No TDS on Franchise Payments u/s 194J: ITAT upholds Deletion of ₹59.11 Lakh Income Tax Demand [Read Order]
The Tribunal observed that on conjoint reading of law and evidence, the franchise fees were business transaction payments under commercial agreements, not consideration for managerial, technical, or consultancy services, and thus fell outside the scope of Section 194J of the Income Tax Act, 1961.
Franchise - payment - Taxscan
Franchise - payment - Taxscan
The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, has held that payments made by a liquor manufacturing company to brand owners under the head “Franchise Expenses” do not constitute “fees for technical services” or “royalty” under Section 194J of the Income Tax Act, 1961, and therefore do not attract tax deduction at source (TDS) provisions.
The Revenue Authorities appealed against the order dated 11 December 2024 of the Commissioner of Income Tax (Appeals), Jaipur [CIT(A)], for Assessment Years 2013–14 to 2015–16, which deleted demands raised under S.201(1) and interest under S.201(1A) on account of alleged non-deduction of TDS. The matter was heard by a Bench comprising Dr. S. Seethalaksmi, Judicial Member, and Shri Rathod Kamlesh Jayantbhai., Accountant Member.
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The assessee, M/s Alwar Malt and Agro Foods Manufacturers Company Ltd., engaged in manufacturing Indian Made Foreign Liquor (IMFL) under tie-up arrangements with United Spirits Ltd., Saraya Distilleries Ltd., and May Fair Enterprises, had paid ₹5.91 crore in FY 2012–13 as franchise expenses.
The Assessing Officer (AO), following a TDS survey, concluded that these payments were for the use of trademarks and operational support, falling within “royalty” and “fees for technical services” as per S.194J, warranting 10% TDS. The AO treated the assessee as in default, raising a demand of ₹59.11 lakh under S.201(1) along with ₹42.55 lakh interest under S.201(1A).
In the appeal to the Tribunal, Shri Gaurav Awasthi, JCIT (Sr. DR), representing the Revenue Authorities, argued that the payments were franchise fees for the use of trademarks and operational support, squarely falling within “royalty” and “fees for technical services” under S.194J, and that the assessee was liable to deduct TDS.
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In contrast, Shri Kranti Mehta, Chartered Accountant for the assessee, contended that the payments were profit-sharing under business tie-up agreements for manufacturing and bottling liquor brands, not consideration for professional or technical services, and relied on earlier favourable appellate decisions in the assessee’s own case.
The Tribunal found that the nature of payments, supported by separate profit and loss accounts for each brand, reflected profit-sharing arrangements under business contracts rather than technical or managerial service fees. It noted that scrutiny assessments under S.143(3) for AYs 2013–14 and 2014–15 had accepted the claim, and the Revenue had not disputed earlier relief granted to the assessee.
Holding that the payments did not fall within the ambit of S.194J, the ITAT upheld the deletion of the TDS demand and interest for all three years, dismissing the Revenue’s appeals.
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