Payments to franchisees held liable to TDS us 194C not 194J. Modus operandi for fee collection and revenue sharing not determine for tds on amount remitted

Payments to franchisees held liable to TDS us 194C not 194J. The modus operandi for collection of the fees as well as of the revenue sharing cannot determine whether the amount remitted by the assessee to the franchisee is subject to tax deduction at source u/s 194J. This was upheld by ITAT in a recent judgment.

ABCAUS Case Law Citation:
941 2016 (06) ITAT
Date of Judgment: June, 2016

Brief Facts of the Case:
The assessee was engaged in the business of running an academic institution/coaching institute. During the relevant year, the assessee made payments to its franchisees on which tax at source was deducted as per the provisions of Section 194C of the Income Tax Act, 1961. However, the Assessing Officer held that the assessee was in default as the payment to franchisee was subject to tax deduction u/s 194J . Aggrieved by the said order, the assessee filed an appeal before CIT(A). The CIT(A) allowed the appeal of the assessee. The Department had filed the present.

The assessee submitted that the issue raised in this appeal had already been decided in his favour in his own case by the ITAT for A.Y 2003 -04 to 2010-11. ITAT relying on the judgment in the assesss’s own case for AY 2003-04 to 2010-11, dismissed the appeal of the Revenue.

Important Excerpts from ITAT Judgment:

“Para 47. …………On reading of para no. 29 to 35 of the decision of the High court it is apparent that in this case the payments are not to be made by the assessee, but it was to be received by the assessee from the franchisees. The services are being provided by the assessee to the franchisees by allowing them to exploit the technical know-how and the trademark that is available with the assessee. The dominant object of the agreement is that the assessee’s trademark should be exploited for the mutual benefit of the parties and the technical know-how that is being owned by the assessee. The licensee is using it for their own benefit. Regarding the consideration also, it is flowing from franchisee to the assessing and not from assessee to the franchisee. Therefore, here. The provisions of the services are dominantly provided by the assessee to the franchisee and for which the consideration is received. The provisions of Section 194J are applicable in case, where the assessee makes any payment to a resident assessee for the specified services. Here, in this case the payment is received by the assessee from franchisee owners. It is only in the modus operandi of the collection of the fees wherein assessee transfers the money to the franchisee. The modus operandi for collection of the fees as well as of the revenue sharing cannot determine whether the amount remitted by the assessee to the franchisee is subject to tax deduction at source u/s 194J of the act. ……………………Looking to the facts of the case we are of the view that in facts assessee is providing services to the franchisee by allowing use of intangible assets. Even otherwise assesse is not paying any fees for professional services as the franchisee do not fall in to the specified profession. It is also not paying any fees for technical services to the franchisee as it does not render any services to the assessee. Hence, we do not find any infirmity in the order of 1st appellate authority and none has been pointed out by the Ld. DR. In view of this, we confirm the finding of 1st appellate authority holding that provisions of Section 194J. 

Para 48. ………………………Ground No. 2 of these appeals is against the applicability of provision of section 194J of the Act on payments made to retainers. We have already decided this issue in that appeal no. 5820/Del/2013 for Assessment Year 2003-04 wherein we have held that on the payments of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by A.O.”