Revenue Shared With Franchise Doesn't Attract TDS Liability U/S 194-I If No Actual Services Were Rendered: Delhi ITAT

Section 194I of Income tax Act imposes an obligation for TDS deduction on persons (other than individual/HUF who are not subject to audit) making rental payments to resident Indians above a specified limit i.e., 2.40 lacs in a year.

The ITAT emphasized that sharing of revenue and its impact of taxability vis-à-vis application of TDS provision depends upon the method of accounting adopted by respective assessees.

Since in the present case, the franchise agreement and method of sharing the revenue based on computation sheet clearly shows that assessee records all the revenue and share the surplus with the franchisee/ collaborator after adjusting the expenditure, the ITAT explained that no TDS is payable on such franchise fees.

The Division Bench comprising S. Rifaur Rahman (Accountant Member) and Sudhir Pareek (Judicial Member) observed that “Whatever expenses claimed as share of surplus with the collaborator, it is only sharing of revenue and not the claim of expenditure, as per the terms of agreement, the collaborator does not render any service to the assessee”. (Para 17)

Facts of the case:

The assessee/ respondent, engaged in the business of slimming and beauty services, claimed expenses amounting to Rs 2.39 crore under the head 'profit from collaborators'. The AO however, disallowed such expenses u/s 40(a)(ia) due to non-deduction of tax u/s 194-I.

Observations of the Tribunal:

The Bench found that the franchiser (VLCC) is the absolute owner of VLCC brand and logo, and operates the business in accordance with fully owned distinctive system, plant, utilizing and comprising certain proprietary markets.

The Bench also noted that VLCC grants franchisee to partner and engage in the business as per the terms of the agreement, and receives requisite fee or payment in consideration for the same.

Further, the assessee is sharing the revenue based on the franchise agreement, and claims expenditure or shares surplus based on the method adopted by the assessee, which may be either the franchise method or the JV method, added the Bench.

The Bench opined that the AO has mixed up the methods adopted by the assessee, and clarified that whatever expenses claimed as share of surplus with the collaborator, it is only sharing of revenue and not claim of expenditure as per the terms of the agreement, as the collaborator does not render any service to the assessee.

The Bench pointed that the assessee records the whole revenue and after adjusting operational expenses, cost of capital outlay and services, shares the revenue with collaborator, therefore there is no involvement of any rental income.

Emphasizing that the assessee has shared the surplus with the collaborator, which does not fall under any expenditure drawn u/s 30 to 37 or Section 40(a)(ia), the Bench observed that sharing of revenue and its taxability vis-à-vis application of TDS depends upon the method of accounting of adopted by the respective assesses.

The Bench elaborated that the assessee follows JV model, incurs all expenditure and shares the surplus with collaborator which clearly showcases that the facilities are operated and controlled by the assessee.

Therefore, the ITAT concluded that issue of TDS has no application as the collaborator does not render any service and claim of expenditure is nothing but sharing of revenue in accordance to the agreement undertaken by the parties.

Thus, the ITAT dismissed the Revenue's appeal.

Counsel for Appellant/ Revenue: Vivek K. Upadhyay

Counsel for Respondent/ Assessee: CA Vinod Kumar Bindal and Advocate Rinky Sharma

Case Title: Additional CIT vs. VLCC Health Care

Case Number: ITA No.4414/DEL/2017

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