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TMI Blog2018 (4) TMI 1879X X X X Extracts X X X X X X X X Extracts X X X X ..... nts are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. Unaccounted income - no disclosure of sale of machines - assessee has responded that these machines were in transit for shipment as on 31st March, 2011 and machines were actually shipped in next year with bill of lading date ranging from 5th April, 2011 to 9th April, 2011 therefore, these machines were treated as part of closing stock - HELD THAT:- As decided in the case of assessee itself for the assessment year 2004-05 to A.Y.2010-11 Section 26 of the Act provides that unless otherwise agreed, the goods remain at the seller risk. In case of FOB contracts the goods are delivered free on board the ship once the seller has placed the goods safely on board at his cost and thereby handed over the possession of the goods to the ship in transfer of the Bill of Landing or other document, the responsibility of the seller ceases on the delivery of the goods to the buyer is complete. After considering the above f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity of procuring orders to non-resident agents rendering services outside India without any permanent establishment in India. Ld. CIT (A) ought to have held commission to non-resident agents not exigible to tax at source for all sales so far as the services are rendered outside India. 3. Ld. CIT (A) erred in law and on facts in confirming addition made by AO of ₹ 1, 59, 43, 850/- towards alleged suppressed sales against legal principles. Ld. CIT (A) confirmed the addition simply following orders of his predecessors without appreciating various submissions, evidences and documents submitted by the Appellant. Ld. CIT (A) ought to have deleted addition of alleged suppression of sales made ignoring tenets of law. 4. Levy of Interest u/s 234A/234B/234C 234D is not justified. 5. Initiation of penalty proceedings u/s 271(1)(c) of the Act is not justified. 3. Assessment u/s. 143(3) of the act was completed on 9th Feb, 2015. During the course of assessment proceedings, the assessing officer has noticed that assessee has paid commission of ₹ 1,20,72,972/- to non-resident out of total commission of ₹ 1,49,64,769/- paid during the year. On scrutiny, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Section 1 95 were applicable in the case of the appellant. The appellant, on the other hand, has submitted that it was not liable to deduct any tax as the commission paid to all the nonresident agents was not liable to tax in India as it had neither accrued or arose in India. The services have been rendered outside India. The provisions of section 195 were not applicable in the case of the appellant On careful examination of the relevant facts, it is noted that the similar issue has been decided by me in the case of the appellant while deciding the appeal for A.Y 2009 - 10 vide Appeal No.CIT(A)-VIII/JCIT/R.4/141/12-13 order dated 31/12/2013. The facts of the present case are also identical to the earlier year. The commission has been paid \ to non-resident agents who have rendered the services abroad, the agents does not have any PE or any other establishment in India. For the sake of clarity the decision given by me in that appeal is reproduced as under: - then he is not under any statutory obligation to deduct tax at source on any part of thereof. While deciding th I have carefully considered the facts of the case, the assessment order and the written subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d none of their activity is in India therefore, it cannot be said that the income has accrued or arisen in India and the source of income was in India. There is no fact brought out by the AO in the order as well as observed by me during the course proceedings to indicate that the services have been rendered in India. The appellant has rightly relied on the judgement of honourable Supreme Court in the case of Toshoku supra wherein if has been held that commission earned by the non-resident for acting as the selling agent for the Indian exporter, wherein such non-resident was rendering services from outside India does not accrue in India. In the present case before me also, the foreign selling commission agent is resident of foreign country, from where the procurement service has been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision. Regarding the observation of the AO that the income is deemed to 'accrue or arise in India by applying the provisions of section 9 (1)(i) if is seen that there is no fact on record of indicate that any of the agents had any permanent establishment in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply for a certificate under section 195 if some payment has been made, has been considered by various courts. The Special Bench of Chennai /TAT in the case of Prasad Productions reported in 125ITD 263 has held in para-35 of the order that if the assessee has not applied to the Assessing Officer under section 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, e case the honourable bench has considered several cases which were relevant to the issue. In the present case the appellant did not deduct the tax or approached the AO for low/no deduction of tax certificate as there are several judicial pronouncements-in support of the appellant which have been relied by it in the written submission. It has submitted that the commission paid to nonresident agent was not liable to tax under the provisions of the Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. The submission given by the appellant dearly demonstrates its bona fide belief. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the commissions paid to non-resident n agent made by the AO under section 40(a)(ia) directed to be deleted except the disallowance of ₹ 1880876 as discussed above. Reliance is also placed on the recent decision of Hyderabad ITAT in the case of IVAX Paper Chemicals Ltd 44 taxmann.com 173[2014] wherein similar issue has been decided in the manner indicated above. The ground of appeal is accordingly, partly allowed. 5. During the course of appellate proceedings before us, ld. counsel has submitted paper book, written submission made before the ld. CIT(A), circular no. 786 and circular no. 7 etc. He has also furnished additional evidences vide application dated 15.12.2018 as under:- (i) Declaration from Ferroatik Milacron GmbH regarding tax resident in Germany having no permanent establishment (PE) in India. (ii) Service provided and Non-competition Agreement. He has placed reliance on the decision of the coordinate bench in the case of the assessee itself for the assessment year 2009 10. The Ld. Counsel has also placed reliance on the decision of the coordinate bench in the case of Welspun Corporation Ltd. 77 taxman.com 165(Ahd.) On the other hand ld. DR has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a coordinate bench decision in the case of DCIT Vs Welspun Corporation Ltd [(2017) 77taxman.165 (Ahd)], speaking through one of us, has observed as follows: 31. The scheme of taxability in India, so far as the non residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a nonresident, provides that the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year . There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is deemed to accrue or arise in India . Coming to the deeming provisions, which are set out in Section 9, we find that the following statutory provisions are relevant in this context: Section 9- Incomes deemed to accrue or arise in India (1) The following incomes will be deemed to accrue or arise in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruling in the case of SKF Boilers Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)], we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra [(2006) 284 ITR 564] which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that no doubt the agent renders services abroad and pursues and solicits exhibitors there in the territory allotted to him, but the right to receive the commission arises in India only when exhibitor participates in the India International Food Wine Show (to be held in India), and makes full and final payment to the applicant in India and that the commission inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 456 (SC)], payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upon the taxability of the commission agent s income in India in terms of the provisions of the Income Tax Act as also the relevant tax treaty provisions. 8. Learned Departmental Representative nevertheless relies upon the stand of the Assessing Officer. For the detailed reasons set out above in these extracts from Welspun order (supra), his argument cannot be accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission of the appellant. The AO has made an addition on account of suppressed sales. The appellant has issued the invoice for sale of the machines but the same was shown as pending shipment at the port. The AO considered it as the sales made and accordingly added the difference of the sale invoice value and the amount shown by the appellant in the closing stock for that machine. The appellant has submitted that it was the owner of the goods till sailing of the ship and till the bill of lading was issued. It accordingly treated these goods as inventory and the sale was recognised when the bill of lading was issued by the shipping company. The goods were treated as sold during the month of April 2011 as the bills of lading were issued on that date. After considering the various details, it is noted that the similar addition is being made in the case of the appellant since A.Y 2004 - 05. : Similar additions were made in all subsequent years arid my predecessors have upheld the addition made by the AO. The appellant has made appeal before ITAT Ahmedabad and the issue is sub-judice at that level. Since the issue is covered by the decisions of my predecessors in earlier years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be owner of the goods till those crossed the custom barrier and entered the export stream. In the case of B.K.Wadeyar vs. M/s Daulatram Rameshwarlal On 27th September, 1961: 1961 AIR 311, 1961 SCR (1) 924 It was stated as under:- We have therefore come to the conclusion that there is no circumstance which would justify a conclusion that the parties came to a special agreement that though the sales were on FOB contracts property in the goods would pass to the buyer at some point of time before shipment. We think that the learned judges who heard the appeal in the Bombay High Court were right in their conclusion that the goods remained the sellers' property till the goods had been brought and loaded on board the ship and so the sales were exempted from tax under Art. 286(i)fb) of the Constitution. 15. We have perused this judgment In the case of Contship Container Lines Ltd. vs. D. K. Lall Ors. on 16 March, 2010 Civil Appeal No.3245 of 2005, in which it was stated that the provisions of Sales of Goods Act 1930 relevant to the transfer of the property in goods to the purchaser specially in FOB transaction is transferred to the buyer at such time as the parties t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessee has entered into services provided and noncompetition agreement on 28th August, 2010. As per agreement a non-compete fees of ₹ 10.96 crore was payable to M.N. Patel. The assessee has claimed depreciation of this non-compete fees by treating the same as intangible assets. The assessing officer was of the view that claim of depreciation on non-compete fees is not justified because the payment of non-compete fees did not merely facilitate conduct of business as it would be a capital expenditure by merely because of capital expenditure it would not be necessary that it is eligible for depreciation. The assessing officer has further stated that as per provision of section 32(1)(ii) depreciation can be claimed in respect of know-how, patents, copy right trade-marks, license, franchise or any other business, commerce rights of similar nature. So far as the nature of non-compete fees is concerned, it is clearly evident that it does not fall within the ambit of any of the above intangible assets or business or commercial rights of similar nature pertaining to the above intangible assets. Therefore, the clam of depreciation of the assessee by treating non-compete fees as int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyment or other work, in any capacity (including, without limitation, as agent), with any person, entity or business similar to, or which directly or indirectly is competitive with FMIL's existing business within India, Africa or the Middle East, (the Restricted Territory ). b. He shall not conspire, plan or otherwise agree with any person, entity or business to organize or develop any business or entity that directly or indirectly is competitive with or engages in business similar to, the FMIL's existing business within the restricted territory. c. He shall not directly or indirectly own, manage, operate, control be employed by, or participate in the ownership, management, operation or control of any person, entity or business similar to, or which directly or indirectly is competitive with, FMIL's existing business within the restricted territory. d. He shall not divert or attempt to divert or seek to cause any party to refrain from doing any business with FMIL, within the Restricted Territory. e. He shall not during the term, directly or indirectly, solicit, seek business from, entice, persuade or induce any person or entity which has a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly, participating in a business which are similar to that of appellant, from directly or indirectly soliciting or influencing clients, the customers and other similar activity which can create competition for the appellant in the business. The fee had been paid by the appellant to carry on the business without competition and indirectly confer a right to carry on business smoothly. This right is capital in nature and would also fall within the ambit of section 32(1)(ii) of the Act and consequently depreciation would be allowable. It is to be noted that agreement is only for three years. The appellant has rightly placed reliance on the following judgements and the relevant extracts from those judgements are quoted as under: - 1. In case of CIT Vs Ingersoll Rand International Ind. Ltd. 227 Taxmann 176 (Karnataka), it has been held by the honourable court that non-compete fee is an intangible asset entitled for depreciation. The head note of the judgement is reproduced hereunder. - Section 32, read with section 28(vaj, of the Income-tax Act,, 196] -Depreciation - Allowance/rate of (Intangible assets] - Assessment year 2006-07 - Whether right to carry on business w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, viz., know-how, patents, trade-marks, copyrights, licences r franchises. The nature of business or commercial rights can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets are, therefore, comparable to a licence to carry out the existing transmission and distribution business of the transferor. In the absence of the aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the category of an 'intangible asset'. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision . 2. In the case of ACIT Vs Real Image Tech (P) Ltd. 120 TTJ 0983, Hon'ble Chennai ITAT, noted that:- When a bus/ness man pays money to another business man for restraining the other business man from competing with the Assessee, he gets a vested right which can be enforced under law and without that the other business man can compete with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passage of time, in the sense, that after the lapse of a definite period of five years, this asset will not be available to the assessee and, therefore, this asset must be held to be subject to depreciation. 3. In case of ITO Vs Medicorp Technologies India Ltd. 122 TTJ 0394, Hon'ble Chennai ITAT has observed that if the business/commercial right of a patent, copyright trade mark, I/cense, and franchise, fulfils the conditions of 'being intangible asset', then surely the impugned business/commercial right acquired by the assessee also fulfils that condition, by way of a logical corollary . The ITAJ has held that the impugned 'non-compete right' acquired by the assessee-company, was eligible for depreciation under clause (ii) of section 32(1) of the Act. 4. In case of Bunge Agri Business (India) P. Ltd. Vs DCIT 132 ITD 0549, Hon'ble Mumbai ITAT has held that We have considered the rival submissions carefully and find that in the case of Real Image Tech (?) Ltd. [supra], after analyzing the provisions of sec.32[1][ii] if was held that non compete fee would constitute capital asset and depreciation was ultimately held to be allowable. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rade mark, patents and other rights in favour of the assessee was undoubtedly the transfer of intangible assets, which in terms of section 32(1 )(ii) of the Act would be a capital asset entitled to depreciation. 7. In case of DCIT Vs Weizmann Forex Ltd. 51 SOT 0525, Hon'ble Mumjpai ITAT noted that - 'The Id DR has submitted that the entire consideration for acquiring the network also includes the payment for non-compete fee. However, the assessee has not shown any bifurcation of the consideration paid for non-compete fee to AFL The ITAT further observed that The Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra) has held in para 24 as under: 25.lt is worth noting that the meaning of business or commercial rights of similar nature has to be understood in the backdrop of section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or co ..... 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