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TMI Blog2016 (4) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... d to hear the matter ex parte for the reason that the revenue is seeking adjournment on frivolous ground and this is a regular feature, which is a matter of record. Hence, without giving adjournment, as the appeal is pending since 2013, we proceeded to decide it ex parte. 3. The only issue in this appeal of assessee is against the order of DIT(IT), Kolkata revising the assessment u/s. 263 of the Act is "Whether the 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) of the Act in the given facts and circumstances of the case or not?" 4. Briefly stated facts are that the assessee is a non-resident company furnished its return of income for the relevant AY 2008-09 on 31.03.2010. The assessment was completed u/s. 143(3) of the Act by the ADIT(IT)-3(1), Kolkata vide his order dated 24.12.2010. The DIT- International Taxation (in short IT) from assessment records noticed that the assessee has received GBP 750000 (converted in Indian currency i.e. Rs. 6,05,25,000) as non-compete premium. According to DIT, this receipt was not disclosed by the assessee in its return of income and not included as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at payments received as non-competition fee under a negative covenant is in the nature of capital receipts. 6. The above mentioned amount of Rs. 6,05,25,000 is therefore taxable under the head capital gains inasmuch as the cost of acquisition of such right to carry on any business or right to manufacture, produce or process any article or thing is to- be treated as nil in accordance with the provisions of section 55(2)(a) of the Act. Erroneous & prejudicial to the interests of Revenue 7. While making the assessment under section 143(3) of the Act, the Assessing Officer, ADIT - 3(1), Kolkata did not make any enquiry regarding the taxability of the above sum of Non-Compete Premium of Rs, 6,05,25,000 nor did he examine the issue and apply his mind thereto in the light of the facts of the case and existing legal provisions. In view of the above, the order u/s 143(3), dated 24.12.2010 is considered erroneous in so far as it is prejudicial to the interests of revenue." 5. The assessee replied to the SCN by stating that the receipt of non-compete premium was taxable in the hands of the assessee as business receipts u/s. 28(va) of the Act. It was further explained that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of a different entity is within the meaning of transfer of capital assets, and would not fall under Section 28(va) of the Act, rather it would be covered under the proviso to sub-clause (a) of Section 28(va) of the Act. 20. The rights are assets. The assessee surrendered its rights to carry out business in the five countries for 5 years. Such surrender was compensated by the third party, and in lieu of that the assessee received a sum of GBP 7,50,000 (Pound Sterling seven lakh fifty thousand only) as Non- Compete Premium. Also, for this surrender of the rights all the formalities had been gone through. In fact, no issue on this was raised by the assessee. That being the case, the process of surrender of rights was complete. Circular No. 8 of 2002 dated 27.8.2002 explaining the provisions of the Finance Act, 2002 by which clause (va) was inserted in Section 28 of the Act, clarifies that receipts for transfer of rights to manufacture, produce or process any article or thing or right to carry on any business would be chargeable to tax under the head capital gain and would not be taxable as profits and gains of business. As per Section 55(2)(a) of the Act, right to carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hon'ble Supreme Court in the case Mangalore Electric Supply Co. Ltd. v. CIT [1978] 113 ITR 655 wherein the transfer has been discussed and not the taxability in term of DTAA. The another precedent cited by Ld. DIT (IT) of Hon'ble Supreme Court in the case of CIT v. Narayan Dairy Products [1996] 219 ITR 478 wherein the similar word transfer was interpreted. Further, he also referred to the decision of Hon'ble Kerala High Court in the case of Blue Bay Fisheries (P.) Ltd. v. CIT [1987] 166 ITR 1, wherein the same issue of transfer is discussed. According to DIT(IT), transfer of shares of Moran Tea Co. (I) Ltd., transferring the controlling interest in the business of the said company and accordingly, the resultant receipt is capital gains taxable u/s. 55(2)(a) of the Act. 7. In view of the above facts, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Section 28(va) is amendatory and not clarificatory. Lastly, in Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT (A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from 1.4.2003." 9. In view of the above facts and circumstances and case law of Hon'ble Supreme Court in the case of Guffic Chem (P.) Ltd., supra, 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 contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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