Facts of the Case

ITC Ltd. was awarded a contract by Airports Authority of India through a bidding process for operating an Executive Lounge at IGI Airport, New Delhi. Under the licence agreement, ITC agreed to pay:

  1. Monthly royalty for the right to operate the lounge; and
  2. Separate licence fee for the physical space allotted.

The Assessing Officer treated both components as “rent” under Section 194-I and held ITC liable for short deduction of TDS under Section 201(1), along with interest under Section 201(1A).

The CIT(A) upheld the view regarding TDS liability but remanded the issue of interest for verification regarding taxes already paid by AAI.

The ITAT reversed the TDS demand holding that royalty was not rent and deleted the penalty under Section 271C.

Revenue challenged the ITAT order before the Delhi High Court.

 Issues Involved

  1. Whether payment made by ITC to AAI described as royalty for operating an executive lounge constituted “rent” under Section 194-I?
  2. Whether interest under Section 201(1A) survives where the recipient has already paid tax on such income?
  3. Whether penalty under Section 271C was justified for non-deduction of TDS? 

Petitioner’s Arguments (Revenue’s Contentions)

  • Revenue argued that the definition of rent under Section 194-I is broad and covers payments under any agreement for use of building or land.
  • Merely describing payment as “royalty” cannot alter its true character.
  • Both royalty and licence fee were inseparable components for operating the lounge.
  • Default in payment of either component would result in termination of rights.
  • Therefore, the entire payment was essentially consideration for use of premises and attracted TDS under Section 194-I.
  • Revenue relied on judicial precedents expanding the scope of “rent” under Section 194-I.

 Respondent’s Arguments (Assessee’s Contentions)


  • ITC contended that royalty was consideration for business rights and not for use of premises.
  • Licence fee for space and royalty for operational rights were distinct payments.
  • Royalty was determined through competitive bidding and represented business consideration.
  • Only the licence fee for physical space could be treated as rent.
  • Since AAI had already paid tax on the income, interest and penalty should not be levied.

 Court Findings / Observations


  • The licence agreement must be read as a whole.
  • The payment of royalty and licence fee were inseparable for the purpose of operating the executive lounge.
  • Without use of the space, the right to operate the lounge was meaningless.
  • The nomenclature of “royalty” could not override the substance of the transaction.
  • The payment squarely fell within the expanded meaning of “rent” under Section 194-I.
  • Hence, ITC was liable to deduct TDS on such payments.

 Court Order / Final Decision


  • Decided in favour of Revenue.
  • Payment made by ITC to AAI was held to be rent under Section 194-I.
  • TDS liability upheld.

On Interest u/s 201(1A)

  • Matter remanded for recomputation.
  • Interest payable only till the date of tax payment by AAI.

On Penalty u/s 271C

  • Decided in favour of ITC.
  • Penalty deleted considering bona fide belief and debatable legal issue.

 Important Clarification


  • Substance of the transaction prevails over nomenclature.
  • Even if payment is termed “royalty,” if it is intrinsically linked to use of premises, it may be treated as rent under Section 194-I.
  • Penalty for TDS default may not be attracted where a genuine interpretational dispute exists and reasonable cause is established under Section 273B.

Sections Involved

  • Section 194-I – TDS on Rent
  • Section 201(1) – Assessee in Default
  • Section 201(1A) – Interest on Non-Deduction of TDS
  • Section 271C – Penalty for Failure to Deduct Tax
  • Section 273B – Reasonable Cause Exception
  • Section 260A – Appeal before High Court

 Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:3273-DB/SMD04072017ITA732005.pdf

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