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TMI Blog2018 (6) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from “Profits and gains of business or profession” as provided under Section 28(va) of the Act, shall not be chargeable to tax in India in the absence of any Permanent Establishment of the Applicant in India, by virtue of Article 7 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and United Kingdom. - A.A.R. No 1238 of 2012 - - - Dated:- 6-6-2018 - Mr. R.S. Shukla, In-charge Chairman And Mr. Ashutosh Chandra, Member (Revenue) For the Applicant : Mr. Kanchun Kaushal, FCA Mr. Dhanesh Bafna, FCA Mr. K. Venkatchalam, FC For the Department : Ms. Kavita Pandey, CIT (DR), AAR Mr. Rajat Kapoor, JCIT (IT) DR RULING ( By Ashutosh Chandra ) HM Publishers Holdings Limited (the Applicant) filed an application on 09.01.2012, seeking an Advance Ruling under Section 245Q(1) of the Income Tax Act, 1961 (the Act ). The same was admitted on 10.01.2014. 2. The Applicant is a company incorporated under the Company laws of England and Wales, United Kingdom and its control and management of the affairs are situated wholly outside of India. It is the holding company of the Macmillan Group, a leading international publisher. MPS Limited is a limited company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerned or interested with or otherwise competes with the business of MPS in India as such involvement would have a detrimental effect, and cause irreparable harm to the business of the MPS; or ii. solicit or entice away or offer employment to or endeavour to solicit or entice away or offer employment to any employee or officer of MPS. c. Point (b) above will not prohibit the Applicant and / or the Macmillan Group from directly or indirectly: i. enhancing and developing its educational and information businesses in India after the date of the agreement; and ii. holding any interest in any securities of a company listed in or deal on any stock exchanges, if the Applicant and any entity controlled by the Applicant are together interested in securities which amount to less than 10% of the issued share capital of that company. 3. On the above facts, the Applicant has posed the following question to us, seeking an Advance Ruling: Whether on the facts and circumstances of the case the non-compete fees received by the Applicant from ADI BPO Services Private Ltd., an Indian Company, as a part of the consideration for transfer of the shares held in MPS Ltd. an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-compete fee was received by the Applicant for not carrying out any activity in relation to any business (in this case, in relation to not carrying out business of publishing BPO services), the said sum should be held to be business income as per section 28(va) of the Act. The Applicant relied on the Hon ble Madras High Court s decision in Commissioner of Income-tax vs. M/s. Chemtech Laboratories Ltd. [Tax case appeal no. 1492 of 2007] [Madras HC] wherein rreceipts arising out of a negative covenant not to carry a business was held taxable as business income under section 28 (va) of the Act. 4.3 However, it is submitted that receipt of non-compete fee would not be chargeable under section 28(va) if it is covered by the proviso to Section 28(va). The said proviso excludes a consideration on account of transfer of right to carry on any business from the head Profits from Business and Profession which is chargeable under the head Capital Gains . 4.3.1 With respect to taxability under the head capital gains, it was submitted that the agreement by which the Applicant agreed to refrain from indulging in a business competing with another is independent by itself to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per Article 7 of the Treaty, such business profits would be taxable in India only if it carries out any business activity through a permanent establishment (PE) in India. In the absence of any PE in India, the non-compete fees receivable would not be chargeable to tax in India. In support of its contention, the Applicant relied on the decision of Trans Global PLC vs. Director of Income tax (International taxation) [158 ITD 230] [Kol. Trib.], wherein non compete fees received by a UK based non - resident company not having a PE in India was held as not liable for taxation in India. The following extract of the decision was highlighted by the Applicant - 6. We have heard the Ld. Sr. counsel Shri R. N. Bajoria and gone through facts and circumstances of the case. Before us, the issue is limited whether the receipt of noncompete premium is taxable as capital gains u/s. 55(2)(a) read with proviso (1) of section 28(va) of the Act, when the assessee is a nonresident company of UK in term of Article7 of Double Taxation Avoidance Agreement (DTAA) with UK. Admittedly, the assessee is a nonresident British Company liable to tax in UK only and does not have a permanent establishment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act resulting in assessment being erroneous and prejudicial to the interest of revenue for not assessing noncompete premium as capital gains. The assessee clearly accepted that the provisions of section 28(v)(a) of the Act will apply to this noncompete section 28(va) premium being business income but that will be taxed in UK being assessee a nonresident British Company having no permanent establishment in India in term of Article7 of DTAA. 8. Before us, Ld. Counsel for the assessee having relied on the decision of Hon'ble Supreme Court in the case of Gufic Chem (P.) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105, wherein it is held as under: 7 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 noncompete premium received by assessee is a business receipt assessable u/s. 28(va) of the Act but in terms 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 nonresident company and does not have a permanent establishment in India, liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was contended that since the Applicant has sold shares along with controlling interest and the shares have been sold at market price, no consideration has been allotted to the control and management which has been transferred. Reliance was placed on the decision of the Delhi High Court in case of Shiv Raj Gupta [2014] 52 taxmann.com 425 (Delhi). 6. In its rejoinder to the above contentions of the Revenue, the Applicant stated during the course of these proceedings as well as in its letter filed with us on 15.09.2017, as under: 6.1 With regard to the first contention of the Revenue, it was stated that: 6.1.1 The Applicant does not have a right to carry on a business of MPS. It reiterated its submissions that Applicant being only a shareholder of MPS did not have right to carry on the business of MPS. It only enjoyed rights such as right to profits, right to dividend, right to vote, etc. Thus, there did not exist any capital asset, as alleged by the Revenue, as per section 2(14) of the Act in order to attract capital gains. 6.1.2 Without prejudice to the above, non-compete fee is in consideration for a restrictive/negative covenant and not for transfer of right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly provided under section 28(va) of the Act, and it nowhere provides or in any way implies that the recipient of non-compete fee must already be carrying on business which he has agreed not carry on further. The section applies to any person who has received or is entitled to receive a sum in consideration for agreeing not to carry out any activity in relation to any business and is not restricted to only that business which he was already carrying on. In support of the above contention, the Applicant relied on the decision of the Hon ble Mumbai Tribunal in the case of Anurag Toshniwal Arun Toshniwal vs. DCIT (56 SOT 52) (Mum. ITAT) which has been affirmed by the Hon ble Bombay High Court, in Arun Toshniwal and Ors. Vs. DCIT (375 ITR 270). 6.2.2 Further, the Applicant pointed that the issue involved in Chennai Properties (supra) was whether rental income of the assessee was chargeable under the head house property or business income. The issue involved in Associated Industrial Development (supra) was whether sale of shares is to be taxed under the head of business income or capital gains. Since the present case involves determining taxability of non-compete fee received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unauthorised use of this information by others would cause substantial loss and harm to MPS and its shareholders. Hence there was justification for payment of non-compete provided under Clause 5 of the SPA. 6.2.4 The Applicant further submitted that the decision of Hami Aspi Balsara has been distinguished by the subsequent decision of Hon ble Mumbai Tribunal in Anurag Toshniwal and Arun Toshniwal (supra) as follows: 15. Before parting, the assessee has placed reliance upon the decision of the Tribunal in the case of Mrs. Hami Aspi Balsara (supra). The facts of that case are clearly distinguishable from the facts of the instant case inasmuch as in that case, for the difference in the sale consideration vis- -vis book value of the shares, the AO was of the opinion that the difference is nothing but a Non Compete fees and therefore the Tribunal rejected the contention of the AO holding that there was no such mention in the agreement between the purchaser and the seller of the shares therefore the difference cannot be said to be Non compete fee. However, in the present case, there is a separate agreement termed as 'Non compete and Non solicitation agreement This dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ; (ii) .................... Article 7 of the India-UK Treaty Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 7.2 The Applicant submits that section 28(va) was introduced by the Finance Act, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion involved in this application, let us also examine the Special Bench decision in the case of Addl. CIT vs. Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB) which has elaborately dealt with taxability under section 28(va) under various scenarios, which shall be relevant for answering the question put before us for a ruling. 37. CAPITAL GAIN OR NON-COMPETE FEE: The conclusion that emerges from the aforesaid discussion is that when a business is sold and the purchaser enters into agreements to ensure that there is no competition, he may enter into agreements not only with the transferor of the business but also with persons connected with the transferor. He may also pay consideration to the transferor for transfer of business, for not engaging in competition. He may also pay consideration to persons associated with the transferor not to indulge in competition. The receipts by the transferor or other persons connected with the transferor can be divided into the following categories; a) The consideration paid by the transferee for transfer of the business to the transferor; b) Consideration paid to the transferor not to carry on same business directly or indirectly not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) of the Act introduced by the Finance Act, 2002, w.e.f 1-4-2003. It is significant to note that the words used in Sec.28(va) (a) of the Act are not carrying out any activity in relation to any business . The proviso (i) to Section 28(va)(a) provides for exception to cases where such receipts are taxable as capital gain viz., where any sum is received for transfer of a right to carry on any business which is chargeable to tax as capital gain. When the transferor is already carrying on business and agrees not to carry on business transferred, then the same would fall for consideration only under Sec.55(2)(a) of the Act. 40. With the change in the law receipts on account of giving up right to carry on business even if it is capital receipt would now be chargeable to tax as income from business. The difference would be that if it is paid to the transferor for giving up right to carry on business, it would be regarded as capital gain, the cost of acquisition of right to carry on business being determined in accordance with the provisions of Sec.55(2)(a) of the Act. If it is compensation paid for not carrying out any activity in relation to any business , which the transferor is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which may be carried out after the date of this Agreement; and 5.3.2 holding any interest in any securities of a company listed in or dealt on any stock exchanges, if the Seller and any entity Controlled by the Seller are together interested in securities which amount to less than 10% (ten percent) of the issued share capital of such company. 5.4 . 8. Keeping the above provisions of law and facts of the Applicant in mind, we shall now consider if the Applicant s receipt of non-compete fee is chargeable to capital gains so as to attract the proviso to section 28(va). Here we shall also deal with the Revenue s arguments for the case as their primary contention has been that the non-compete fee received by the Applicant is chargeable under the head capital gains and not under the head of business income as contended by the Applicant. In contending so, the Revenue has stated that the Applicant had a right to carry on a business (i.e. the capital asset) and that this right was extinguished when the Applicant was paid non-compete fee as consideration for transfer of the said capital asset. Since there was extinguishment of the right to carry on a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th businesses being inter connected and belonging to same industry. Such use of information could cause substantial loss and harm to MPS and its shareholders (including the payer). Thus, the payer entered into a non-compete clause with the Applicant to protect its own interests and not for gaining any rights of carrying on a business from the Applicant. We, therefore hold that the fee received by the Applicant is for a negative covenant to not compete with MPS and not for transfer of any right to carry on business to the payer as contended by the Revenue. 8.3 Thirdly, in order to fall within the definition of transfer u/s 2(47) of the Act, there must be extinguishment of a capital asset (in this case the right to carry on business). If there is no extinguishment of right in the capital asset, there cannot be a transfer under section 2(47)(ii). The word extinguishment means destruction, implying that the right, contract, etc. which is extinguished is destroyed in perpetuity. The extinguishment of a right is permanent in nature. Extinguishment of right implies that the right cannot be revived. Till the time the right is revocable, it could not be said that there was extinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived towards the transfer of business rights, would be liable to tax as business profits. The question whether the activity of non- compete was incidental or dominant was thus irrelevant, and the Tribunal mis-directed itself in addressing itself to the same. This is particularly so since the parties themselves agree, in Article 3.6 8 (extracted above) of the Non-compete Agreement, that the total consideration of ₹ 6 crores shall include consideration towards the negative covenant as well. 9. However, the Revenue has contended that if the receipt of non- compete fee is to be taxed as business income under section 28(va), it can be so taxed only if the recipient has received such consideration for agreeing not to carry on a business which he was already carrying on prior to non-compete agreement. 9.1 We find it difficult to agree with the aforesaid view of the Revenue. The taxation of non-compete fee under the head business income has been specifically provided under section 28(va) of the Act which states that 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 . The language ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to M/s. Thermo Electron LLS India Pvt. Ltd. and not the entire business which negates the submission of the Counsel for the assessee. The ITAT Hyderabad Special Bench had the occasion to deal in similar issue in the case of Dr. B.V. Raju (supra) wherein the Tribunal was seized with the situation which was prior to the amendment of Sec. 28. Therefore, the Tribunal has held that prior to the amendment, Non compete fee was regarded as capital receipt. However, the Tribunal at para-38 of its order has emphatically made it clear that w.e.f. 1.4.2003, a new sub-sec (va) is inserted in Sec. 28 to bring in the Non compete fees within the purview of Sec. 28 to make it taxable in the hands of the recipient of such income. Hon'ble Supreme Court in the case of Guffic Chem. (P.) Ltd. (supra) held that payment received as Non Compete fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 w.e.f. April 2003 that receipt by way of Non compete fee was made taxable u/s. 28(va) of the Act. The Hon'ble Supreme Court was dealing with the situation wherein it was to be decided whether Non compete fees could be char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it appears that in order to attract section 28(va)(a), there is no condition of receiving a non-compete fee for agreeing not to carry on a business which the assessee was already carrying on. Hence, we do not agree with the Revenue that the fee received by the Applicant cannot be taxable under section 28(va) because the Applicant and MPS were carrying on different businesses. 9.6 Moreover, we find that the Revenue has sought to determine the taxability of non-compete fee received by the Applicant under the head of Capital Gains and not business income by relying on the principles laid down by the Apex Court in Chennai Properties (supra) and Associated Industrial Development Co. (supra). However, in our opinion, the said reliance is misplaced. If the facts of a case squarely fall within the wordings used in the provisions of law, there is no requirement to apply a decisive test such as the one laid down in Chennai Properties which holds that while taxing an income under the head of business income, it is to be seen whether the activity resulting in the income is the business of the assessee. 9.6.1 In the present case, the receipt of non-compete fee is in fact a capital receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest from the non- compete consideration and question the genuineness of the SPA in any manner. 10.2 Also, the reliance placed on the case of Shiv Raj Gupta is misplaced. We find that the facts of the said decision are vastly different from the facts in the Applicant s case. In that case, the assessee had transferred its controlling interest in a company engaged in liquor business for ₹ 55,83,270 and had received non-compete fee vide a separate agreement of ₹ 6.60 crore. The High Court held that the bundle of rights including non-compete right acquired on the sale of shares of a thriving and running company was valued at ₹ 56 lakhs approximately and ₹ 6.60 crore was paid as consideration for non- compete agreement to the assessee who did not even have a license to manufacture alcohol. Thus, it held that the real and true nature of the transaction or event was the sale of shares and transfer of control and management which had been camouflaged as non-compete fee . It was under these peculiar circumstances that the High Court held that to hold the two agreements of sale of shares and non-compete as independent would be to ignore reality, and treat sham an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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