By TIOL News Service

NEW DELHI, JULY 12, 2017: THE issues before the Bench is - Whether when assessee pays composite licence fee comprising of rent and royalty for right to operate airport lounge, such payment falls within expanded ambit of rent u/s 194-I. YES is the verdict.

Facts of the case    

The assessee-company was awarded the contract for running an Executive Lounge at the Indira Gandhi International Airport, New Delhi (‘IGI’) by the Airports Authority of India (‘AAI’). The award of the contract was preceded by a bidding process and the successful bidder had to quote the royalty amount. The AAI was to fix the licence fee for the space to be provided to the successful bidder for operating the lounge.

A License Agreement (LA) was entered into and the period of licence was from 1st October, 1998 to 30th September, 2003. A controversy arose regarding the failure on the Assessee’s part to deduct tax at source in terms of Section 194-I of the Act read with Section 201(1) thereof from the payments made by it to AAI under the LA. The stand taken by the Assessee was that the payment was not in the nature of rent but in the nature of royalty.

The AO held that there was a failure by the Assessee to deduct tax at source from the rent payments and accordingly, it was held that the Assessee was deemed to be an Assessee in default to the extent of non-deduction or short deduction of tax under Section 201(1) of the Act. The total short deduction for the FYs worked out to Rs 1,17,39,448. The interest thereon under Section 201(1A) of the Act worked out to Rs 61,80,971. Thus, the total demand worked out to Rs. 1,79,20,419. It was held that the mere fact that one part of the payment under Clause 2(a) of the LA was termed as royalty “cannot take away the character of payments being rent for the use of land and premises at the Indira Gandhi International Airport in respect of International Terminal.” The CIT(A) concurred with the view of the AO.

On appeal before the ITAT, the certificate issued by the AAI stated that the royalty charged was not for the use of the building but for the right to carry on the business. It further clarified that it was for the right to operate the lounge and therefore, the amount paid by the assessee was not rent. The ITAT finally ruled in favour of the assessee.

On appeal, the HC held that,

++ in the present case, the Assessee is permitted to operate an executive lounge. The question of being able to operate the lounge without the actual use of the space simply does not arise. The payment for the use of space is inseparable from the payment of royalty for the right to operate the lounge. Therefore, even applying the ratio of Japan Airlines Co. Limited v. CIT the only conclusion that can be drawn is 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;

++ the Court is satisfied that in the present case, the payment made by the Assessee to AAI under the LA is ‘rent’ within the meaning of Section 194-I of the Act.

(See 2017-TIOL-1282-HC-DEL-IT)