CIT vs. CAREER LAUNCHER (INDIA) LTD

?K IN THE I{IGH COURT OF DELHI AT NEW DELHI + ITA No.926l20ll Reserved on: 21" March, 2012 Date of Decision: Igth April, 2012 COMMISSIONER OF INCOME TAX .....Petitioner Through: Mr. Sanjeev Rajpal, Sr. Standing Counsel. Versus CAREER LAUNCIIER INDIA LTD. ....Respondents Through: Mr. Ajuy Vohra with Ms. Kavita Jha and Mr. Vrjay Kumar Punna, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KIIANNA HON'BLE MR. JUSTICE R.V. EASWAR R.V. EASWAR. J.: For orders See ITA 93912010. |rrt N r.__-t . R.V:EASWAR, J 4ttu1 .ll q-. t- t , SANJIV KIIANNAO J APRrL t9,2ot2 /vld/trs nt.gienon Page I ofl 2012:DHC:9829-DB

+ + + L NN T'X{E ]IIIGH COUR.T OF'DEI-,HI ,{T NEW DEI-HI i trT'A No,939/20110 trT'A. No.911/20nX l lltA No.926l2011.1 ;' Rt)served on; 21'' March,, 2012 Date of Decision; 19't' April, 2012 COMMISSIONER OF INCOME TAX .....Petitioner Through: Ir,4r. Sanjeev Rajpal, Sr. Standing Counsel. Versus CAREER LAI.INCHER INDIA LTD. ....Respondents Through: Mr. Aiay Vohra with Ms. Kavita Jha and Mr. Vijay Kumar Punna, Advocates. COR,AM: IION'tsI.E MR.. JIIST'NCE SANJIV KH[.{NNA HON'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 | | Page I of36 I t ! J 2012:DHC:9829-DB

'l common order on 27'h December, 2010 in cross-appeals filed by the assessee and the revenue in ITA Nos.402 4 8. 4925/DEL/2009 and ITA Nos. 523 & 524/DEL/2010. ii 2. On 28th July, 201| this court fiamed the following substantial questions of law in respect of the assessment year 2005-06 in ITA No.9IIl20I7: I "I. Whether the respondent was not liable to deduct the tax at source for the relevant yeier on account of the payment 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 reject the claim of the respondent making the addition of Rs.6,38,64,0I8/- to income of th.g respondent for the relevant year on account of non-cleduction of TDS in terms of section aO(a)(ia) of the Act'/ m. Whether the ITAT has rightly deleted the addition of Rs.33,22,000/- made by the 'assessing officer od account of disallowance of bonusi paid to its directors without payment of the dividend, in tenns of section 36(1Xii) of the Act? ' IV. Whether the clairn of the respondent for paying interest of Rs.22,07,I88/- in the releyant year to the Noida Authority on account of purchase clf land was allowable as revenue expenditure u/s 36(lxiii) of the Act?" 3. On 14'h November, 2011, the following substantial questions of law were framed by this court for the asse'ssment year 2006-07 in ITA No.926/2011: - tTA 939t2010,9tu20t1 & 926t2011 Page 2 of36 t r' 2012:DHC:9829-DB

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 i age 3 ol'36 . ; { t I 2012:DHC:9829-DB

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 AO required the assessee to justiff the claim in view of the,proviso to section 36(1)(iii) of the .Act, inserted with effect from t'4-2004. According to the ,t proviso, 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 .i allowable 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 | | (' I 4 Page 4.ol'36 ' i 2012:DHC:9829-DB

e $: to I 8. These submissions were rejected by.the AO who disallowed the ' expenditure. The CIT(A) upheld the disailowance for the assesstnent year 2004-05. On further appeal the disaflowance was deleted by the Tribunal. Following the order of the Tribunal, the CITA) allowed the claim for the assessment year 2005-06. The revenue carried the malter in appeal to the Tribunal, which, followin$ 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 ITR 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 "i asset 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 & 92612011 Page 5 of36 2012:DHC:9829-DB

il 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 I purpose 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 & 92612011 Page 6 of36 i 2012:DHC:9829-DB

l2- 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 ITR 194 (SC) are cases in which there was an act of borrowing of capital and not a a mere incurring of a debt otherwise than by way of a.borrowing- The judgment of the Punjab &Haryana High Court in CIT v. Sunil Kwmar l Sharmu, (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 rl Page 7 of36 2012:DHC:9829-DB

D t3 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 Page B of36 t : 2012:DHC:9829-DB

\tl 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 AO 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 the total 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, "fot substantially the same 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 I the 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 ; ',' 2012:DHC:9829-DB

\i 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 finding that none of the directors woutd have received bonus .as dividend 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 shareholding of each of the directors, 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 t7 2012:DHC:9829-DB

i It ... 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 AMD Metplast Pvt Ltd vs DCtrT (2012) 341 ITR 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 .t 2012:DHC:9829-DB

i t? 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 t the 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 ought to have deducted tax Yfrom. the payment at the 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). ' rT A, 939 120 r0, 9 | | /201 r & 926 /20 | 1 Page l2 ol'36 tl 2012:DHC:9829-DB

", [L ' ,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'anchisee -, was neither a contractor nor a sub-contractor for carrying out any ' work for the assessee and that in these cirf,umstances the assessee was not 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 accepted by the Assessing Officer. He held that the words "any worl(" 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 also relied 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 tT A 939 12010, 9 1l l20l | &. 9261201 \ It ., i Page l3 of36 Ir.t ; rl 2012:DHC:9829-DB

l1 : assessee that the arrangement was a composite arrangement providing t for 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 for providing education to the students. For these reasons, the Assessing Officer held that Section I94C read *itn a0(a)(ia) applied. He -. 1 accordingly, 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 I94C 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 :l rTlg3gt2ol;,glrl2oll &9261201r I : Page 14 of36 2012:DHC:9829-DB

: \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 2012:DHC:9829-DB

: '' 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 289 and found that the facts were similar and though there were sorne differences in.the terms of the agreement between the cited case aud the assessee's case, read as a whole, it was clear from the agreement that it was a composite agreernent providing for mutual obligations and duties, embodying a business arrangement and cannot be broken into various components as suggested by.the Revenue. The Tribunal found 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 in accordance 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 2012:DHC:9829-DB

L2" 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. ' I 29. 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 copy of 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 the location, 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' I' Page l7 of36 2012:DHC:9829-DB

,,: 23 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 the professional 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 different parts of the country. lr 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 I lage tB of:6 2012:DHC:9829-DB

',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, I coordinator 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 I in 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 t licensee 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 i the licensor in a form and at a frequency.. determined by the licensor. rT A 939 12010, 9 | | l20t | & 92612011 I Page l9 of36 t 2012:DHC:9829-DB

2,) 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 i the 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 2012:DHC:9829-DB

2h 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, 1 conduct of classes, tests, examinationS, . 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 make detailed provisions relating to design g.ttd d6cor of the building, equipment, signs, manuals, cleanliness aiid so forth. Generally these are treated as the obligations of the licensee. The licensee is also to i' comply with the laws relating to health, lileanliness, compensation to workmen and their working conditions. i : i 33. 'Clause B provides for "limitations of license". The gist of it is that 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 I secrecy 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 & 92612011 Page 2l of36 2012:DHC:9829-DB

>7 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 by the licensee in the event of non-payment,of any monies due fiorn the licensee, default in payment of any othqr charges, non-adherence or violation of any terrns and conditions agreed uporl and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, in case an drdministrator is appointed by the licensor is obliged to provide him adgquate working space and is also liable to bear the cost of the posting of the adininistrator. The licensee shall reimburse the licensori the salary paid to the adrninistrator. Claus'e 17 provides for "arlitration and jurisdiction". The annexures to the agreement contain the details which are required to be mentioned therein by the various clabses of the agreement. i 35. There can be no {ispute with regard to the general proposition that in ascertaining the true effect of a document it has to be read as a t.' whole and in the context of the sunoil"aittg circumstances. The assessee is undoubtedly in the businesb of irnparting coaching or rrA 939/201 0, 91112011 & 9261201 1 Page22 of36 2012:DHC:9829-DB

LI ii j 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 t which 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 , 2012:DHC:9829-DB

21 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 person merely renders cefiain services to the other person for consideration. It is no doubt true thatithe word "work" has beeu defined in a broad and inclusive manner ih the Section. Nevertheless its essential feature remains the same nanrely that it should be a work tT A 939 12010, 9 | | 1201 | &. 9261201 | Page 24 of,36 2012:DHC:9829-DB

i. 3? t: carried out by one person for another. '] tn. tertns of the contract between the assessee and its franchisees in the case before us do not satisfy this condition. The income tax authorities have enoneously interpreted the contract as one for carrying out a work by the franchisee for the assessee. It is not afbirnple case of the assessee l engaging certain other person to condrict the learning centres for which they were to be paid. The agreerhent is rnuch lnore complex ,;|, and reflects a business arrangement, as gpposea to a simple contract for carrying out a work. The agreement provides for the supervision and control by the assessee of the manner in which the learning centres are conducted by the fianchiseesj' The records and books of account as also the premises from wnith the learning ceutres are i carried on are subject to inspection and.audit by the assessee. 'fhe materials for the learning centres are to be supplied by the assessee for '! which separate charges are to be paic! by the fi'anchisee. 'It is essentially a case of the eissessee permitting its goodwill/knowhodtrade name to be utiliaecl by the fianchisees. ;: 37. In consideration of the assessee permitting the use of its trade name by the franchisees for the pulpose of rururing the learning centres, the franchisee/licensee is oblige$ to pay under clause 5.6 of the agreement, recurring franchise fees tb the licensor at 25% of the net revenue which means gross revenue the service tax as applicable. This is in addition to the non-refundable dgposit to be made by the licensee with the assessee. The fees ;*1re to be collectecl by the tr A 939 12010, 9 11 l20l | & 926120 | | Page 25 of36 2012:DHC:9829-DB

L t, ?l ; licensees/franchisees fiom the students' for and on behalf of the assessee. Strict control is exercised by thq assessee, in terms of clause 4.6 ofthe agreement, over the collection and 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. Any collections made after the banking houils shall be deposited at the i. commencement of the banking hours on: the following working day for the bank. The licensee is to issue receipts on behalf of the licensor. There was solne debate before..us as to whether this clause would militate against the contention of the assessee that the contract is not one for carrying out any work. It appears to us that the clause has been incorporated into the agreement only as a measure of exercising control over the collections made by the licensees and it does not in any rnanner discredit the claim of the assessee that the contract is not one for carrying out any work. Both the parties-the assessee and the licensees-have entered into this arrangement only in their mutual interest and for mutual guin$. It is a simple. case of the assess.ee perrnitting the use of its trade- name or reputation by the licensees for a consideration. There arejseveral other clauses in the contract, which we have already refei'red to, which have been incorporated in the interest of both the parties to the contract. They ensure proper cornpliance of the arrangdment and the tnutual rigl-rts and obligations. These clauses, in our view; have been included only ,! trA 93912010,91112011 & 926/201r Page 26 of36 I a 2012:DHC:9829-DB

': .', to protect the interest of both the sides and to ensure smooth functioning of the business arrangement. , 38. The incomb tax authorities, we cannot help observing, have not been able to show clearly how the contract between the assessee aud the franchisees can be interpreted to be one for carrying out any work by the licensees. They have failed to appreciate that rnerely because some work is to be carried out by the i'licensees in conducting the learning centres it cannot be said that i.,the agreetnent embodies a contract for carrying out a work. The inclusive definition of the word "work" given in clause (iv) of the Explanation below section I94'C gives a clue to the interpretation of the wqrd, notwithstanding that it is an inclusive definition. The clause is as under : "(iv) "work" shall include - . ("1advertising; ,, (b)broadcasting and telecasting including production of programines for such broadcasting or telecasting; , (c) carriage of goods or passenggrs by any mode of transpott other than by railways;' (d)catering; :, (e)manufacturing or supplying ? product according to the requirement or specification of a customer by using rnaterial pr;rchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification'of a customer by using material purchased fiom'a person, other than such customer." ITAg3gt11t1,gty21tt &92g201 ,; page}T of36 . I : 2012:DHC:9829-DB

3) 39. A perusal of the extended definitior; of the word "worl(" shows that it covers a simple case of engaging a. person to render services of the kind mentioned in the definition. Otherwise every composite transaction which also has an elementl of work will be covered. Clause (e) is illustrative that this is not the intention of the legislature. A case of an arrangement under which both sides have joined together by mutu al arcangement and to share the profits of the joint enterprise carried on by them is not covered bV th3 definition. They mutually undertake the profit making activity witl; a stipulation to divide the gains of their collective efforts. The work is undertaken jointly by them for third parties who pay consideration which is shared. Parties do not work for each other. Therefo.re, the mere fact that the definition of the word "work" is an extehded or inclusive definition does not automatically justify the conclusion of the income tax authorities that the activities carried cjn by the licencees of the assessee in running learning centres amount to the carrying or-rt of any work for the assessee in pursuance of the contract. 40. In Commissioner of GifrTax vs. l{. S. Getti Chettiar, (1971) 82 ITR 599, Hegde J. elucidated the functi,on of an inclusive definition in the following words (at page 605): - "As observed in Craies on Statute Law (sixth edi.tion, page 213), an interpretation clause which extends the meanin.g of a v,ord does not take away its qrdinary nxeani'ng. An tT A 939 12010, 91 1 1201 1 &. 926120r I Page 28 ol'36 'i 2012:DHC:9829-DB

3) interpretation clause is not mean( to prevent the vvord receiving its ordinary, popular,,. and natural sense whenever that would be properly ailplicable, but to enable the word as used in the Act, when.there is nothing i'n the context or the subject-matter to the contrary, to be applied to sonxe things to which it would. not ordinarily be applicable." ,1 41. We are not referring in detail to the judgment of this Court in CIT Vs. NIIT Ltd. (supra) cited on behalt- of the assessee because that case was concerned with the provisions 'of Section I94I of the Act. However, ofl going through the judg*'"nt *" find that there arb observations therein to the effect that a tianchisee agreetnent cannot be broken up into several parts to bring it rryithin the TDS provisions and that the dominant intention of the par,fies to the agreement should be respected and given effect to, as gatthered from the composite agreement. It is significant to note that in that case the assessee (NIIT) was engaged in the business of providing computer education and training through its own centres and also through franchisees, who were providing NIIT courses under licenses from the assessee. The other terms of the franchisee agreement, ,lvhich have been referred to in the judgment, show that as in the presept case, in'that case also the NIIT was to provide the relevant cour$ material and expertise in providing computer education to the franchisees, that it was the responsibility of the franchisees to set up,infrastructure facilities such as class room, equipment, furniture, adtnihistrative set up etc. and also to operate and manage the education cer{tre on day-to-day basis etc. IT A 939 12010, 9 | | l20l 1 8. 926120 1 | I I Page 29 o1'36 I .; 2012:DHC:9829-DB

3{ In that case it was also one of the terms,of the franchisee agreement that fees collected from the students by the franchisees were to be deposited in the account. of the assessee and were thereafter to be shared with the franchisees in accordance with the fianchisees in accordance with the franchise/license agdeement. On these facts, it was held by the Division Bench of this Court that the dominant intention of the parties, gathered from a composite reading of the entire agreement as a whole, was to coriduct business and share the profits. The ratio of this judgment equally applies to the facts of the present case despite the fact that a differ,ent TDS provision has been invoked by the income tax authorities in the present case. 42. For the above reasons we hold that the conclusion arrived at by the Tribunal cannot be disturbed. The Tribunal was right in law in holding that the provisions of Section 194C and section 40(a)(ia) are not applicable to the facts of the case. 'We accordingly, answer the substantial question of law in favour of 'the assessee and against tlie Revenue for both the years. 43. In respect of assessment year 20t04-05 in ITA No.939/2010 there is another substantial question of ldw which has to.be decided. This is in respect of the non-compete fee of {5,40,000/- payable by the assessee to Mr. Vrjay Kalyan Jhal and Mr. Sujit as revenue expenditure. The substantial question of.ilaw frarned by this Court is somewhat restrictive in the sense that it,appears to lirnit the scrutiny tr A 939 12010, 9 t\ 1201 | & 9261201 | . Page 30 of36 2012:DHC:9829-DB

)[ by this Court of the order of the Tribunal only on two aspects (a) the period of the agreement and (b) on the mode of payment. 44. The brief facts in this connection are that the assessee paid a sum of {5,40,000/- during the ,.l.vunt accounting year as non- compete feqs to Mr. Vrjay Kalyan Jha and Mr. Sujit. The stipulation was that they should not enter into a business similar to the assessee's business up to 3I.12.2005. The Ass.rring Officer was of the view that the amount represented capital expenditure and accordingly called upon the assessee to justify the claim., It was ekplained by the assessee that the amount represented propottionate amount for 9 months during the relevant previous year r,vhich ended on 3I.3.2004 and that it was paid under an agreement r,yith the two persons. A copy of the agreement was also filed with the Assessing Officer. It was claimed that. the non-compete fee was pa,id in respect of a very short period of non-competition and therefore the assessee cannot be said to have derived any enduring advantage. It was thus claimecl that the payment represented revenue expenditure. ; 45. These submissions did not find -favour with the Assessing Officer. He perused the agreement and found that Mr. Vrjay Kalyan Jha and Mr. Sujit were to be paid a sum of {15 lakhs over a period fiom I.3.2003 to 30.11.2003 and that out of the. total amount, 60% amounting to {9 laktrs shall be paid both for services rendered by them as faculty, trainer etc. and the bafance of {6 lakhs shall be rT A 939 12010, 9 11 l20l | & 926120 | | Page 3l ol-36 2012:DHC:9829-DB

)1 treated as payment of non-compete fee fbr their agreeing not to enter the same business as was being carri-eil on by the assessee till 31.12.2005. He referred to several authorities and held that in the light of these authorities, 'the elimination or warding off of competition over some .length of timp resulted in an enduring advantage to the assessee and therefore the payment atnounted to capital expenditure. 46. On appeal the ClT(Appeals) upheld the disallowance. In the further appeal to the Tribunal, it was con.tended that the payment was necessitated for the smooth running of the_ assessee's business and was hence revenue expenditure. The Tril:lunal on a perusal of the agreement entered into between the assessee on the one hand and Mr. VUay Kalyan Jha and Mr. Sujit on the oih*., held that these persons had agreed not to enter the MBA Education Preparation marlcet either individually, jointly or in association with other persons, either in the capacity of running their own business or joining any other competitor in the faculty, lnanagerial or consultin g capacity for a period of 3 years ending on 3 1.3.2005. The Tribunal further noticed that fi'orn 'I o hours I.1.2004 to 30.12.2004 Mr. Vrjay KalyanJha was to deliver 40 of classes and was required to design and develop contacts with the assessee. The payrnent for this was fixed at<3,20,000/-. Similarly, I\{r. Sujit was also to be available to the assessee for talcing 425 hours of classes for the period frorn 1.5.2004 t6 ZO.g.Z004 and also require to design and develop contacts for the assessee, for which he was to rTA 93912010,9t1/2011 & 92612011 I Page 32 of36 2012:DHC:9829-DB

,;ijl be paid <2,02,5001-. These payments lvere to be made in rnonthly installments over a period of time. After hoticing the provisions of the :i agreement the Tribunal held that the period involved, during which Mr. Vrjay I(alyan Jha and Mr. Sujit were not to compete with the assessee in any maruler was only a short period o'f 12 months and therefore there could be no enduring berlefit enuring to the assessee. In this view of the matter, the Tribunal directed the Assessing Officer to allow the payment as revenue expenditure. 47. It rnay be seen from the above Jhat the Tribunal gave two primary reasons for allowing the exp.ndilture as revenue expenditure. First, that the period for which the assessee sought to elirninate competition from Mr. Vrjay Kalyan Jha and Mr. Sujit was only 12 months which was too short a period to bf considered as conferring an enduring benefit to the assessee. Second, the Tribunal relied on the fact that the non-compete fee was to be paid to the above persons in equal installments over a period of time. In the case of Mr. Vtjay I(aiyan Jha, the payment of <3,20,000/- was to paid in 10 equal monthly installments of <32,0001- each ,fro- I.3.2004 to 1.12.2004. In the case of Mr. Sujit, the payment was {2,02,5001- which was to be paidin 5 equal monthly installments of <42,5001- each fiom I.6.2004 1o 1 . 10.2004. 48. These reasons.given by the Tribunal, though may appear to be too brief, are however germane to the cbnclusion that there was no tTA 93912010. 9l l/20 I | & 926/2011 Page 33 of36 'l s ;l I 2012:DHC:9829-DB

31 enduring advantage received by the asse$see by rnaking ihe payrnent of non-compete fee3. It is necessat'y , to keep the nature of the assessee's business in mind before judging the allowability by the payment. The assessee is engaged in theibusiness of running learning centres . for preparing/coaching students to ' face corlpetitive examinations held by IIM, IIT, Institute. of Inforrnation Technology etc. In conducting the classes for the stuclents, the assessee has to rely on faculty members of repute. Mr. Vtj{y Kalyan Jha and Mr. Sujit were such faculty members, who were engaged by the assessee. It is also necessary for the assessee to ensure,that the faculty rnernbers do not compete with its business because th4t would affect the business. It cannot be disputed that the popularrtytand success of the learning centres run by the assessee is in a large measure due to the efficieltcy, . knowledge and reputation of the faculty mernbers. If the faculty members leave the assessee and decide to set up their own learning : centres, that is most certain to affect the'assessee's business. 'It was therefore, in the interest of the assessee'sbusiness that it ensured that .for some period of time, such faculty -.-b.r, do not compete with it in the same business. It is with this end id'view that the assessee made '1 the payment to Mr. Vijay Kalyan Jha and Mr. Sujit. The period for which these persons could not competer with the assessee has been 'I found by the Tribunal to be a short perictd of 12 months. This is not an irrelevlnt consideration taken into account by the Tribunal. The fact that the payment was made in monthly installments is not decisive tT A 939 12010, 9 1 | l20l | & 926/201 1 E I Page 34 of36 2012:DHC:9829-DB

\o of the question; even if it had been mad,g in a lump sum that would have made little difference to the conclusion, having regard to the short period of 12 months during which the above two persons were prohibited from competing with the asseisee's business. In our opinion, it cannot be disputed any more that payment to ward off competition for a limited period should be held to be revenue expenditure and not capital expenditure. If that is so, the fact that the payment was made in a lump sllm or in'' installments hardly matters. We are therefore, satisfied that in coming to the conclusion that the payment of {5,40,000/- was a revenue erpenditure, the Tribunal has not ignored any relevant material or taken into account irrelevant material. The Tribunal was certainly entitled to take note of the entire conspectus of the facts of the case and in particular the period during which the faculty members were prohibited from competing with the assessee's business. In this view of ''thd matter we auswer the substantial question of law fi'amed vide cirder dated 20.9.2010 in the affirmative, in favour of the assessee and against the revenue. 49. In the result, the first thlee substantiaf questions of larv in ITA No.91I/2011 answered in favour of th.e assessee and against the Revenue and the forth substantial questiol qf law is answered against the assessee and in favour of the Revenue. both the substantial : t' assessee and against 50. In ITA No.926120II answered in favour of the rT A 939 120 10, 9 1 1 12011 &. 9261201 | questions of law are the Revenue. In ITA Page 35 ol'36 2012:DHC:9829-DB

No.939/2010 question No.1 is answered in iu,rorr. of the assesbee and against the Revenue and question No.2 is answered in favour of the Revenue and against the assessee. The, aiipeals are disposed of as above. There will be no order as to costs.r ,' l" r'\ ll\l .^yt--I'. ' n.v.fuaswAR, J t' i -// '/L1 .I t / - LL ; 1 . SANJIV KITANNA, J AlPRrX, !9,2012 ' lvldlhs ,' .l || rT A 939 12010, 9 | | l20l | & 9261201 1 Page 36 of36 t1l a I F -i 2012:DHC:9829-DB