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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 ..... onal Stock Exchange of India Limited, BSE Limited and Madras Stock Exchange Limited. 2.1 It is stated that the applicant is the legal and beneficial owner of 1,03,29,980 equity shares representing 61.46% of the issued, subscribed and fully paid up share capital of MPS. ADI BPO Services Private Limited (ADI), a company incorporated under the laws of India with its registered office at New Delhi, is in the business of publishing BPO services in India. It is stated that the Applicant and ADI had entered into a Share Purchase Agreement dated October 11, 2011 (SPA) whereby ADI will purchase all the shares held by the Applicant in MPS. As per clause 3 of the SPA, ADI will pay to the Applicant the following consideration for the share purchase: a. Purchase Price - calculated as per SEBI circular dated 2 September, 2005 bearing circular No. MRD/ DoP / SE / Cir - 19/05, on the basis of a price of INR 36.15 per share aggregating to INR 37,37,90,277. b. Non-compete fee - in consideration of the undertaking set out in clause 5 of the SPA will also pay the Applicant the non- compete fee of INR 9,30,00,000. 2.2 It is stated by the Applicant that as per clause 5 of the SPA, the non-compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Double Tax Avoidance Agreement ('DTAA') between India and United Kingdom, in absence of any Permanent Establishment of the Applicant in India?" 4. The Applicant has submitted that the non-compete fees received by it from ADI though would be business income under section 28(va) of the Income-tax Act, 1961 (the "Act"), in absence of any permanent establishment in India, would not be taxable in India as per Article 7 of the India-UK Double Taxation Avoidance Treaty (DTAA). 4.1 The Applicant explained the basis and circumstances under which it received the non-compete fees from ADI as follows - 4.1.1 The Applicant received the non-compete fee for not carrying out any business activity which can compete with MPS for a period of three years as per the terms and consideration set out in Clause 5 of the SPA. While the Applicant itself was not engaged in carrying out the same business as that of MPS prior to sale of its shares, the Applicant being an international publisher was operating in the same industry. 4.1.2 The Applicant's Group of companies i.e. the HMPHL Group, had contacts and expertise to arrange to carry out publishing solution services similar to those being provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the definition of transfer under Section 2(47) of the Act. 4.3.2 Without prejudice, it was further submitted that there was no capital asset also which could be transferred under section 2(47). By entering into a non-compete clause with ADI, the Applicant was restrained from carrying out similar activities as those of MPS for a period of three years, so as to enable ADI to understand and establish itself in the business carried out by MPS. Thus, the Applicant had simply imposed a restriction upon itself and not transferred any right to ADI BPO. The Applicant is only a shareholder of MPS with controlling interest in it and was not carrying on nor had the right to carry on business of MPS. Being a shareholder, it enjoyed rights such as right to profits, right to dividend, right to vote, etc. However, the Applicant contended that in the present facts of the case, it cannot be said to be enjoying a right to carry on business. A company and its shareholders are distinct entities enjoying different rights and obligations. The Applicant, thus, at best, can be said to be enjoying controlling interest in MPS which is not separately identifiable nor legally enforceable. In view of the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or for transfer of any right to manufacture. According to assessee, this noncompete fee premium is a mere refraining from carrying on activity, which can be taxed u/s. 28(va) of the Act as amended by the Finance Act, 2002 w.e.f. 01.04.2003. The assessee also pleaded that this can be assessed as business income but assessee being a nonresident having no permanent establishment in India and accordingly, in term of Article7 of DTAA with UK any business income arising to the enterprise of a contracting state is taxable only in that state unless the enterprise is carrying on business in the other contracting state through a permanent establishment situated therein. We find 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 Article7 of DTAA, being noncompete 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 noncompete premium in accordance with the provisions of the Act and the provisions of the DTAA. The DIT(IT) has relied on the case law of Hon'ble Supreme Court in the case Mangalore Electr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any basis and quashed." 5. The Revenue has contended that the non-compete fee received by the Applicant is chargeable under the head 'Capital Gains' and not under the head of business income. A report dated 1-09-2017 was filed by the Revenue wherein it was argued as under: 5.1 That the receipt of non-compete fee is for transfer of right to carry on business covered under the definition of 'transfer' as per section 2(47) of the Income-tax Act. As per the said section, extinguishment of any right in a capital asset amounts to transfer. In the case of non-compete fee, the right to carry on a business is a capital asset and that right is extinguished when the payment is made to a person for not carrying out that business. Thus in the present case when payment is made to the applicant for not carrying out a business, his right in the capital asset is extinguished and there is a transfer within the meaning of Section 2(47) of the Act. 5.2 That section 28(va) is attracted only in a case where assessee receives non-compete fee to not carry on a business further, which it was already carrying on prior to agreement for non-compete. Reliance was placed upon decisions of the Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ential and proprietary information relating to the business and operations of MPS. Thus, the payer i.e. ADI 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. Accordingly, 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 argued by the Revenue. 6.1.3 Such restrictive/negative covenant does not amount to 'transfer' under section 2(47)(ii) since there is no extinguishment of any right/capital asset in an agreement for non-compete. The Applicant argued that the word 'extinguishment' means destruction, implying that the right, contract, etc. which is extinguished is destroyed in perpetuity. Till the time the right is revocable, it could not be said that there was extinguishment of rights. At best, it can be said to be a case of suspension of rights. Since the non-compete fee was received by the Applicant in consideration for an agreement not to compete with MPS for 3 years only, it could not be said that rights were destroyed permanently so as to be called extinguishment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue are not relevant for the instant case. Also, the facts of the Applicant's case squarely fall within the provisions of section 28(va) and hence there is no requirement to apply a decisive test as proposed by the Revenue by relying on the decision of Chennai Properties (supra). 6.2.3 As regards Revenue's reliance on the decisions of Hon'ble Mumbai Tribunal in the case of Hami Aspi Balsara Vs. ACIT (supra) and Savita Mandhan 2011-LL-1007-51 (Mum. ITAT) which has followed the ratio of Hami Aspi Balsara, the Applicant explained the facts involved in these cases and sought to distinguish them as under: 6.2.3.1 The applicant submits that the facts in the case of Hami Aspi Balsara were distinguishable. In that case the assessee had sold shares of target companies along with other sellers and received sales consideration from the purchaser M/s. Dabur India Limited. The share purchase agreement contained a non-compete clause since there was no separate consideration provided for it, moreover as the shares were sold at a much higher value than their book values, the assessing officer allocated a certain amount towards non-compete clause and held the same to be taxable under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he circumstances of the case and in law, the Tribunal erred in holding that the amount received by the Appellant from Thermo was taxable as business income under the provisions of section 28(va) of the Act, despite the fact that the Appellant was not carrying on any business in the relevant previous year ? II. Whether the Appellate Tribunal is correct in holding that carrying on of business is not a precondition was chargeability under the head 'profits and gains of business ?" 6.2.5 The Applicant further placed reliance on a Special Bench decision in Addl. CIT vs. Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB) and Sterling Re-rolling Mills (P.) Ltd. v. ACIT (53 SOT 41) (Mumbai ITAT) to explain its interpretation of law under section 28(va) of the Act. 6.3 As regards Revenue's alternate argument, the Applicant submitted that the shares held by the Applicant in MPS were listed on the NSE, BSE and MSE. These shares had been sold at the prevalent market price calculated as per the SEBI circular dated 2 September, 2005 bearing circular no. MRD/DoP/SE/Cir - 19/05, on the basis of a price of INR 36.15 per share aggregating to INR 37,37,90,277 (as reflected in the SPA). Also, the SPA pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax net, a specific charge was introduced vide section 28(va) to tax receipts in the form of non-compete fee as business income. Thus, even though such a receipt may be capital in nature, the same is now required to be taxed as business income under section 28(va). 7.3 Further, the section provides that sub clause (a) shall not apply to a sum received or receivable inter-alia, on account of transfer of right to carry on business, which is chargeable under the head capital gains. Thus, 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". For this purpose, it is important to analyse the terms "transfer" and "right to carry on any business" used in the said proviso. The definition of "transfer" as provided under Section 2(47) of the Act is as follows: "(47) "transfer", in relation to a capital asset, includes,- i. the sale, exchange or relinquishment of the asset ; or ii. the extinguishment of any rights therein ; or iii. the compulsory acquisition thereof under any law ; or iv. in a case where the asset is converted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eree claims the consideration paid as above as revenue expenditure have no bearing whatsoever when we deal with the case of the tax treatment in the hands of the transferee. There are different considerations for determining whether the cost paid by the transferor is to be regarded as capital expenditure or revenue expenditure. 38. As far as category (a) is concerned the receipt would fall for consideration under the head capital gains as there is a transfer of capital asset in respect of which the machinery provisions of computation of capital gain can be applied. As far as category (b) is concerned the consideration received would fall for consideration under the head capital gain but depending upon the law that prevailed at the time of transfer. Self generated assets like, goodwill of a business or a trade mark or brand name associated with a business, 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 by their very nature could not have cost of acquisition and therefore machinery provisions were amended to provide cost of acquisition being treated as nil. These amendments are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus for the provisions of Sec.55(2)(a) of the Act to apply the transferor must be carrying on a business which he agrees not to carry on. If the transferor is not already carrying on business then he receives consideration only for "not carrying out any activity in relation to any business". In that case the provisions of Sec.28(va)(a) of the Act would apply and not the proviso thereto." 7.5. Before proceeding further, we may also refer to the relevant clause of the SPA between the Applicant and ADI which provides for the Non - compete fee, taxability of which in the hands of the Applicant is under consideration here. The Clause 5 - Non Compete of the SPA reads as under: "5. NON-COMPETE 5.1 ........................................................ ........................................................ 5.2 In further consideration of, and as a further inducement to the Purchaser entering into this Agreement, the Seller undertakes to the Purchaser that for a period of 3 (three) years commencing from the Completion Date, the Seller shall not and it shall procure that no member of the Macmillan Group, directly or indirectly, alone or jointly with any other Person, and wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case are that the Applicant held shares of MPS to the extent of 61.46% but it did not have a right to carry on business of MPS. The right to carry on business of publishing BPO services is with the company MPS who is carrying on such business and not the Applicant. It is important to draw a distinction between the company (i.e. MPS) and its shareholders (i.e. Applicant). A company and its shareholders being distinct legal entities, enjoy different rights and obligations. 8.1.1 We are in agreement with the Applicant's argument that shareholders enjoy rights such as right to profits, right to dividend, right to vote, etc. but they cannot be said to be carrying on the company's business or having a right to carry on business of a company. The Applicant, in this case, was only a shareholder of MPS. Hence, the Applicant cannot be said to be enjoying a right to carry on business as contended by the Revenue. Accordingly, we hold that the Applicant does not hold a legally enforceable right which can be treated as a 'capital asset' within the meaning of section 2(14). In view of this position, there can be no question of transfer of any right to carry on business from the Applicant to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of time only i.e. 3 years. Thus, after the period of 3 years as provided in the SPA got over, the Applicant would be free to compete with MPS without any of the restrictions provided in the SPA. Thus, the Applicant's right to carry on business as that of MPS is restricted for 3 years and cannot be said to be destroyed permanently so as to be called extinguishment of 'right to carry on business' amounting to 'transfer' under section 2(47)(ii). We find support from the decision relied upon by the Applicant in the case of Dy. CIT v. Max India Ltd. (supra) wherein it has been held that negative covenant not to carry on manufacture or trade in product for certain period of time amounts only to self-imposed restriction and not a transfer. 8.4 In view of the above, we hold that the Applicant has received consideration in the form of non-compete fee for a negative covenant and not for transfer of any right to carry on business. As there is no capital asset as per section 2(14) and no transfer as per section 2(47), there can be no income chargeable to tax under the head of Capital Gains. Hence, the case of the Applicant does not fall under the proviso to section 28(va). We are, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any activity in relation to any business' and it nowhere provides that the recipient of non-compete fee must already be carrying on business which he has agreed not to carry on further. Nothing provided in section 28(va) suggests that the recipient should agree not to carry on a business further which he was already carrying on. 9.1.1 There is no ambiguity in the provisions of section 28(va) so as to lead to such a conclusion that the recipient must first be carrying on a certain business and then should agree not to carry it out further for certain period of time. We agree with the Applicant that 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. The section also does not use the words 'carry on further' as contended by the Revenue so as to imply that the recipient should have already been carrying on the business. 9.2 In this regard, we derive support from the ratio in Addl. CIT vs. Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB) and Sterling Re-rolling Mills (P.) Ltd. v. ACIT (53 SOT 41 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larificatory, which observation fortifies our view that w.e.f. 1.4.2003 Non compete fees is taxable under the head "profits and gains of business or profession" as a revenue receipt." 9.3 We thus hold that the fact whether the receiver of non-compete fee was carrying on any business or whether he was carrying on the same business or a different business than that of the payer of non-compete fee or the transferor of shares, etc. is totally irrelevant while considering taxability under section 28(va)(a). 9.4 The above position gets further support from the fact that various High Courts and Tribunals have held non-compete fee to be taxable under section 28(va) in both the following scenarios: i. Where assessee was carrying on a particular business and received a non-compete fee for agreeing not to carry on the same business, and ii. Where assessee was carrying on a particular business and received a non-compete fee for agreeing not to carry on some other business, which could be any business, different from the one he was already carrying (the Applicant's case falls in this scenario). 9.4.1 In the cases of John D'souza vs. CIT (226 CTR 540) (Bombay High Court), Chemech Laborato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 28(va). The principles which the Revenue has relied upon to determine the taxability of non-compete fee will not apply to a receipt which has been brought under the tax net by virtue of specific charge under provisions of section 28(va) under the head of business income. We, thus hold that the Revenue's interpretation of section 28(va) to hold that recipient of non-compete should already have been carrying on the business which he has agreed not to carry on further is erroneous and contrary to the provisions of the Act. 9.7 We also agree with the Applicant that the decisions in the cases of Savita Mandhan (supra) and Hami Aspi Balsara (supra) relied upon by the Revenue are distinguishable from the facts of the present case and hence not applicable. 10. The Revenue have made an alternative plea, by placing reliance on Hon'ble Delhi High Court's decision in Shiv Raj Gupta (supra), that if non-compete fee is taxable under section 28(va), then the entire consideration of Rs. 9.3 crore should not be considered to be towards non-compete fee and some amount should be allotted to transfer of controlling interest by the Applicant to ADI. 10.1 We find this plea difficult to accept. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocation was made towards sale of shares which led to transfer of controlling interest. The High Court has not held that some amount, over and above the market price of shares must be allocated in every case where controlling interest is transferred. 11. We have already held that the non-compete fee is taxable as business income u/s 28(va) of the Act. In absence of any permanent establishment of the Applicant in India, such business income will not be taxable in India by virtue of Article 7 of the India-UK DTAA which provides that business income shall be taxable only in the UK in absence of a permanent establishment in India. While holding so, we agree with the reliance placed by the Applicant on the Kolkata Tribunal's decision, rendered under similar facts as that of the Applicant, in Trans Global PLC vs. Director of Income tax (International taxation) (supra). 12. In view of the foregoing discussions, the question posed before us for a ruling is answered as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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