ITAT Rules VLCC Health Care Ltd.'s Revenue-Sharing Model Not Subject to TDS, Dismisses Revenue's Appeal [Read Order]

The Delhi Bench Of Income Tax Appellate Tribunal( ITAT )dismissed the Revenue's appeal against VLCC Health Care Ltd., ruling that the company's revenue-sharing model under its franchise agreement was not subject to Tax Deducted at Source ( TDS ).

The Revenue appellant challenged the order passed by the Commissioner of Income Tax (Appeals)[CIT(A)], which pertained to a dispute regarding the VLCC Health Care Ltd,the respondent-assessee’s revenue-sharing arrangement with its collaborators under a franchise agreement. The  assessee, operating in the wellness and fitness industry, had entered into franchise agreements where it shared a portion of its revenue with franchisees or collaborators.

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The revenue contended that the payments made by the assessee to the collaborators, in the form of revenue sharing, were subject to Tax Deducted at Source (TDS) under the provisions of Section 194-I of the Act, as these payments were classified as rent or services rendered.

During the assessment proceedings, the Assessing Officer (AO) had held that the payments made to the collaborators should have been subject to TDS, as they were in the nature of expenses for services or premises, and were not a share of profits. The AO’s findings were based on the absence of a formal partnership between the assessee and the collaborators, which would have justified treating the payments as a share of profits.

As a result, the AO disallowed the expenses claimed by the assessee under Section 40(a)(ia) of the Act due to non-deduction of TDS.

Aggrieved, the assessee appealed before the CIT(A), who ruled in its favor by holding that the payments made under the franchise agreement were part of a revenue-sharing model and not for any specific services rendered or rental payments. The CIT(A) noted that the agreement did not involve the hiring of premises or the provision of services by the collaborators and thus, the payments did not attract TDS provisions under Section 194-I. The Revenue, dissatisfied with this decision, filed an appeal before the tribunal.

At the hearing before the tribunal, the Revenue’s representative argued that the CIT(A) had erred by overlooking the fact that the payments should have been subject to TDS. They referred to the detailed findings of the AO, emphasizing that the payments to the collaborators could not be treated as a share of profits due to the absence of a formal partnership.

The Revenue further contended that the CIT(A)’s conclusion lacked clarity and failed to address the nature of the payments adequately.

On the other hand, the assessee’s counsel submitted that the franchise agreement followed a business model where the assessee shared its revenue with collaborators based on the surplus derived after accounting for operational expenses and capital outlay.

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The assessee argued that the revenue-sharing model was consistent with industry practices and was not subject to TDS, as the collaborators did not render any services. The counsel also cited the decision of the Delhi High Court in CIT vs. NIIT Ltd., where similar revenue-sharing agreements were held not to attract TDS under Section 194-I.

The ITAT examined the franchise agreement and noted that the assessee followed two business models: (a) the franchise model, where the collaborator controlled the revenues and expenses, and (b) the joint venture (JV) model, where the assessee recorded all revenues and shared the surplus with the collaborator. The Tribunal concluded that the arrangement was purely a revenue-sharing mechanism and not a service arrangement that would attract TDS.

Relying on the Delhi High Court’s decision in NIIT Ltd., the bench held that the payments made by the assessee did not involve the hiring of premises or the provision of services and, therefore, were not subject to TDS under Section 194-I.

The two member bench comprising Sudhir Pareek(Judicial Member) and S.Rifaur Rahman(Accountant Member) found that the CIT(A)’s findings were appropriate and that the payments were part of a legitimate revenue-sharing model rather than deductible expenses under Sections 30 to 37 or 40(a)(ia) of the Act.

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In conclusion, the bench dismissed the Revenue’s appeal, affirming that the payments made by the assessee under the franchise agreement were part of a revenue-sharing model and not subject to TDS.

To Read the full text of the Order CLICK HERE

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