2018 (10) TMI 1955 - HC - Income Tax

TDS u/s 195 - Disallowance u/s. 40(a)(ia) for non deduction of tax on commission payable to foreign agents - HELD THAT - As relying on 2018 (10) TMI 615 - GUJARAT HIGH COURT Section 9 of the Act carries the heading income deemed to accrue or arise in India. Sub-section (1) of section 9 provides that in following incomes, contained in various clauses therein, shall be deemed to accrue or arise in India. Clause (i) of sub section (1) provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India or through or from any property in India or through or from any asset or source of Income in India or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. In the present case, as noted, admitted facts are that the non-resident agents appointed by the assessee for procuring export orders do not have permanent establishment in India. Their agents are situated outside India. Their activities as commission agents are being carried out outside India. The Tribunal therefore correctly held that there was no liability on the assessee to deduct tax at source. Merely because a portion of the sale to the overseas purchasers took place in India, would not change situation vis a vis the commission agents.This question is therefore not entertained. Disallowance of depreciation on no-compete fees - HELD THAT - As observed that on perusal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term business or commercial rights of similar nature it is seen that intangible assets are not of the same kind and are clearly distinct from one another. The legislature thus did not intend to provide for depreciation only in respect of the specified intangible assets but also to other categories of intangible assets which may not be possible to exhaustively enumerate. As concluded that the assessee who had acquired commercial rights to sell products under the trade name and through the network created by the seller for sale in India were entitled to depreciation. In the present case, Mr Patel was erstwhile partner of the assessee. The assessee had made payments to him to ward off competence and to protect its existing business. Mr. Patel, in turn, had agreed not to solicit contract or seek business from or to a person whose business relationship is with the assessee. Mr. Patel would not solicit directly or indirectly any employee of the assessee. He would not disclose any confidential information which would include the past and current plan, operation of the existing business, trade secretes customer lists etc. It can thus be seen that the rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression or any other business or commercial rights of similar nature used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation.

Summary

Issues:
1. Disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents.
2. Disallowance of depreciation on non-compete fees.

Issue 1: Disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents:
The Revenue appealed against the Income Tax Appellate Tribunal's decision to delete the addition made under section 40(a)(ia) of the Income Tax Act for failure to deduct tax on commission paid to non-resident agents. The Tribunal ruled in favor of the assessee, stating that since the non-resident agents had no permanent establishment in India and their activities were carried out outside India, there was no liability to deduct tax at source. The Tribunal emphasized that for the applicability of section 195 of the Act, the payment to the non-resident must be a sum chargeable under the Act. The Tribunal dismissed the appeal, highlighting that no part of the income accrued or arose in India, hence no tax deduction was required.

Issue 2: Disallowance of depreciation on non-compete fees:
The second issue involved the disallowance of depreciation claimed by the assessee on non-compete fees paid to protect its business interests. The Assessing Officer objected to the claim, stating that the non-compete fee did not fall under the categories eligible for depreciation under section 32(1)(ii) of the Act. However, the CIT(A) allowed the appeal, citing relevant case laws and confirming that the non-compete fee was a capital expenditure, and the assessee had acquired an intangible right eligible for depreciation. The Tribunal upheld the CIT(A)'s decision, emphasizing that the rights acquired through the non-compete agreement provided enduring benefits and qualified as depreciable intangible assets. The Tribunal rejected the Assessing Officer's view that the non-compete fee did not satisfy the requirements for depreciation under section 32(1)(ii) of the Act, citing precedents that supported the depreciation claim for similar intangible assets.

In conclusion, both issues were decided in favor of the assessee, with the Tribunal dismissing the Revenue's appeals in both instances. The judgment provided detailed analyses of the legal provisions and precedents relevant to each issue, ultimately upholding the assessee's positions on the disallowances.