A division bench of the Delhi High Court in CIT v. ITC Ltd, held that the payment of royalty made by the Assessee to the Airport Authority of India (AAI) for the use of lounge premises under the License Agreement would constitute ‘rent’ within the meaning of Section 194-I of the Income Tax Act and therefore, assesse is liable to deduct tax at source.
Assesse, ITC Ltd, was awarded the contract for running an Executive Lounge at the Indira Gandhi International Airport, New Delhi (‘IGI’) by the AAI. According to them, the award of the contract was preceded by a bidding process which commenced with a tender being floated by the AAI. The successful bidder had to quote the royalty amount it was prepared to pay for being granted license to operate the executive lounge. The AAI was to fix the license fee for the space to be provided to the successful bidder for operating the lounge. They said that the payment was not in the nature of rent but in the nature of royalty.
AO said that the payment was in the nature of rent. Consequently, he treated ITC Ltd as assesse-in-default on ground that it failed to deduct TDS under section 194I of the Act from the payments made by it to AAI under the License Agreement.
On appeal, the Appellate Tribunal held that the amount paid by the Assessee to the Airport Authority of India for use of lounge premises by way of royalty was not tantamount to rent within the meaning of Section 194-I of the Income Tax Act. It further noted that the interest under Section 201(1A) of the Income Tax Act cannot be charged once the payee had paid the tax. It also deleted the penalty under Section 271C of the Income Tax Act, 1961.
The bench relied on the decision in the case of Japan Airlines Co. Limited v. CIT and noted that in the present case, the payment for the use of space is inseparable from the payment of royalty for the right to operate the lounge. It therefore concluded that the payment of the sum by the Assessee to the AAI under the LA falls within the expanded definition of ‘rent’ under Section 194-I of the Act. “The certificate issued by the AAI stating that the payment of licence fee for the space is different from the payment of royalty will not make a difference to the legal position as regards Section 194 I of the Act”, it said.
With regard to the levy of penalty on the assesse, the division bench comprising of Justice S. Muralidhar and Justice Prathibha M. Singh observed that the question whether in the present case the payment of royalty for the right to operate the executive lounge is in fact ‘rent’ under Section 194-I of the Act, was a debatable issue and therefore, the benefit of s. 273 B must be given to the assesse.
Read the full text of the Judgment below.
