911/2011 & 92612011Page l4 of36 ,i il' assessee and deposited them in the a assessee's bank account.Thereafter, the assessee made paymenti to the fianchisee and thispayment was for the work carried out by lhe franchisee in tenns of thecontract. Accordingly, he held that the Assessing Officer was right indisallowing the payments. He thus dismissed the assessee's appealson this point for both the years. ,i il' assessee and deposited them in the a assessee's bank account.Thereafter, the assessee made paymenti to the fianchisee and thispayment was for the work carried out by lhe franchisee in tenns of thecontract. Accordingly, he held that the Assessing Officer was right indisallowing the payments. He thus dismissed the assessee's appealson this point for both the years. 27. The assessee carried the matter in further appeal before theTribunal, which also passed a coinmon o..F"t for both the years on27tt'December,2010. The Tribunal had before it the sample agreementdated 1.10.2007 between the assessee and MA Sphere Academy ofAhmedabad. It appears that a statement rxlas made before the Tribunalon behalf of assessee that all the agreemi:nts with the franchisees areidentically worded. In view of the staternent, the Tribunal proceededto decide the appeals on the basis of the aforesaid agreement, taking itas representatirre of all the agreements errtered into by the assesseewith the franchisees. Before us also, the arguments proceeded on thebasis of a specimen agreement dated 1 .10.2005 entered into betweentlthe assessee and \zils Career Solutions' of, Trivandrum and it wasagreed by both the sides that this agreem"nt may be taken asrepresentative of all the agreements between the assessee and itsvarious 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 1T A 939 /2010, 9 1 | /201 | & 926/201 |Page l5 of36 I were that it was not a case where the licensee was doing any work fortlre assessee even within the wider meanirlg of the term "any work" asdefined in Section I94C or the meaning of the word ["\ryork" ][as]understood in common parlance. According to the Tribr-ural it was.only [a ][case ]of [the ][assessee ][running ][a ][study ][centre ][through ][various]licensees or fianchisees and sharing the profits with them. It opinedthat the agreement has to be read as. a whole and on doing so itbecame clear that the agreement is not for making any payment to thelicensee for any work done for the assess'ee and that it was a case ofsharing of fees for carryrng out respective obligations under acontract. In coming to this conclusion th* Tribunal referred to thejudgment of this Court in CIT v IYItrT Limited (2009) 318 ITR 289and found that the facts were sirnilar and though there were somedifferences in the terms of the ugr""ro"nt between the cited case andthe assessee's case, read as a whole, it was clear from the agreementthat it was a composite agreement providing for mutual obligationsand duties, embodying a business arrangement and cannot be brokeninto various components as suggested by the Revenue. The Tribunalfound that in the cited case also the fees:collected from the studentswere deposited in the account of the assessee (in that case) andthereafter it was shared between the assessee and the franchisees inaccordance with the terms and conditiong 9f the license agreement.The ratio of the [judgment ]of this Court;in iNIIf's case (supra) was;found applicable to the present case. In this view of the matter, thetTA 939/2010,911/2011 & 926/201rPage 16 of36 Tribunal agreed with the assessee's contention that the payment wasnot made by the assessee to the licensee/franchisee for any work andtherefore neither Section I94C nor Section 4O(aXia) was applicable.The Assessing Officer was accordingly, directed to allow thepayments. Ii Tribunal agreed with the assessee's contention that the payment wasnot made by the assessee to the licensee/franchisee for any work andtherefore neither Section I94C nor Section 4O(aXia) was applicable.The Assessing Officer was accordingly, directed to allow thepayments. Ii 29. It is against the aforesaid decision of the Tribunal that theRevenue has come in appeal under Sectic,n 260Abefore us. We havegone through the model or specimen 'agr..tn.nt dated 1.10.2005between the assessee and \zVs Career Solutions of Trivandrunl, a copyof which was filed before us in the .burr. of the hearing. Theagreement is a comprehensive agreement. It provides for severalaspects of the arrangement. The preamble narrates that the assessee isengaged in the business of offering professional learning to themembers of the public for becoming proficient in competitiveentrance examinations, personality development related programmesas per norms and methods developed by [-it ]and that the assessee alsot.owns or has access to various copyrighted material, preparatoryinformation and substantial body of technical larowhow relating to thelocation, design and operation of profe$sional learning centres. Itfurther states that the assessee (describi:d in the agreernent as thelicensor) has established a high position legarding quality of servicesavailable at the learning centres run by it and recognizes the benefit tobe run it. The licensee or the franchisee, it is further stated in thepreamble, "recognizes the benefit to be dprived fi'om being identifiedtr A 939 12010, 9 1 1 1201 1 & 926 1201 1Page l7 of36 with and licenses by the licensor and being able to [trtrlize ]the TradeNames, Designs and Copyrighted material, which the licensor is [in]possession" and that the "licensor wibhes to make its learningcommercially avaiiable to the publiq at large". With thisunderstanding between them, it was the'desire of the licensee to beiicensed on a limited basis to use the trade names, designs, copyrightand technical knowhow in connection',with the operation of theprofessional learning centres. The "preamble thus gives thebackground of the main object of ihe arrangement between theassessee and its licenses/fianchisees. If the preamble is any guide, itseems to us that the parties proceedeil to enter into a businessaffangement between themselves for their mutual benefit and themethodology adopted was to exploit the.. knowhow and copyrightedmaterial available with the assessee by .running learning centres indifferent parts of the country. 30. We may now take a brief survey of the various terms andconditions of the agreement. The territories of the fianchisees weredefined and they were prohibited from opelating beyond the marlcedterritories. It was agreed (clause 3) that the grant of the license islirnited in the sense that it is given to the licensee only for thepermitted use, which means the running of the learning centres and forthe purpose of marketing the right to use th.e technical knowhow andthe copyrighted material owned by the qFsqssee. It was also agreedthat after the termination of the agreemen!, tlle licensee shall not malcelT A 939 /20 10. 9 | | /201 | 8. 926/2011Page lB of36 30. We may now take a brief survey of the various terms andconditions of the agreement. The territories of the fianchisees weredefined and they were prohibited from opelating beyond the marlcedterritories. It was agreed (clause 3) that the grant of the license islirnited in the sense that it is given to the licensee only for thepermitted use, which means the running of the learning centres and forthe purpose of marketing the right to use th.e technical knowhow andthe copyrighted material owned by the qFsqssee. It was also agreedthat after the termination of the agreemen!, tlle licensee shall not malcelT A 939 /20 10. 9 | | /201 | 8. 926/2011Page lB of36 any claim to the trademark "Career Launcirer [India ][Ltd." ][or ]["CL" ][and]'ithe similar trade names or Llse in similar [trademark or ][trade nalne ][or ][to]confuse the public. Clause 4 provided for [the ][obligations ][of ][the]licensee. The licensee had to [provide ][at ][.its ][owtl ][cost ][the ][eqr-ripment,]furniture and fixtures at the premise apilroved [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 refet'ence [material, ][transpiracies,]coordinator guides, audit and the tapes, [video ][tapes, ][CDs ][etc. ][and ][they]:will be used by the assessee for the purpdse of [conducting the ][classes]in the learning 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]licensee will receive and collect all fees on behalf of [the ][licensor ][and]shall deposit such collections into the licensor's bank [account]-in4de specified by it and such deposit shall [be ]directly into the bankIaccount of the licensor on the day or1 which they are [collected.]Collections made after the banking hours of [the day shall ][be ][deposited]into the account on the very next day. Another [important obligation]of the licensee was to maintain a record of the [costs ]of [naterials,]wages and direct operating expenses whid.h shall be [made ][available to]the licensor in a form and at a frequency" determined by [the ][licensor.]I'rc a [gigtzoto, ][g ]rt t2ot t & [g26tzot ]lPage l9 of36a 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 accbunts, etc. for the audit to be conCucted by [the ][licensor. ][The]licensor was also at liberty to inspect [the ][premises ][of ][the ][learning]centre run by the licensee. .i .i31. Clause 5 provided for "financial [oonsideration". ][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 ilgrees [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 wbs 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 "recurringfianchise fees" in addition to the depo$it mentioned [above. ][This]clause provides that the licensee shall pa)/ recllrring fianchise [fees to]the licensor at 25% of the net revenue [parned ]fiom 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 licensor. The licensor sliall provide all confidential,all procedural manuals to the licensee. It shall [also ][give ][marketing]rT A 939 12010. 911 l20rr & 9261201rA 939 12010. 911 l20rr & 9261201r939 12010. 911 l20rr & 9261201rl20rr & 9261201r& 9261201r9261201rPage 20 of36 rT A 939 12010. 911 l20rr & 9261201rA 939 12010. 911 l20rr & 9261201r939 12010. 911 l20rr & 9261201rl20rr & 9261201r& 9261201r9261201r I and advertising advice and research data developed by it which [may]be helpful to the licensee in running the centre. [Any ][special]techniques or instructions or new ser.vices,las may be developed by thelicensor and considered to be helpful tcf the l.icensee shall [also ][be]provided. The licensor is obliged to join and assist the licensee indesigning the course-scheduling, the technique, business, ethics,conduct of classes, tests, examination;, certifications etc. [The]materials and services which are not; covered by the technicalknowhow fee were to be charged extra. In particular, the licensee hadto separately pay the licensor for application forms, procedures,publicity material, prospectus, student Ib cards, guides and charts,t:technical reference material, student grlide folders etc. Clause 7provides for "operational standards". The various sub-clauses makedetailed provisions relating to design and d6cor of the building,equipment, signs, manuals, cleanliness and so forth. Generally theseare treated as the obligations of the licensee. The licensee is also tocomply with the laws relating to health, i:leanliness, colllpensation toworkmen and their working conditions. I33. Clause B provides for "limitations ef license". The gist of it isthat the licensee cannot have any right or,interest in the licensor'strademarks, designs, copyrights, trade, names or the goodwillbelonging to it and that the licensee shpll rnaintain confidence andsecrecy of their secrets and procedures. iClurm" 10 provides for theobligation of the assessee to talce out a policy of insurance to [cover]rT A 939 t20r0, 9 | | t20t 1 &, 926t20 I 1Page 2l of36I'i'i.{ itself against certain kinds of loss/durouggi [as ][specified ][by ][the licensor]';in the project implementation manual. fh" li..ttsor's [name ][is ][to ][be]iadded as additional insured in the insurhnce policy. Copies of theinsurance policies have to be provided byhhe licensee to [the ][licensor.] i i34. There are various other provisiolrs made in the agreementregarding indemnification, consequences of default, change in theownership of licensee etc. Clause 13 provides for an administrator tobe appointed by the licensor at the professional learning centre run bythe licensee in the event of non-payment of any monies due from thelicensee, default in payment of any other charges, non-adherence or!iviolation of any terms and conditions. bgreed upoll and prolongeddisruption of the infrastructure which in the opinion of the licensor isnot [justified. ]The licensee, iir case an aifministrator is appointed bythe licensor is obliged to provide him adequate working space and isalso liable to bear the cost of the posting of the adrninistrator. Thelicensee shall reimburse the licensor, the salary paid to theadministrator. Claus'e 17 provides for "Lbitration and jurisdiction".iThe annexures to the agreement contain t!. details which are requiredto be mentioned therein by the various claluses of the agreement. i 35. There can be no dispute with regar,d to the general propositionthat in ascertaining the true effect of a document it has to be read as awhple and in the context of the surrounding circumstances. Theassessee is undoubtedly in the business of imparting coaching ortrA 939/2010,9r1/2011 & 926/2011Page22 of36 i 35. There can be no dispute with regar,d to the general propositionthat in ascertaining the true effect of a document it has to be read as awhple and in the context of the surrounding circumstances. Theassessee is undoubtedly in the business of imparting coaching ortrA 939/2010,9r1/2011 & 926/2011Page22 of36 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 tradetnark'ortrade name or reputation. It is noteworthl', that the income declared bythe assessee was <4,80,26',0601- for the assessment year 2005-06 and<6,84,27,8411- for the assessrnent year 2006-07. The income declaredby the assessee itself is an indication of its success and popularity inthe field. It is not therefore surprising thf others wanted to associatethemselves *iitr the assessee's business. .It is equally understanclablethat the assessee was willing to enter into some arrangernents withsuch persons so that the learning centres, as they are called in theagreement ) can be opened in several places of the country with theblessings or association of assessee for ihe mutual benefit of all theparties concerned. Such arrangements. are not uncotnlnon in thebusiness world which is a well known fact. These are loosely called"fianchisee agreement". In the agreement entered into by the assesseein the preset case, the words "licensor" and "licensee" are usedrespectively to denote the assessee anil {he franchisee, who hasassociated itself with the assessee's sucicess story and has openedlearning centres using the trade name of the assessee. The substance:of the agreement however, is that it is a'bursiness arrangement underwhich both parties hope to benefit. It would be myopic to view theagreement divorced from the nature of the assessee's activities and thebusiness realities.IrT A 939 /2010, 9 | 1 /2.01 1 & 926120 | |Page 23 of36i 36. Let us examine the real [nature ][of,the ][agreement between ][the]assessee and the franchisees [and ][considgr ][the ][question whether ][the]agreernent or contract is for "carrying out [any work" ][by ][the]franchisee, so as to affract the [provisions ][of ][section ] [relating ][to]tax deduction at source and consequently [the ][disallowance ][under]'section a0(a)(ia) of the Act. Or q careful;consideration of the issue, itseems 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 ii [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 studenlsare coached for writing competitive [examinations, ][is ][permitted ][to ][be]made use of by the franchisees in diffdrent places for a tnonetaryconsideration. In the case of a contractlfor the carrying [out ][of ][any]work as is envisaged by Section I94C, [there ][cannot ][be any ][use ][of ][a]person's trade name or goodwill or knbu'how by the other. Thecontract envisaged by the Section would be one [under ][which ][one]person merely renders certain services to the other person forconsideration. It is no doubt true that the word "work" has beendefined in a broad and inclusive manner in [th9 ]Section. [Nevertheless]its essential feature remains the same namely [that ]it [should ][be ][a ][work]rT A 939 12010, 9 1r 1201 | & 9261201 [1]Page24 of36 _._._-_ltI ,.-) _._._-_ltI ,.-) carried out by one person for another. [', ]The [terms ][of ][the ][contract]between the assessee and its frahchisees [in ][the ][case ][before us ][do ][not]satisfy this condition. The income tax puthorities [have'erroneously]t4: contract as one for [carrying ][out ][a ][worlc ][by ][the]interpreted franchisee foq 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 ][111o1'e ][complex]and reflects a business arrangement, as opposed to a simple [contract]for carrying out a work. The [agreement.provides ][for ][the ][supervisiou]and control by the assessee of the muhn"r. in which the learningcentres are conducted by the franchiseesi The records and books ofaccount as also the premises from whibh [the ]learning [ceutres ][are]carried on are subject to'inspection and'audit by the assessee. Thematerials for the learning centres are to be supplied by [the ][assessee ]forwhich separate charges are to be paid by the fianchisee. It [is]essentially a case of the assessee perrnitting itsgoodwill/knowhodtrade name to be utiliiecl by the fianchisees. l, 37. In consideration of the assessee permitting the use of its tradeiname by the fianchisees for the purpo,:e of running the learningcentres, the franchisee/licensee is obligell to pay under [clause ][5.6 ][of]the agreement, recurring franchise fees to the licensor at 25% of [the]net revenue which means gross revenue the service tax as applicable.This is in addition to the non-refundablg deposit to [be ][macle ][by'the]licensee with the assessee. The ['fees ]are to be [collectecl ][by ][the]tT A 939 /201 0, 9 tt l20t | & 926/20 | [1]Page 25 of36 {i ,, ,, licensees/franchisees fiom the students [jfor ]and on behalf of tlreassessee. Strict control is exercised by the [assessee, ][in ][terms ][of ][clause]4.6 ofthe agreement, over the collection hnd deposit of [the ]fees. [The]licensee is bound'to deposit the collections received [on ][a ][particular]day directly into the licensor's bank account on that day itself. Anycollections made after the banking hours shall be [deposited ][at ][the]commencement of the banking hours on the following working [day]for the bank. The licensee is to issur: receipts on behalf of [the]licensor. There was some debate before,us as to whether this [clause]would militate against the contention of the assessee th