2019 (8) TMI 365 - HC - Income Tax

Disallowance of depreciation on non-compete fees - HELD 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 subsection 32(1)(ii) is wide enough to include the present situation. TDS u/s 195 - 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. As relying on assessee's own case 2018 (10) TMI 615 - GUJARAT HIGH COURT . - Decided in favour of assessee.

Summary

Issues:
1. Appeal against order passed by Income Tax Appellate Tribunal for Assessment Year 2012-13.
2. Disallowance of depreciation on noncompete fees.
3. Disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents.

Analysis:
1. The Tax Appeal under Section 260-A of the Income Tax Act, 1961 was filed by the Revenue against the order of the Income Tax Appellate Tribunal for the Assessment Year 2012-13. The substantial questions of law proposed by the Revenue were related to the disallowance of depreciation on noncompete fees and the disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents. The Court noted that similar questions had been decided against the Revenue in a previous case involving the same assessee.

2. Regarding the disallowance of depreciation on noncompete fees, the Court analyzed the nature of the expenditure and the enduring benefits acquired by the assessee. The Assessing Officer contended that the noncompete fee did not qualify as a depreciable intangible asset under section 32(1)(ii) of the Act. However, the Court referred to precedents and held that the rights acquired by the assessee through the noncompete agreement were akin to business or commercial rights of a similar nature, making them eligible for depreciation.

3. Concerning the disallowance under section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents, the Court examined the applicability of section 195 of the Act and the requirement to deduct tax at source for sums chargeable under the Act. The Court referred to the case law and concluded that since the non-resident agents did not have a permanent establishment in India and their activities were conducted outside India, there was no liability on the assessee to deduct tax at source. The Tribunal's decision in this regard was upheld.

4. Ultimately, the Court dismissed the Tax Appeal based on the analysis of both issues, affirming the decisions of the lower authorities and rejecting the Revenue's contentions.