2016 (4) TMI 673 - AT - Income Tax

Revision u/s 263 - whether Non-compete premium is taxable in the hands of the assessee under the head capital gains u/s. 55(2)(a) read with proviso (i) to section 28(va) - assessee is a non-resident company of UK in term of Article-7 of Double Taxation Avoidance Agreement (DTAA) with UK - Held that - It is not the case of the revenue that the assessee is having a permanent establishment in India and as such in term of Article-7 of DTAA, being non- compete premium received by assessee cannot be taxed in India. The AO while framing assessment u/s. 143(3) of the Act, after considering the provisions has not taxed the non- compete premium in accordance with the provisions of the Act and the provisions of the DTAA. We are of the view that a perusal of non-compete agreement clearly shows that by any stretch of imagination it cannot be held that there is a transfer within the meaning of section 2(47) of the Act resulting in assessment being erroneous and prejudicial to the interest of revenue for not assessing non-compete premium as capital gains. The assessee clearly accepted that the provisions of section 28(v)(a) of the Act will apply to this non-compete section 28(va) premium being business income but that will be taxed in UK being assessee a non-resident British Company having no permanent establishment in India in term of Article-7 of DTAA. Thus we hold that the above said non-compete premium received by assessee is a business receipt assessable u/s. 28(va) of the Act but in term of Article- 7 of DTAA any business income arising to the enterprise of a contracting state is taxable only in that state, assessee being a non-resident company and does not have a permanent establishment in India, liable to tax in UK only. Accordingly, the assessment framed by AO is neither erroneous nor prejudicial to the interest of revenue and hence, the revision order passed by DIT(IT) is without any basis and quashed. - Decided in favour of assessee

Issues Involved:
1. Taxability of non-compete premium under the head capital gains.
2. Applicability of Section 55(2)(a) read with proviso (i) to Section 28(va) of the Income Tax Act, 1961.
3. Relevance of Article 7 of the Double Taxation Avoidance Agreement (DTAA) with the UK.
4. Validity of the revision order passed by the Commissioner of Income Tax (International Taxation).

Issue-Wise Detailed Analysis:

Issue 1: Taxability of Non-Compete Premium under the Head Capital Gains
The core issue in this appeal is whether the non-compete premium received by the assessee is taxable under the head capital gains as per Section 55(2)(a) read with proviso (i) to Section 28(va) of the Income Tax Act, 1961. The assessee, a non-resident company, did not disclose the non-compete premium in its return of income, leading the DIT (International Taxation) to issue a show-cause notice. The DIT contended that the non-compete premium is a capital receipt and should be taxed as capital gains. The DIT relied on the Supreme Court judgment in Gufic Chem P. Ltd., which held that payments received as non-competition fees are capital receipts.

Issue 2: Applicability of Section 55(2)(a) Read with Proviso (i) to Section 28(va) of the Act
The DIT argued that the non-compete premium falls under the ambit of Section 55(2)(a) and should be taxed as capital gains. The assessee, however, contended that the non-compete premium is taxable as business receipts under Section 28(va) of the Act. The assessee further argued that since it is a tax resident of the UK and does not have a permanent establishment in India, the amount should not be taxed in India as per Article 7 of the DTAA between India and the UK.

Issue 3: Relevance of Article 7 of the DTAA with the UK
The Tribunal examined whether the non-compete premium should be taxed in India, considering the DTAA between India and the UK. The Tribunal noted that the assessee is a non-resident British company without a permanent establishment in India. According to Article 7 of the DTAA, business income arising to an enterprise of a contracting state is taxable only in that state unless the enterprise has a permanent establishment in the other contracting state. Since the assessee does not have a permanent establishment in India, the non-compete premium cannot be taxed in India.

Issue 4: Validity of the Revision Order Passed by the Commissioner of Income Tax (International Taxation)
The Tribunal reviewed whether the assessment order was erroneous and prejudicial to the interests of the revenue. The DIT (IT) had directed the AO to revise the assessment and tax the non-compete premium under the head capital gains. The Tribunal found that the AO had correctly applied the provisions of the Act and the DTAA, and the non-compete premium was rightfully not taxed in India. The Tribunal held that the assessment order was neither erroneous nor prejudicial to the interests of the revenue. Consequently, the revision order passed by the DIT (IT) was quashed.

Conclusion:
The Tribunal concluded that the non-compete premium received by the assessee is a business receipt assessable under Section 28(va) of the Act. However, in terms of Article 7 of the DTAA, any business income arising to an enterprise of a contracting state is taxable only in that state. Since the assessee is a non-resident company without a permanent establishment in India, the non-compete premium is taxable only in the UK. The Tribunal allowed the appeal of the assessee and quashed the revision order passed by the DIT (IT).

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