DCIT, NEW DELHI vs. M/S. C L EDUCATE LTD., NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B”: NEW DELHI BEFORE SHRI A.T.VARKEY, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA Nos.5820 to 5827/Del/2013 (Assessment Years: 2003-04 to 2010-11)

DCIT, C.L. Educate Ltd., Circle-49(1), 4th Floor, (Formerly M/s. Career Vs. Aayakar Bhawan, Laxmi Nagar, launcher India Ltd.), District Centre, New Delhi- R-90, Greater Kailash, Part-I, 110092 New Delhi PAN:AAACC3885C (Appellant) (Respondent)

Revenue by : Sh.Yatendra Singh, Sr. DR Assessee by: Sh. Ajay Vohra, Sr. Adv Sh. Neeraj Jain, Adv Smt. Shaily Gupta, CA Date of Hearing 20/01/2016 Date of pronouncement 17/03/2016

O R D E R PER PRASHANT MAHARISHI, A. M. These are the appeals filed by the revenue against the order dated 1. 31.07.2013, 06.08.2013, 08.08.2013of the learned Commissioner of Income-tax (Appeals)-XXX, New Delhi for the Assessment Years 2003-04 to 2010-11. Firstly we take up appeal no 5820, 5821, 5822 and 5823 /del/2013 for AY 2003- 2. 04 to 2006-07 as these appeals contain identical grounds 3. The revenue has raised the following grounds in ITA No.5820/Del/2013 for the Assessment Year 2003-04:- 1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assesses that the order passed by the AO has become barred by limitation relying upon the judgment of Hon'ble High Court in the case of M/s NHK Japan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 3. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the

Page 2 of 24 appeal on the issue of short deduction of TDS on payments of retainer ship fee. 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of the assessee as unless it is verified whether the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component. The revenue has raised the following grounds in ITA No.5821/Del/2013 for the 4. Assessment Year 2004-05:- 1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assessee that the order passed by the AO has become barred by limitation relying upon the judgment of Hon'ble High Court in the case of M/s NHK Japan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable lo the payments made to franchisees. 3. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee. 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of the assessee as unless it is verified whether the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component.” The revenue has raised the following grounds in ITA No.5822/Del/2013 for the 5. Assessment Year 2005-06:- “1 . On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assessee that the order passed by the AO has become barred by limitation relying upon the judgment of Hon'ble High Court in the case of M/s NHK Japan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 3. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee.

Page 3 of 24 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of the assessee as unless it is verified whether the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component.” The revenue has raised the following grounds in ITA No.5823/Del/2013 for the 6. Assessment Year 2006-07:- “1. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the appeal in favour of the assessee that the order passed by the AO has become barred by limitation relying upon the judgment of Hon'ble High Court in the case of M/s NHK, Japan Broadcasting. However, this issue has not attained finality since the SLP on the said issue is pending with the Hon'ble Supreme Court in the case of M/s NHK Japan Broadcasting. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 3. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee. 4. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in deciding the issue of non-deduction of TDS on service tax component in favour of the assessee as unless it is verified whether the deductee has duly deposited the service tax, it cannot be concluded that the deductee has not earned any income from service tax component.” These appeals contain identical grounds and therefore for the sake of 7. brevity grounds raised in appeal no 5820/Del/2013 for AY 2003-04 are taken first. 8. The ground No.1 is against the issue of limitation which is conceded by the AR of the appellant. Therefore the ground regarding the validity of the order is allowed. Therefore ground no 1 of the appeal is allowed. 9. Ground No.2 of the appeal is that payment made to the franchise arenot covered u/s 194C of the Act and therefore no withholding tax is applicable on the same. During the year the assessee has made payment of Rs.33701080/- to various franchises. According to the assessee the payment made to the franchise are not subject to taxdeduction atsources u/s 194C of the Act and therefore no tax has been deducted. However according to the AO the assessee should have deducted tax on this sum u/s 194C of the Income Tax Act. The AO was of the opinion that the relationship

Page 4 of 24 between the assessee and the franchise are in the nature of contract and not a joint venture as claimed by the assessee. It is further stated the licensee has provided services to the various customers on behalf of the assessee and therefore it is in the nature of service contract. It was also contention of the AO that the assessee is crediting the sum in the name of the licensee and the payment has been reflected by the franchisee in the profit and loss account and therefore there is no sharing of the revenue but the contract is for consideration for the service. On this pretext, LD. AO held that the gross amount paid of Rs.3,37,01,080/- is subject to TDS @2.06% and therefore there is non- deduction of tax and hence, short deduction of tax of Rs.694242/- and interest thereon of Rs.6,66,473/- was worked out u/s 201(1) and interest u/s 201(1A) of the Act respectively. 10. Against this assessee preferred appeal before the learned Commissioner of Income-tax (Appeals) who held that no tax deduction at source is required to be made on payment made to franchise in view of the decision of the Hon’ble Delhi High Court in assessee’s own case reported at 358 ITR 179. Therefore against this ground the revenue is in appeal. 11. The LD DR relied on the order of the AO. The ld. AR submitted that this matter is covered in favour of assessee in assessee’s own case for the Assessment Year 2005-06 by decision of Honourable Delhi high court which ld. CIT (A) has followed. He further submitted that there is no change in the facts and circumstances of the case as well as the agreements of the assessee entered in to with the franchise centers. 12. We have carefully considered the rival contentions. In assessee’s own case Hon’ble Delhi High Court was of the view that provision of section 194C does not apply to the payment of franchise fees as under :- “22. The next issue, which is common to the assessment years 2005-06 and 2006-07 relates to the applicability of Section 40(a)(ia) of the Act. According to the Section any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work including supply of labour for carrying out any work, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in Section 139(1) of the Act is not deductible in computing the business income of the assessee. 23. Since the facts are common for both 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

Page 5 of 24 education centres run by the assessee itself or by its franchisees. While completing the assessment, the Assessing Officer noted that the assessee had debited a sum of Rs. 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 franchisees, which was apparently taken as a specimen agreement, the Assessing Officer took 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 from the payment at the applicable rates. He further took the view that since the assessee failed to deduct the tax as contemplated by Section 194C, the amount cannot be allowed as a deduction in view of the embargo placed by Section 40(a)(ia). 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 194C, that it was an agreement for permitting the payee to utilize the name and copyright of the assessee in the study material and in running the coaching centres, that there were mutual rights, duties and obligations envisaged by the agreement, that a holistic appraisal of the agreement would show that it is a business arrangement and contemplates a sharing of the profits from the business between the assessee and the franchisee, that the franchisee was neither a contractor nor a sub-contractor for carrying out any work for the assessee and that in these circumstances the assessee was not responsible for deducting any tax under Section 194C. It was therefore submitted that the Section 40(a)(ia) was not applicable and the payment should be allowed as a deduction in computing the business income of the assessee. These submissions were not accepted by the Assessing Officer. He held that the words "any work" appearing in section 194C were defined in an inclusive manner. He opined that the agreement entered into between the assessee and the franchisee was a contract enforceable in law 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 from the students by the franchisee and deposited in the bank account of the assessee, which militated against the claim of the 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 were not acting as agents for each other. According to him the franchisee was acting on behalf of the assessee as he was using the trade name of the assessee for providing education to the students. For these reasons, the Assessing Officer held that Section 194C read with 40(a)(ia) applied. He accordingly, disallowed the payment of Rs. 6,38,64,018/-. 25. For the same reasons he disallowed the payment of Rs. 11,24,07,079/- made by the assessee in the assessment year 2006-07. 26. The assessee appealed to the CIT(Appeals) who disposed of the appeals by a common order dated 16.11.2009. The CIT(Appeals) examined the agreement between the assessee and the franchisee 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 arrangement was not a joint venture arrangement and both parties were independent contractors. The franchisee had no power to appoint the assessee in any manner nor represent the assessee. The words "any work" have been widely defined in Section 194C and the services rendered by the franchisee fell within the definition. According to the CIT(Appeals) the franchisee carried out specific work for the assessee in terms of the agreement and also collected the fees on behalf of the assessee and deposited them in the 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 terms of the contract.

Page 6 of 24 Accordingly, he held that the Assessing Officer was right in disallowing the payments. He thus dismissed the assessee's appeals on this point for both the years. 27. The assessee carried the matter in further appeal before the Tribunal, which also passed a common order for both the years on 27th December, 2010. The Tribunal had before it the sample agreement dated 1.10.2007 between the assessee and M/s Sphere Academy of Ahmedabad. It appears that a statement was made before the Tribunal on behalf of assessee that all the agreements with the franchisees are identically worded. In view of the statement, the Tribunal proceeded to decide the appeals on the basis of the aforesaid agreement, taking it as representative of all the agreements entered into by the assessee with the franchisees. Before us also, the arguments proceeded on the basis of a specimen agreement dated 1.10.2005 entered into between the assessee and M/s Career Solutions of Trivandrum 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. 28. The Tribunal, after noting the various clauses of the agreement, held that the tenor and purport of the various terms of the agreement were that it was not a case where the licensee was doing any work for the assessee even within the wider meaning of the term "any work" as defined in Section 194C or the meaning of the word "work" as understood in common parlance. According to the Tribunal it was only a case of the assessee running a study 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 the Tribunal referred to the judgment of this Court in CIT v. NIIT Ltd. [2009] 318 ITR 289/ 184 Taxman 472(Delhi) and found that the facts were similar and though there were some differences in the terms of the agreement between the cited case and the assessee's case, read as a whole, it was clear from the agreement that it was a composite agreement 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 fees collected from the students were deposited in the account of the assessee (in that case) and thereafter it was shared between the assessee and the franchisees in accordance with the terms and conditions of the license agreement. The ratio of the judgment of this Court in NIIT's case (supra) was found applicable to the present case. In this view of the matter, the Tribunal agreed with the assessee's contention that the payment was not made by the assessee to the licensee/franchisee for any work and therefore neither Section 194C nor Section 40(a)(ia) was applicable. The Assessing Officer was accordingly, directed to allow the payments. 29. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal under Section 260A before us. We have gone through the model or specimen agreement dated 1.10.2005 between the assessee and M/s Career Solutions of Trivandrum, 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 preamble 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 material, preparatory information and substantial body of technical know-how relating to the location, design and operation of professional learning centres. It further states that the assessee (described in the agreement as the licensor) has established a high position regarding quality of services available at the learning centres run by it and recognizes the benefit to be run it. The licensee or the

Page 7 of 24 franchisee, it is further stated in the preamble, "recognizes the benefit to be derived from being identified with and licenses by the licensor and being 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 trade names, designs, copyright and technical know-how in connection with the operation of the professional learning centres. The preamble thus gives the background of the main object of the arrangement 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 know-how and copyrighted material available with the assessee by running learning centres in different parts of the country. 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 operating 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 know-how and the copyrighted material owned by the assessee. It was also agreed that after the termination of the agreement, the licensee shall not make any claim to the trademark "Career Launcher India Ltd." or "CL" and the similar trade names or use in similar trademark or trade name 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, transpierces, coordinator guides, audit and the tapes, video tapes, CDs etc. and they will be used by the assessee for the purpose 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 specified by it and such deposit shall be made directly into the bank account of the licensor on the day on 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 materials, wages and direct operating expenses which shall be made available to the licensor in a form and at a frequency determined by the licensor. 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 accounts, etc. for the audit to be conducted by the licensor. The licensor was also at liberty to inspect the 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 know-how 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 the first receipt. Clause 5.6 is important and it provided for "recurring franchise fees" in addition to the deposit

Page 8 of 24 mentioned above. This clause provides that the licensee shall pay recurring franchise fees to the licensor at 25% of the net revenue earned from 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 shall provide all confidential, all procedural manuals to the licensee. It shall also give marketing 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 services as may be developed by the licensor and considered to be helpful to the licensee shall also be provided. The licensor is obliged to join and assist the licensee in designing the course-scheduling, the technique, business ethics, conduct of classes, tests, examinations, certifications etc. The materials and services which are not covered by the technical know-how fee were to be charged extra. In particular, the licensee had to separately pay the licensor for application 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 and décor of the building, equipment, signs, manuals, cleanliness and so forth. Generally these are treated as the obligations of the licensee. The licensee is also to comply with the laws relating to health, cleanliness, compensation to workmen and their working conditions. 33. Clause 8 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 secrecy of their secrets and procedures. Clause 10 provides for the obligation of the assessee to take out a policy of insurance to cover itself against certain kinds of loss/damage as specified by the licensor in the project implementation manual. The licensor's name is to be added as additional insured in the insurance policy. Copies of the insurance policies have to be provided by the licensee to the licensor. 34. There are various other provisions made in the agreement regarding indemnification, consequences of default, change in the ownership of licensee etc. Clause 13 provides for an administrator to be appointed by the licensor at the professional learning centre run by the licensee in the event of non-payment of any monies due from the licensee, default in payment of any other charges, non- adherence or violation of any terms and conditions agreed upon and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, in case an administrator is appointed by the licensor is obliged to provide him adequate working space and is also liable to bear the cost of the posting of the administrator. The licensee shall reimburse the licensor the salary paid to the administrator. Clause 17 provides for "arbitration and jurisdiction". The annexures to the agreement contain the details which are required to be mentioned therein by the various clauses of the agreement. 35. There can be no dispute with regard to the general proposition that in ascertaining the true effect of a document it has to be read as a whole and in the context of the surrounding circumstances. The assessee is undoubtedly in the business of imparting coaching or 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 know-how or a trademark or trade name or reputation. It is noteworthy that the income declared by the assessee was Rs. 4,80,26,060/- for the assessment year 2005-06 and Rs. 6,84,27,841/- for the assessment year 2006-07. The income declared by the assessee itself is an indication of its success and popularity in the field. It is not therefore surprising that others wanted to associate themselves with the assessee's business. It is equally

Page 9 of 24 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 the parties concerned. Such arrangements are not uncommon in the business world which is a well known fact. These are loosely called "franchisee agreement". In the agreement entered into by the assessee in the preset case, the words "licensor" and "licensee" are used respectively to denote the assessee and the franchisee, who has associated itself with the assessee's success story and has opened learning centres using the trade name of the assessee. The substance of the agreement however, is that it is a business arrangement under which both parties hope to benefit. It would be myopic to view the agreement divorced from the nature of the assessee's activities and the business realities. 36. Let us examine the real nature of the agreement between the assessee and the franchisees and consider the question whether the agreement or contract is for "carrying out any work" by the franchisee, so as to attract the provisions of section 194C relating to tax deduction at source and consequently the disallowance under Section 40(a)(ia) of the Act. On a careful consideration of the issue, it seems to us that it would not be possible to view the agreement as a contract for carrying out any work by the franchisee. The terms 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 know-how belonging to the assessee in the business of running learning centres, where students are coached for writing competitive examinations, is permitted to be made use of by the franchisees in different places for a monetary consideration. In the case of a contract for the carrying out of any work as is envisaged by Section 194C, there cannot be any use of a person's trade name or goodwill or know-how by the other. The contract envisaged by the Section would be one under which one person merely renders certain services to the other person for consideration. It is no doubt true that the word "work" has been defined in a broad and inclusive manner in the Section. Nevertheless its essential feature remains the same namely that it should be a work carried out by one person for another. The terms of the contract between the assessee and its franchisees in the case before us do not satisfy this condition. The income tax authorities have erroneously interpreted the contract as one for carrying out a work by the franchisee for 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 more complex and reflects a business arrangement, as opposed 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 franchisees. The records and books of account as also the premises from which the learning centres are carried on are subject to inspection and audit by the assessee. The materials for the learning centres are to be supplied by the assessee for which separate charges are to be paid by the franchisee. It is essentially a case of the assessee permitting its goodwill/know-how/trade name to be utilized by the franchisees. 37. In consideration of the assessee permitting the use of its trade name by the franchisees for the purpose of running the learning centres, the franchisee/licensee is obliged 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-refundable deposit to be made by the licensee with the assessee. The fees are to be collected by the licensees/franchisees from the students for and on behalf of the assessee. Strict control is exercised by the assessee, in terms of clause 4.6 of the agreement, over the collection and deposit of

Page 10 of 24 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 hours shall be deposited at the 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 some 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 manner 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 gains. It is a simple case of the assessee permitting the use of its trade name or reputation by the licensees for a consideration. There are several other clauses in the contract, which we have already referred to, which have been incorporated in the interest of both the parties to the contract. They ensure proper compliance of the arrangement and the mutual rights and obligations. These clauses, in our view, have been included only to protect the interest of both the sides and to ensure smooth functioning of the business arrangement. 38. The income tax authorities, we cannot help observing, have not been able to show clearly how the contract between the assessee and the franchisees can be interpreted to be one for carrying out any work by the licensees. They have failed to appreciate that merely because some work is to be carried out by the licensees in conducting the learning centres it cannot be said that the agreement embodies a contract for carrying out a work. The inclusive definition of the word "work" given in clause (iv) of the Explanation below section 194C gives a clue to the interpretation of the word, notwithstanding that it is an inclusive definition. The clause is as under : "(iv) "work" shall include - (a) advertising; (b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting; (c) carriage of goods or passengers by any mode of transport other than by railways; (d) catering; (e) manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased 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 from a person, other than such customer." 39. A perusal of the extended definition of the word "work" 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 element 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 mutual arrangement and to share the profits of the joint enterprise carried on by them is not covered by the definition. They mutually undertake the profit making activity with 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. Therefore, the mere fact that the definition of the word "work" is an extended or inclusive definition does not automatically justify the conclusion of the income tax authorities that the activities carried on by the licensees of the assessee in running learning centres amount to the carrying out of any work for the assessee in pursuance of the contract.

Page 11 of 24 40. In Commissioner of Gift-Tax v. N. S. Getti Chettiar, [1971] 82 ITR 599(SC), Hegde J. elucidated the function of an inclusive definition in the following words (at page 605): - "As observed in Craies on Statute Law (sixth edition, page 213), an interpretation clause which extends the meaning of a word does not take away its ordinary meaning. An interpretation clause is not meant to prevent the word receiving its ordinary, popular and natural sense whenever that would be properly applicable, but to enable the word as used in the Act, when there is nothing in the context or the subject-matter to the contrary, to be applied to some things to which it would not ordinarily be applicable." 41. We are not referring in detail to the judgment of this Court in NIIT Ltd. (supra) cited on behalf of the assessee because that case was concerned with the provisions of Section 194I of the Act. However, on going through the judgment we find that there are observations therein to the effect that a franchisee agreement cannot be broken up into several parts to bring it within the TDS provisions and that the dominant intention of the parties to the agreement should be respected and given effect to, as gathered 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, which have been referred to in the judgment, show that as in the present case, in that case also the NIIT was to provide the relevant course 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, administrative set up etc. and also to operate and manage the education centre on day-to-day basis etc. 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 franchisees in accordance with the franchise/license agreement. 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 conduct business and share the profits. The ratio of this judgment equally applies to the facts of the present case despite the fact that a different 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 the Revenue for both the years.”

Page 12 of 24 on the assessee on account of non-deduction of tax on Franchisee fees of Rs. 3,37,01,080/- u/s 201 (1) of the Act of Rs. 694242/- and interest thereon of Rs. 6,66,473/- u/s 201(1A) of the Act. Therefore ground No.2 of the appeal is dismissed. 14. Ground No.3 of the appeal is against the issue of short deduction of TDS on payment of retainer fees and consequently passing an order u/s 201(1) and section 201(1A). 15. Brief facts of this case is that the assessee is engaged in regular faculty on rolls of the company and the assessee is also using the services of teachers whom it is showing as retainers and payment made to them is subject to TDS u/s 194J of the Act as professional fees. According to the AO the payment made as retainer ship should have been subjected to TDS u/s 192 of the Act as according to him it is a contract of employment and not a contract for service. The reasons for reaching at this conclusion was that retainers are attending office for 25 days in a month, receiving fixed monthly remuneration and are also subject to some control by the assessee as it exercise on regular employees. Based on this the AO worked out short deduction of tax amounting to Rs 3564000/- on amount paid on retainer ship fees of Rs.2.40 lacs u/s 201(1) and interest thereon of Rs.342140/- u/s 201(1)(A)

Page 13 of 24 there is an age of retirement and entitlement for the benefit of provident fund and gratuity in case of employees of the company whereas the retainers are not entitled for such benefit and are paid on lump-sum basis. Re: the termination of an employee. He stated that that the assessee is required to give notice in case of employee for cancellation of their employment contract whereas the retainer ship contracts if cancelled the retainers will lose all the amounts and no notices prescribed for him to cancel the contract. Therefore, his main argument is that there are many distinctions between the contract of employment and contract for retainer ship. Based on this, it was argued that that the most important fact is that in case of an employee. The master and servant relationship subsists while in case of a retainer. There is no relationship of employer and employee, but the service contract provides the service between a service provider and the service receiver which is governed by individual contracts. Therefore, he submitted that the payment made to retainers are subject to tax deduction at source u/s 194J of the act and not under section 192 of the act. He further relied on several judgements of various courts such as CIT V Apollo Hospital International Limited 262 CTR 78, CIT V yashoda Super Specialty hospital 44 SOT 87. 18. We have carefully considered the rival contentions. To resolve the controversy raised in these appeals, necessarily, it will be required to be seen whether the agreement between the assessee and the concerned retainers was a 'contract for service' or a 'contract of service'. In case, it is 'contract for service', the income of the retainers would fall under the head 'income from business or profession' whereas under 'contract of service, it would partake the character of salary which is dependent upon master- servant relationship. It is always a vexed question to determine whether employer-employee relationship exists between the parties or not. There is no strait jacket formula prescribed under any statute or by any pronouncement on the basis of which it could be said that in a given eventuality, it would be characterized as employer-employee relationship. It is dependent upon several factors taken together which would result into such relationship. Besides the control/supervisory test and the organization test, the question whether the relationship between the parties is one of the employer and employee is a pure question of fact. It was also noticed that

Page 14 of 24 control test and the organization test are not the only factors whereas several other factors such as (a) who is the appointing authority; (b) who is pay master; (c) who can dismiss; (d) how long alternative service lasts; (e) the extent of control and supervision; (f) the nature of the job e.g. whether it is professional or skilled work; (g) nature of establishment; (h) the right to reject, are also required to be scanned before arriving at the conclusion of employer- employee relationship. On the perusal of the distinction between the service provided by the retainer as well as the employees. The employees are governed by the issue of appointment letter Sample copy of which is produced in paper book at page No. 28. On perusal of appointment letter issued to the various employees. The salient conditions of the employment is’ related to the probation period, which is 6 months. The employees are entitled to leave of 30 days in a year and the retirement age is also fixed at 58 years. The employees are further required to devote their full time to the business of the company and in case, if they wish to take any other work for remuneration or working in advisory capacity, then they are required to obtain prior permission in writing from the employer. It also provides a prohibition on seeking membership of any local or public bodies without 1st obtaining specific permission in writing of the chairman of the company. The employee’s job is also subject to transfer. Re: the termination of the employment. It is also provided that after completion of the 6 months of the employment the contract of employment can be terminated by 1 months’ notice or on payment of one month’s salary in lieu of notice by either side without assigning any reasons. On termination. The employees are required to give back all material related to the business of the company and they are not supposed to retain or make copies of the any of the items. With the employees. The company also enters into an innovation and confidentiality agreement. The assessee is also provided at page No. 34 of the paper book, which is one of the simple retainer agreement entered into between the assessee and the retainers. The salient conditions of that agreement is that it provides for specified services to be provided by the retainer. The contract of retainers are valid for one year from the date of effective commencement of the provision of services. The remuneration provided in the agreement is without any provision for provident fund, gratuity, etc. on cancellation of contract of retainer ship the

Page 15 of 24 lump-sum amount stands forfeited without any recourse even on a pro rata basis. If the assessee misses to cancel this contract. It will help to provide for 15 days’ notice period to the retainer. In case of absence in excess of specified number bay number of days in the month. A specified sum per day would be deducted from the payment to be made to the contract. There is no provision for change in the services by either party’s entered into by this agreement. Of course the contract of service of retainer ship also provide that the retainer would be required to meet the deliverables as required by the organization which would be subject to the rules and regulations of the organization is laid down in relation to conduct, discipline and other matters. Admittedly, there is such condition in the service contract. However, these conditions are necessary for the purpose of maintaining the standard of services of the organization to the outside customers. Therefore, this terms and conditions cannot say that it puts the retainer in the control of the assessee in the same manner as it puts on its employees. On reading of these 2 agreements, one of employment and another of retainer ship we are of the view that the retainer ship contracts are not employment contracts and employer, employee relationship does not subsist in case of retainer ship contracts. Therefore, we are of the view that payment made to the retainers is not subject to TDS u/s 192 of the act but u/s 194J of the Act. Hence, we confirm the findings of CIT (A) on this count. In the result ground no. 3 of the appeal is dismissed. 19. Ground No. 4 of the appeal is against the order of CIT (A) in holding that no tedious is required to be made in case of service tax component. 20. Ld. DR relied on the order of assessing officer and submitted that it unless there is a proof of payment of service tax, ld. CIT (A) has erred in civil holding that no tax is required to be deducted on service tax component. 21. Against this ld. AR relied on circular No. 1/2014 dated 13/01/2014 issued by the CBDT and decision of Hon’ble Delhi High Court in case of CIT vs Mitchell drilling International private limited to 234 taxman 818. 22. We have carefully considered the rival contentions. CBDT has issued a circular No. 1 2014 on 13/01/2014 wherein it has been provided that that wherever the service tax component comprising the amount payable to a resident is indicated separately the tag shall be deducted at source on the amount paid or payable without including such service tax component. The

Page 16 of 24 above circular has not laid down any condition, as per para No. 3 of that circular. In view of this, we hold that that no tax is required to be deducted on service tax component. In the result ground No. 4 of the appeal is dismissed. 23. In the result appeal of revenue is partly allowed. ITA No 5821 to 5823/Del /2013 A Y 2004-05 to 2006-07 24. As these appeals also involves the identical grounds of appeal as contained in appeal no ITA 5820/Del /2013 for AY 2003-04. Therefore same are decided on the reasons and findings contained in that appeal with respect to different grounds raised therein. 25. Identically we allow ground no 1 of these appeal related to the validity of the orders of assessing officer. 26. Identically we dismiss ground no 2 , 3 and 4 of these appeals. 27. In the result appeal nos 5821 5822 and 5823 are partly allowed.

ITA No 5824 , 5825 and 5826/Del/2013 for AY 2007-08, 2008-09 and 2009-10

The revenue has raised the following grounds in ITA No.5824/Del/2013 for the 28. Assessment Year 2007-08:- “1. On the facts and in the circumstances of the case as well in law, the ld CIT(A) has erred in holding that the provisions of section 194C of the IT Act are not applicable to the payments made to franchisees. 2. On the facts and in the circumstances of the case as well as in law, the ld CIT(A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the IT Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee. 3. On the facts and in the circumstances of the case as well as in law. The ld CIT(A) has erred in directing the AO to file rectification application before him. The ld CIT(A) should have directed the assessee to file rectification application before the AO as it is normal procedure.” The revenue has raised the following grounds in ITA No.5825/Del/2013 for the 29. Assessment Year 2008-09:- “1. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the

Page 17 of 24 appeal on the issue of short deduction of TDS on payments of retainership fee. 3. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in directing the AO to file rectification application before him. The Ld. CIT (A) should have directed the assessee to file rectification application before the AO as it is normal procedure.” The revenue has raised the following grounds in ITA No.5826/Del/2013 for the 30. Assessment Year 2009-10:- “1. On the facts and in the circumstances of the case as well as in law. the Ld. CIT (A) has erred in holding that the provisions of section 194C of the I T Act are not applicable to the payments made to franchisees. 2. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in not considering the reasons mentioned in the order passed u/s 201(1)/201(1A) of the I T Act while deciding the appeal on the issue of short deduction of TDS on payments of retainership fee. 3. On the facts and in the circumstances of the case as well as in law, the Ld. CIT (A) has erred in directing the AO to file rectification application before him. The Ld. CIT (A) should have directed the assessee to file rectification application before the AO as it is normal procedure.” 31. All the grounds of these years are identical and therefore we take up the appeal of the revenue for AY 2007-08 and give our reasons for our decisions and then apply it to the other two appeals. 32. We take up ground no 1 of this appeal in which the issue is whether on the payment of franchisee fees the provision of section 194C of the Act applies or not. This grounds is identical to appeal no.5820/Del/2011 of A.Y. 2003- 04 wherein we have held that provision of section 194C does not apply to the franchisee fees payment of the assessee. Therefore we also hold for this year too accordingly. Therefore ground no.1 of the appeal is dismissed. 33. Now we take up ground no2 of the appeal which is on the applicability of provisions of section 192 or 194J of the act on payment of retainer ship fees. It is agreed by the parties that the ground no 3 of the appeal in ITA No 5820/Del/2013 for AY 2003-04 is on the same facts and circumstances. 34. We have already decided this issue in that appeal no 5820/Del/2013 for AY 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 AO. Therefore following our decision in that appeal we also hold for this year that of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Hence we confirm the order of CIT (A) and dismiss ground no 2 of the appeal.

Page 18 of 24 35. Now we address the ground no 3 of the appeal which is against the rectification made by AO. 36. In the result we dismiss the appeal of the revenue for AY 2007-08 in ITA no 5824/Del/2013. 37. Now we take up appeal no 5825 & 5826/Del /2013 for AY 20088-09 and 2009-10. Grounds raised in these appeals are identical to grounds of appeal raised in ITA No 5820/Del/2013. 38. Ground No of these appeals are 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 AY 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 AO. Therefore following our decision in that appeal we also hold for this year that of retainer ship fees the provision of section 194J applies and not section 192 of the act as held by AO. Hence we confirm the order of CIT (A) and dismiss ground no of the appeal. 39. In the result we dismiss the appeal of revenue in ITA No 5825 & 5826/Del/2013 for AY 2008-09 and 2009-10. 40. Now we address the appeal no ITA No 5827/Del/2013 for AY 2010-11 of the revenue where in following grounds of appeals are raised. 41. Ground No 1 of the appeal of revenue is against the order of CIT (A) holding that on payments of franchisee fees provisionsof section 194J does not apply. It was an admitted fact that in this year assessee has deducted tax at source on payments made to franchisee fees u/s 194C of the Act. Be that it may be. During this year AO is of the view that provision of section 194 J of the Income tax Act applies on these payments. 42. Learned DR relied on the orders of assessing officer holding that franchisee fees payment is covered for 4 tax deduction at source under section 194J of the act. 43. Learned AR relied on the decision of Hon’ble Delhi High Court in case of CIT vs NIIT limited reported at 318 ITR 289. It was submitted that that there is no rendering of services in the franchise agreement. His main contention is that the franchise agreement is a revenue sharing model for this, he referred to the franchise agreement which is submitted at page No. 1 to 27 of the paper book. Hefurther submitted that dominant object of this agreement

Page 19 of 24 needs to be seen which is sharing of the revenue between the parties and there is no services being rendered by one to another. As there is no service provision of section 194J does not apply. 44. We have carefully considered the rival contention. HonourableDelhi high court in 358 ITR 179 in assessee’s own case has considered the franchise agreement in detail citing various clauses of the agreement. For deciding the issue of applicability of section 194J it is important to understand the findings given by the honourable highcourt which are as under :- “29. It is against the aforesaid decision of the Tribunal that the Revenue has come in appeal under Section 260A before us. We have gone through the model or specimen agreement dated 1.10.2005 between the assessee and M/s Career Solutions of Trivandrum, 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 preamble 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 material, preparatory information and substantial body of technical know-how relating to the location, design and operation of professional learning centres. It further states that the assessee (described in the agreement as the licensor) has established a high position regarding quality of services available at the learning centres run by it and recognizes the benefit to be run it. The licensee or the franchisee, it is further stated in the preamble, "recognizes the benefit to be derived from being identified with and licenses by the licensor and being 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 trade names, designs, copyright and technical know-how in connection with the operation of the professional learning centres. The preamble thus gives the background of the main object of the arrangement 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 know-how and copyrighted material available with the assessee by running learning centres in different parts of the country. 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 operating 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 know-how and the copyrighted material owned by the assessee. It was also agreed that after the termination of the agreement, the licensee shall not make any claim to the trademark "Career Launcher India Ltd." or "CL" and the similar trade names or use in similar trademark or trade name 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

Page 20 of 24 custodian of all technical reference material, transpierces, coordinator guides, audit and the tapes, video tapes, CDs etc. and they will be used by the assessee for the purpose 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 specified by it and such deposit shall be made directly into the bank account of the licensor on the day on 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 materials, wages and direct operating expenses which shall be made available to the licensor in a form and at a frequency determined by the licensor. 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 accounts, etc. for the audit to be conducted by the licensor. The licensor was also at liberty to inspect the 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 know-how 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 the first receipt. Clause 5.6 is important and it provided for "recurring franchise fees" in addition to the deposit mentioned above. This clause provides that the licensee shall pay recurring franchise fees to the licensor at 25% of the net revenue earned from 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 shall provide all confidential, all procedural manuals to the licensee. It shall also give marketing 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 services as may be developed by the licensor and considered to be helpful to the licensee shall also be provided. The licensor is obliged to join and assist the licensee in designing the course-scheduling, the technique, business ethics, conduct of classes, tests, examinations, certifications etc. The materials and services which are not covered by the technical know-how fee were to be charged extra. In particular, the licensee had to separately pay the licensor for application 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 and décor of the building, equipment, signs, manuals, cleanliness and so forth. Generally these are treated as the obligations of the licensee. The licensee is also to comply with the laws relating to health, cleanliness, compensation to workmen and their working conditions. 33. Clause 8 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 secrecy of their secrets and procedures. Clause 10 provides for the obligation of the assessee to take out a policy of insurance to cover itself against certain kinds of loss/damage as specified by the licensor in the project implementation manual. The licensor's name is to be added as additional insured in

Page 21 of 24 the insurance policy. Copies of the insurance policies have to be provided by the licensee to the licensor. 34. There are various other provisions made in the agreement regarding indemnification, consequences of default, change in the ownership of licensee etc. Clause 13 provides for an administrator to be appointed by the licensor at the professional learning centre run by the licensee in the event of non-payment of any monies due from the licensee, default in payment of any other charges, non- adherence or violation of any terms and conditions agreed upon and prolonged disruption of the infrastructure which in the opinion of the licensor is not justified. The licensee, in case an administrator is appointed by the licensor is obliged to provide him adequate working space and is also liable to bear the cost of the posting of the administrator. The licensee shall reimburse the licensor the salary paid to the administrator. Clause 17 provides for "arbitration and jurisdiction". The annexures to the agreement contain the details which are required to be mentioned therein by the various clauses of the agreement. 35. There can be no dispute with regard to the general proposition that in ascertaining the true effect of a document it has to be read as a whole and in the context of the surrounding circumstances. The assessee is undoubtedly in the business of imparting coaching or 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 know-how or a trademark or trade name or reputation. It is noteworthy that the income declared by the assessee was Rs. 4,80,26,060/- for the assessment year 2005-06 and Rs. 6,84,27,841/- for the assessment year 2006-07. The income declared by the assessee itself is an indication of its success and popularity in the field. It is not therefore surprising that 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 the parties concerned. Such arrangements are not uncommon in the business world which is a well known fact. These are loosely called "franchisee agreement". In the agreement entered into by the assessee in the preset case, the words "licensor" and "licensee" are used respectively to denote the assessee and the franchisee, who has associated itself with the assessee's success story and has opened learning centres using the trade name of the assessee. The substance of the agreement however, is that it is a business arrangement under which both parties hope to benefit. It would be myopic to view the agreement divorced from the nature of the assessee's activities and the business realities. 36. Let us examine the real nature of the agreement between the assessee and the franchisees and consider the question whether the agreement or contract is for "carrying out any work" by the franchisee, so as to attract the provisions of section 194C relating to tax deduction at source and consequently the disallowance under Section 40(a)(ia) of the Act. On a careful consideration of the issue, it seems to us that it would not be possible to view the agreement as a contract for carrying out any work by the franchisee. The terms 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 know-how belonging to the assessee in the business of running learning centres, where students are coached for writing competitive examinations, is permitted to be made use of by the franchisees in different places for a monetary consideration. In the case of a contract for the carrying out of any work as is envisaged by Section 194C, there cannot be any use of a person's trade name or

Page 22 of 24 goodwill or know-how by the other. The contract envisaged by the Section would be one under which one person merely renders certain services to the other person for consideration. It is no doubt true that the word "work" has been defined in a broad and inclusive manner in the Section. Nevertheless its essential feature remains the same namely that it should be a work carried out by one person for another. The terms of the contract between the assessee and its franchisees in the case before us do not satisfy this condition. The income tax authorities have erroneously interpreted the contract as one for carrying out a work by the franchisee for 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 more complex and reflects a business arrangement, as opposed 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 franchisees. The records and books of account as also the premises from which the learning centres are carried on are subject to inspection and audit by the assessee. The materials for the learning centres are to be supplied by the assessee for which separate charges are to be paid by the franchisee. It is essentially a case of the assessee permitting its goodwill/know-how/trade name to be utilized by the franchisees. 37. In consideration of the assessee permitting the use of its trade name by the franchisees for the purpose of running the learning centres, the franchisee/licensee is obliged 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-refundable deposit to be made by the licensee with the assessee. The fees are to be collected by the licensees/franchisees from the students for and on behalf of the assessee. Strict control is exercised by the assessee, in terms of clause 4.6 of the 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 hours shall be deposited at the 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 some 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 manner 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 gains. It is a simple case of the assessee permitting the use of its trade name or reputation by the licensees for a consideration. There are several other clauses in the contract, which we have already referred to, which have been incorporated in the interest of both the parties to the contract. They ensure proper compliance of the arrangement and the mutual rights and obligations. These clauses, in our view, have been included only to protect the interest of both the sides and to ensure smooth functioning of the business arrangement.” [Underline supplied by us] 45. On perusal of findings given by Hon’ble, High Court the franchisee agreement is the agreement between the licensor assessee to the licensee – franchisee for use of trademark and other know how available with the assessee. Further the use of these license granted by the assessee to the franchisee is for limited geographical location. The Dominant Object of the

Page 23 of 24 parties is, If the preamble is any guide, that the parties proceeded to enter into a business arrangement between themselves for their mutual benefit and the methodology adopted was to exploit the know-how and copyrighted material available with the assessee by running learning centres in different parts of the country. Regarding the arrangement of financial consideration between the parties which is mentioned in clause ( 5) of the agreement provided for "financial consideration". It stated that in consideration of the licensor agreeing to provide the technical know-how 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. As per Clause 5.6 is important and it provided for "recurring franchise fees" in addition to the deposit mentioned above. This clause provides that the licensee shall pay recurring franchise fees to the licensor at 25% of the net revenue earned from the operations. The net revenue meant gross revenue minus service tax as applicable. 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 are 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 provision of the services are dominantly provided by the assessee to the franchisee and for which the consideration is received. The provisions of section 194, J are applicable in case, when 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

Page 24 of 24 deduction at source under section 194J of the act. The Ld. CIT (A) has dealt with this issue as under:- 46. 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 . Do not apply to the franchisee fees paid by the assessee. In the result ground number of the appeal of revenue is dismissed. 47. In view of above appeal of the revenue is dismissed. Order pronounced in the open court on 17/03/2016. -Sd/- -Sd/- (A.T.VARKEY) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 17/03/2016 A K Keot Copy forwarded to