2019 (8) TMI 306 - HC - Income Tax

Disallowance of depreciation on non-compete fees - HELD THAT - 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 subsection 32(1)(ii) is wide enough to include the present situation Disallowance u/s.40(a)(ia) for non deduction of tax on commission payable to foreign agents - HELD THAT - As 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. Relying on assessee own case 2018 (10) TMI 615 - GUJARAT HIGH COURT . - Revenue appeal dismissed.

Summary

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

Issue 1: Disallowance of depreciation on noncompete fees
The Revenue challenged the deletion of an addition made on account of disallowance of depreciation on noncompete fees. The court referred to the decision in Principal Commissioner of Income-tax v. Ferromatic Milacron India (P.) Ltd., where similar questions were decided against the Revenue. The court analyzed the nature of noncompete fees and observed that such fees could qualify for depreciation under section 32(1)(ii) of the Income Tax Act, 1961. The court emphasized that the rights acquired through a noncompete agreement provided enduring benefits and could be considered depreciable intangible assets. The court cited precedents to support the view that expenses incurred to protect business interests through noncompete agreements could be eligible for depreciation under the Act.

Issue 2: Disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents
The second issue pertained to disallowance under section 40(a)(ia) for the failure to deduct tax on commission paid to foreign agents. The court reviewed a similar case from a previous assessment year and highlighted the requirement of deducting tax at source under section 195 of the Act. The court noted that for the section to apply, the payment to the non-resident should be chargeable under the Act. It was established that if the income did not accrue or arise in India, there was no liability to deduct tax at source. The court referenced section 9 of the Act, which specifies income deemed to accrue or arise in India, and concluded that in the present case, where the non-resident agents did not have a permanent establishment in India and their activities were conducted outside India, there was no obligation to deduct tax at source. The court dismissed the Tax Appeal based on these findings.

In conclusion, the High Court dismissed the Tax Appeal filed by the Revenue, upholding the order passed by the Income Tax Appellate Tribunal. The judgment provided detailed analysis and interpretations of the relevant provisions of the Income Tax Act, 1961, regarding the disallowance of depreciation on noncompete fees and the non-deduction of tax on commission payable to foreign agents.