Payment made for composite arrangement under franchises agreement not liable for TDS

Delhi High Court (HC) in the case of CIT Vs NIIT Ltd. (Taxpayer) [2009-TIOL-533-HC-DEL-IT], on the issue of whether the amount paid by the Taxpayer to the franchisees, pursuant to a franchises agreement (Agreement), can be considered in the nature of rent, for the purpose of tax deduction at source (TDS) under the Indian Tax Law (ITL). The HC held that the Agreement, when read as a whole, indicated that the main intention of the parties to the Agreement, was to carry on the business and share the revenues therefrom and not to let out the premises and infrastructure therein, in isolation. Hence, the payments made cannot be considered in the nature of rent and are not liable for TDS.

Facts of the case

• The Taxpayer is engaged in the business of providing computer education and training, through its own centres and through franchisees.

• The Taxpayer granted limited license to the franchisees for use of its trademark and trade name for the education centre. The license was granted for a specified territory with a right to operate the education centre, in relation to marketing courses offered by the Taxpayer.

• As per the Agreement with the Taxpayer, the franchisees were providing these courses under the Taxpayer’s license. The franchisees were in charge of bringing together resources such as classroom facilities, equipment, furniture, fixtures, administrative set-up etc., for the purpose of providing computer education and training. The franchisees were responsible for the day-to-day operation and management of the education centre, including marketing the course, admitting the students, conducting the classes and performing all other administrative functions relating to the education centre.

• The Taxpayer, as owner of technical information, was to provide the franchisees the relevant course ware and expertise in providing

• The education centre was to run under the Taxpayer’s brand name.

• The Taxpayer and the franchisees agreed to share revenues, based on the number of students enrolled. The Taxpayer collected fees from the students enrolled by the franchisees and shared the same with them.

• The payment of the franchisees’ share was linked to performance-based milestones. For the sake of convenience, the payments were broken into marketing and infrastructure claim.

• For the relevant assessment year, the Taxpayer made payments to the franchisees, without withholding tax. The Tax Authority treated the payments made for infrastructure claims, in the nature of rent for use of assets and infrastructure, which is liable for TDS under the ITL.

• The second appellate authority held that the broad objective of the Agreement was to share the revenue and was not in the nature of hiring of premises and infrastructure thereof and, hence, not liable for TDS. Aggrieved by this, the Tax Authority preferred an appeal before the HC.

Contentions of the Tax Authority