Revenue shared with franchise doesn’t attract TDS liability

Revenue shared with franchise doesn’t attract TDS liability U/S 194I if no actual services were rendered:

The case of Addl CIT Vs. VLCC Health Care Ltd. (ITA No. 4414/DEL/2017) decided by the Delhi Income Tax Appellate Tribunal addresses the issue of whether revenue shared with collaborators or franchisees under a Joint Venture Partnership model attracts a TDS liability u/s 194I of the Income Tax Act.

The Delhi Income Tax Appellate Tribunal concluded that revenue shared under a Joint Venture model where the assessee bears all expenses and shares only the surplus is not liable to Tax Deducted at Source u/s 194I, since no services or premises were hired from the collaborators. This ruling clarifies that pure revenue-sharing models without actual service provision or rental arrangements fall outside the ambit of Section 194I’s Tax Deducted at Source provisions. 

Facts of the Case in the matter Addl CIT Vs. VLCC Health Care Ltd:

1. Assessee, VLCC Health Care Ltd., is engaged in the business of slimming and beauty services. It did not disclose any income apart from this business during the year.
2. During the assessment, the Assessing Officer noted that the assessee had claimed expenses of INR 2,39,80,342/- under head ‘Share of profits of collaborators.’
3. Under the Joint Venture Partnership model, the fees generated from operating healthcare centers were collected by the assessee and recorded in its books. The collaborator’s share was disbursed after covering expenses. Profits or losses from the center were shared between the assessee and the collaborator as per a pre-agreed ratio.
4. The Revenue’s argument was that payments made to the collaborators could be viewed as expenses for services or premises usage, thus subject to Tax Deducted at Source provisions, especially Section 194I, which pertains to rent.
5. Since no formal partnership firm was formed between assessee and the collaborators, the Revenue contended that the payments could not be treated as a share of profits, thereby making them liable for Tax Deducted at Source deduction.

Income Tax Appellate Tribunal Delhi’s Decision in the matter of Addl CIT Vs. VLCC Health Care Ltd :

1. Income Tax Appellate Tribunal held that the assessee followed joint venture model where it bore the expenses and shared only the profits with the franchisees or collaborators. All the operations and facilities at the healthcare centers were controlled and managed by the assessee.
2. Primary purpose of Agreement between assessee & franchisees was revenue sharing, not renting or hiring premises or services from the collaborators.
3. Given this nature of the arrangement, the Income Tax Appellate Tribunal ruled that the payments were not subject to Tax Deducted at Source u/s 194I, as they did not involve any rent or service-related payments requiring tax deduction at source.