Applicability of section 194-I of IT Act, 1961 in case of property leased under licence agreement

 

Merely because name of agreement is given as licence agreement is not enough to thwart provisions of section 194-I

 

ITAT, INDORE BENCH, INDORE

J. C. Bansal

v.

TRO

ITA Nos. 115 to 117/Ind/2005

May 23, 2008

 

RELEVANT EXTRACTS:

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20.    On examination of the license agreement and schedule attached with the same, we find that entire factory building along with plant & machinery have been given under the agreement by M/s. Ramco Ind. Ltd. to the assessee for taking over the production facilities. The agreement as a whole has to be considered. As per the agreement between licensee and licensor, there was a definite obligation of the assessee to make minimum licence fees of Rsy40 lakh and the rest was dependant on the production respectively for permitting the licensee to utilize all production facilities provided in the premises of the licensor including use of all facilities, utility, machine, factory, office premises, spare parts, tools and equipments, essential for efficient running of the said unit along with residential quarter also. The assessee is entitled to sub-let or under-let the whole or part of the factory building or plant ft machinery. It would therefore, clearly prove that entire factory building including plant ft machinery for manufacturing facilities have been given through the agreement to the assessee and the minimum payment was definitely a consideration for use of entire facility including land and building including factory building and furniture and fittings and plant ft machinery. The agreement in question is therefore, composite agreement for the whole factory building including plant & machinery and residential quarters and the consideration paid is for the entire factory building including plant ft machinery. The assessee has not clarified as to how it can b use effectively the plant & machinery without using the factory building. The details of gross block of fixed assets on 31.3.2003 as filed at PB-A/13 shows that the total gross value of land, building and plant & machinery was Rs.9,35,08,298/- out of which, the value of plant & machinery is Rs.6,94,04,216/. It would therefore, prove that the value of land and building, furniture fittings, factory building was also having substantial value which cannot be given to be assessee without any consideration for use and occupation. Schedule A (PB-13) attached with the agreement also prescribed that entire factory building of pipe plant excluding warehouse have been handed over by M/s. RIL to M/s. KSGML This would also support the findings of the authorities below that the agreement in question is a composite agreement to give entire factory building including plant ft machinery to the assessee subject to consideration. Since entire factory building is given to the assessee and the licensor had no control over the factory building, therefore, ft cannot be believed that it was a case of licence agreement. In the case of (ease, the creation of interest in the rented property is there, which we find in this case because the right to enjoyment in the entire property has been created in favour of the assessee : therefore, it falls within a definition of rent as prescribed in Explanation (i) of sec. 194-1 of the IT Act. The assessee has not made out any case that it was getting the goods manufactured from the licensor on job basis. The Id. counsel for assessee submitted that the words plant & machinery have been included in the definition of rent in sec. 194-f after the amendment w.e.f. 13.7.2006. However, this would not prove contention of Id. Counsel for assessee because Id. Counsel for assessee himself referred to circular no. 715 (supra) in which, in answer to question no.24, it was clarified that if the composite agreement is in essence, the agreement for taking the premises on rent, the tax will be deducted u/s 194-1 from payment thereof. This would put the assessee under liability to deduct the tax at source. Ld. CIT(A) relied upon decision of Calcutta High Court in the case of Smt. Visakha Sarkar (supra) in which, Hon'ble High Court examined the scope word "rent" for the purpose of sec. 194-1 and it was held "the definition for the purpose of this act of the nomenclature rent as expounded in the explanation column of this sec. itself, amply reveals that the same is projected as the generic turn which includes within its ambit payment made on any account whatsoever for occupation of a tenanted portion. It appears to be a composite concept. Once the rent is comprehended as a composite concept then it is not capable of being fragmented." Ld. CIT(A) also referred to the decision of Hon'ble AP High Court in the case of Krishna Oberai and others (supra) in which, the word "rent" in context of sec. 194-1 has been examined and it was held that the rent has been defined in a wider sense to include not only consideration paid under a lease or sub-lease or tenancy but also the consideration paid under any other agreement or arrangement for the use of any (and or building etc; was further held that the assessee was engaged fn running^ of five star hotel and customers are provided -furnished rooms and other facilities for consideration which is known as room charges. However, certain cos. entered into agreement to utilize hotel services for accommodating their officials and lesser amount is charged, in that context, the petitioner approached the corporate customers requesting them not to deduct TDS u/s 194-1. It was therefore, held that the charges paid to the petitioner by its customers for use and occupation of hotel rooms should be regarded as rent within the meaning of sec. 194-I. Ld. CIT(A) also noted that after this decision the Board clarified that so long as the accommodation has been taken on regular basis in a hotel, the same would be subjected to TOS. The findings of Id. CIT(A) based upon on these decisions have not been contradicted through any material on record. The same would therefore, support the findings of the AO.

21.     Ld. counsel for assessee relied upon order in the case of National Panasonic India P. Ltd. (supra) in which, the payment to C ft F agents was not a rent u/s 194-1 because the C&F agent has to store the goods during inventing period and then the C&F agent sold the goods in the interregnum. The distribution agreement between the manufacturer and the C&F agent was not found to be converted into an agreement as may be obtaining between a landlord and tenant. Ld. counsel for assessee also relied upon order fn the case of Kamat Hotels (I) Ltd. (supra). In this case, in effect the agreement was not for renting out the premises but for managing and conducting the restaurant/food outlet on payment of royalty/commission on which, the owner had complete control- In the case of Ganesh Aloo Bhandar (supra), the payment made for use of old storage was held to be not subjected to deduction u/s 194-1. These decisions are clearly distinguishable on facts of the present case.

22            Considering the facts and circumstances noted above, we are of the view that the agreement in question is a composite agreement for renting out the entire factory building including plant h machinery, tools, and residential quarters subject to minimum payment of Rs.40 lakh. Merely, because the name of agreement is given as licence agreement is not enough to thwart the provisions of sec. 194-1 of the IT Act. In this view of the matter, we do not find' any infirmity in the orders of authorities below. Provisions of sec. 194-1 are applicable to this case. We therefore, confirm the orders of authorities below and dismiss ground no. 1 in all the appeals of the assessee.

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