Business expenditure: TDS: Works contract: Disallowance u/s. 40(a)(ia) r/w. section 194C: Assessee running coaching classes for competitive exams: Agreement with franchisees: Not a works contract: Tax not deductible at source on payment to franchisees: Amount paid to franchisees not disallowable u/s. 40(a)(ia):

The assessee was a company engaged in providing education and training for various preparatory examinations like IIM, IIT, designing, etc. These services were provided across the country through education centres run by the assessee itself or by its franchisees. For the A.Ys. 2005-06 and 2006-07, the Assessing Officer disallowed the amounts paid to the franchisees relying on section 40(a)(ia) on the ground that the assessee had not deducted tax at source which it was obliged to do u/s. 194C of the Act. The Tribunal deleted the disallowance and held that the agreement was not for making any payment to 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. It held that neither section 194C nor section 40(a) (ia) was applicable.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The agreements with franchisees were not the simple cases of the assessee engaging certain other persons to conduct the learning centres for which they were to be paid. The agreements were much more complex and reflected a business arrangement, as opposed to a contract for carrying out a work. Both the parties, the assessee and the licensee had entered into this agreement only in their mutual interest and for mutual gains. It was a simple case of permitting the use of its trade name or reputation by the licensees for a consideration.

ii) The provisions of section 194C and section 40(a)(ia) were not applicable to the facts of the case.”