2012 (7) TMI 458 - AT - Income Tax

Tribunal classifies payments as commission, not rent. TDS under sec 194H. Expenses allowed with good faith TDS.

The Tribunal held that the payments were correctly classified as commission, with TDS deducted under section 194H, not 194I. The expenses were not ... Commission versus Rent - Whether TDS was required to be deducted in terms of provisions of sec. 194H or 194 I of the Act - AO invoked provisions of sec. 194I of the Act on the ground that agreements were for rent payments and not commission – Held that:- Specific clause in agreements that the exclusive possession will be with the franchisee and not the assessee - when the assessee is not only not in physical possession and there being no fixed rent payable while the francisee have to receive commission on the basis of turnover or on mutually agreed terms, it is evident that the aforesaid two agreements are truly of franchise and can, by no stretch of imagination, be treated as a tenancy in favour of the assessee - assessee rightly deducted TDS in terms of provisions of sec. 194H of the Act in respect of payments. Provisions of sec. 40(a)(ia) of the Act – Held that:- Assessee deducted and paid tax in accordance with the provisions of sec. 194H of the Act in relation to payments - there is no violation of provisions of sec. 40a(ia) of the Act - even in the event of any shortfall in deduction of tax at source, provisions of sec. 40a(ia) are not attracted Issues Involved:1. Whether the TDS was required to be deducted in terms of provisions of section 194H or 194I of the Income-tax Act, 1961.2. Applicability of provisions of section 40(a)(ia) of the Income-tax Act, 1961 in case of short deduction of tax at source.3. Whether the agreements in question were franchise agreements or tenancy agreements.Issue-wise Detailed Analysis:1. Whether the TDS was required to be deducted in terms of provisions of section 194H or 194I of the Income-tax Act, 1961:The Assessing Officer (AO) contended that the payments made by the assessee were rent payments, thereby requiring TDS deduction at 15% under section 194I. The assessee, however, deducted TDS at 5% under section 194H, treating the payments as commission. The CIT(A) allowed the assessee's claim, stating that the payments were indeed commission and not rent, and thus, the TDS was correctly deducted under section 194H. The CIT(A) emphasized that the agreements were franchise agreements and not lease agreements, as evidenced by clauses linking payments to sales, responsibilities for rent, and possession of the premises.2. Applicability of provisions of section 40(a)(ia) of the Income-tax Act, 1961 in case of short deduction of tax at source:The AO disallowed the expenses under section 40(a)(ia) due to the alleged short deduction of TDS. The CIT(A) found that the assessee had deducted and paid TDS under section 194H in good faith, and thus, there was no violation of section 40(a)(ia). The Tribunal upheld this view, stating that the object of section 40(a)(ia) was to ensure compliance with TDS provisions, which the assessee had met by deducting and paying TDS under section 194H.3. Whether the agreements in question were franchise agreements or tenancy agreements:The Tribunal examined the agreements with M/s Star Enterprises and Mr. Mahesh Garg. It found that these agreements were franchise agreements, as they involved the franchisee bearing the rent and the assessee not having exclusive possession of the premises. The agreements stipulated that the franchisee would receive commission based on sales, and the assessee would not be responsible for rent or possession of the premises. However, the agreement with Mrs. Manisha Kalra was not renewed during the relevant period, and thus, the matter was remanded to the CIT(A) for fresh consideration.Conclusion:The Tribunal concluded that the payments to M/s Star Enterprises and Mr. Mahesh Garg were correctly treated as commission, and TDS was rightly deducted under section 194H. Consequently, the provisions of section 40(a)(ia) were not violated. The matter regarding the agreement with Mrs. Manisha Kalra was remanded for further examination. The appeal was partly allowed for statistical purposes.