2015 (11) TMI 1302 - AT - Income Tax

Profits in lieu of salary - chargeable to tax under section 17(3) or section 28(va) or any other section of the Income-tax Act - Held that - The wide amplitude of the role assigned to the appellant clearly show that he was not subject to the direct control or supervision of Suzuki India, but was managing all affairs of the company; evolving business strategies; and advising the company. His role was clearly that of a joint venture partner in Suzuki India and not that of an employee of the company. In view of the foregoing and the submissions made by Shri Aggarwal, we are of Opinion that the appellant was not an employee of Suzuki India and, as such, the sum received by him from the company cannot be taxed as profits in lieu of salary under section 17(3) of the Act. We agree with Shri Aggarwal that as the sum of ₹ 1,32,00,000 was paid by Suzuki India to the appellant in consideration of not providing the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment it cannot be regarded as non-competition fee because it has not been paid for not competing with the payer, but for not providing the benefit of his knowledge, expertise, skills etc. to any other person in the two wheeler segment. Thus compensation attributable to a negative/restrictive covenant is a capital receipt. Hence, as the sum received by the appellant does not fall within the ambit of section 28(va), and being a capital receipt is not taxable under the Income-tax Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is taxable as "profits in lieu of salary" under section 17(3) of the Income-tax Act, 1961.
2. Whether the said sum is taxable under section 28(va) of the Income-tax Act, 1961.
3. Validity of the observations made by the learned CIT(A) regarding the Opinion of Shri Bhardwaj.

Issue-wise Detailed Analysis:

1. Taxability under Section 17(3) of the Income-tax Act, 1961:
The primary issue is whether the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is taxable as "profits in lieu of salary" under section 17(3) of the Income-tax Act. The appellant argued that he was not an employee of Suzuki India but a joint venture partner. The Agreement's WHEREAS clauses indicated that the appellant was appointed as managing director by virtue of his being the Indian joint venture partner and wished to step down as he was no longer a joint venture partner. The absence of a Service Agreement and the fact that the appellant did not receive any salary, perquisites, or benefits during his tenure further supported this claim. The tribunal held that the appellant was a joint venture partner and not an employee, thus the sum received could not be taxed as "profits in lieu of salary."

2. Taxability under Section 28(va) of the Income-tax Act, 1961:
The second issue is whether the amount received falls within the ambit of section 28(va) of the Income-tax Act, which taxes receipts in the nature of non-compete fees and exclusivity rights. The appellant contended that the payment was not for not competing with Suzuki India but for not providing his expertise to others. The tribunal agreed, noting that the payment was for prohibiting the appellant from providing his knowledge, skills, and expertise to others, not for non-compete purposes. Additionally, the tribunal referenced the Supreme Court's observation in Guffic Chem. P. Ltd. vs. Commissioner of Income-tax that compensation attributable to a restrictive covenant is a capital receipt. Therefore, the sum received did not fall within section 28(va) and was not taxable as it constituted a capital receipt.

3. Observations by learned CIT(A) on the Opinion of Shri Bhardwaj:
The tribunal addressed the criticism by the learned CIT(A) regarding the Opinion of Shri Bhardwaj, which suggested that the Opinion made incomplete references to the Agreement. The tribunal found that Shri Bhardwaj had accurately reproduced the relevant parts of the Agreement and provided valid reasons for his conclusions. The tribunal condemned the unwarranted observations made by the learned CIT(A) and emphasized that a more appropriate approach would have been to analyze and rebut the points made in the Opinion.

Conclusion:
The tribunal concluded that the sum of Rs. 1,32,00,000 received by the appellant from Suzuki India is not taxable under section 17(3) as "profits in lieu of salary" nor under section 28(va) of the Income-tax Act. The amount is considered a capital receipt and is not taxable. The appeal was allowed, and the observations made by the learned CIT(A) were deemed without basis.