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TMI Blog2011 (8) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany Munich re, Germany. The assessee had treated as a capital receipt and offered the entire amount as Capital gains, as cost of acquisition for non compete payment u/s 55(2)(a) is NIL. The AO had treated it as business profits. When called upon to explain the transaction the assessee, vide his letter dt 16.11.2008 explained as under: I had promoted a company called Paramount Health Care Management Company Pvt. Ltd. (PHMC) for the purpose of providing Third party administration and managed care service. On account of my experience and expertise in providing such services, I had the ability to do this business on my individual capacity. Munich Re was interested in becoming a shareholder of the said company. For this purpose a Memorandum of Understanding dt. 15th Oct. 1999 was entered into between me and Munich Re. Under the MOU, it was inter alia agreed that PHMC will increase its share capital by issue of further shares and Munich Re would subscribe to 500000 No. of shares being 33.33% of the shareholding in the PHMC and our percentage holding and of others will be reduced to 66.67% from 100%. Further I will grant Munich Re option to acquire 265000 shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset being goodwill of a business or a trade mark or brand name associated with business or a right to manufacture produce or process any article or thing or right to carry on any business tenancy rights stage carriage permits or loom hours. Provisions of sec 28(va) reads as under: (va) any sum whether received or receivable in cash or kind under an agreement for (a) not carrying out any activity in relation to any business or (b) not sharing any know how patent copyright trade mark licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Provided that sub-clause (a) shall not apply to: (i) Any sum whether received or receivable in cash or kind on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business which is chargeable under the head Capital Gains. 6. From the combined reading of both the above provisions and sec 28(va), it is abundantly clear that if the assessee gives up right to carry on any activity in relation to bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are given up irrespective of the width or narrowness of the same there is a complete impairment and therefore the receipt would be capital in nature. 10. As to the poser of the learned DR that assessee has not given up all the activities which he could conduct as a professional doctor, it was submitted that non compete has to be always with reference to existing business profession. If assessee mentions giving up of activities not being undertaken by him the same would be redundant. The Ld. Counsel for the assessee submitted that it reminds him of a famous anecdote about south Indian restaurant displaying a board outside the premises announcing their policy of not granting credit as under: We have entered into a non compete agreement with our neighbouring branch of State Bank of India. They will not sell Idli wada and we will not give credit . 11. It was further submitted that there is a vast difference between the languages of S. 28(va) and sec 55(2) of the Act whereas sec 28(va) of the act uses the words any activity in relation to any business sec 55(2) of the act is composed of the words right to carry on any business it is further submitted that the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case are exactly identical the settled issues cannot be made unsettled. Needless to state both the segments of the aggregate amount of consideration of ₹ 627,93,605/- emanate from the same non compete agreement dated 15.10.1999 and therefore the treatment which has been given to the first part of the consideration requires to be meted out to the other part as well. 15. Heard both the Parties. Clause of the Non Compete agreement on the basis of the payments have been made, impose the following obligations on the Assessee (recipient) 1. In consideration of amounts paid by MR to NS specified below. NS convenants that, from the date of execution of this Agreement, he (whether alone or jointly with any other person, and whether directly or indirectly qrand whether as a shareholder, participating partner, promoter, director, officer, agent, manager, employee or consultant of in or any other person or in any other similar position) will not directly or indirectly) (a) Compete with PHMC in any business as may be carried out by PHMC in future. (b) Solicit or endeavour to entice away from or discourage from or dealing with PHMC any per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the compensation under clause 3 of the agreement determined at US$ 100,000/-, the minimum under that clause, which has been received by the Assessee during the year under appeal and it is the treatment of this amount which is under appeal. 19. A reading of the Non Compete agreement gives us the impression that MR and the Assessee had agreed upon two types of payment (i) US$ 1.25 Million on the first year for the Assessee not to undertake various activities provided in clause 1 of the Non Compete Agreement. And (ii) a further compensation to the Assessee, who is also the MD of the JV companies, based on the business results of the company to be computed on the basis of the formula given in the Non Compete Agreement, which is based on the performance and profitability for a period of 5 years. Thus the payment made during the year can be considered only as payment made for the services rendered by the Assessee to the Non-resident Transferee, based on the performance/profitability. Thus the payment has been rightly assessed as revenue receipt. 20. Even if the entire agreement is considered as a single one and the payment is part of the non compete fee paid, the issue has t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nant agreed to by the Assessee would amount to transfer of right to carry on any business is to be seen. 23. The first aspect is that the Assessee has not transferred any right to do business. It is only self imposed restriction himself not to enter into business in competition with the non-resident. The Amritsar Tribunal in the case of Dy. CIT v. Max India Ltd. [2007] 112 TTJ 726 has held that when the assessee signed the negative covenant not to carry on manufacture or trade in product for certain period of time, it amounted only to self imposed restriction and not a transfer. The right to manufacture or trade remained intact after the period for which negative covenants were signed. Even though the Tribunal in that case held in favour of the assesee as it related to the year prior to 2003-04, the ratio that mere restriction not to carry out manufacture or trade in competition would not amount to transfer of right to carry on any business, would be applicable to the instant case. 24. In the circumstances, it cannot be said that the assessee has transferred completely it right to carry on any business; in fact the Assessee had continued to do his activity in the same lin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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