TMI Blog2014 (1) TMI 865X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 194J of the Act has to be seen - prior to 13.07.2006, neither royalty or non-compete fee u/s. 28(va) of the Act was covered by the provisions of section 194J of the Act - there was no obligation to deduct tax at source u/s. 194J of the Act on the part of the assessee - payments made by the assessee were after 13.07.2006 cannot fasten any obligation on the part of the assessee u/s. 194J of the Act because the obligation arises only at the time of credit of sum to the account of the payee or at the time of payment, whichever is earlier - the provisions of section 194J were not applicable to the payment of Rs.5 crores made by the assessee – the orders passed by the revenue authorities treating the assessee as ‘assessee in default’ and also levying interest u/s. 201(1A) of the Act are found to be unsustainable and are cancelled – Decided in favour of Assessee. - ITA Nos.1624 to 1627/Bang/2012 - - - Dated:- 21-6-2013 - N Barathvaja Sankar And N V Vasudevan, JJ. For the Appellant : Shri H Padamchand Khincha For the Respondent : Shri Etwa Munda, CIT-III(DR) ORDER:- PER : N V Vasudevan These are appeals by the assessee against the common order dated 05.12.2012 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rry on any business directly or indirectly alone or in association with others competing with that carried on by the assessee. Under clause XIV(c) of the share subscription and shareholders agreement dated 12.09.2006, the assessee agreed that it shall pay a lump sum amount of Rs.5 crores to Shri G.N. Mohan Raju for offering the first right of refusal to the assessee and WHPL of 74% of economic interest in any business which may be ventured by Shri G.N. Mohan Raju in the field of telecommunication, digital media and convergence. The agreement specifies the manner in which the aforesaid consideration of Rs.5 crores was to be paid, which is as follows:- On or before 31.03.2006 Rs.1 crore On or before 30.09.2006 Rs.2 crores On or before 31.03.2007 Rs.2 crores. 4. The agreement further provides that if Shri G.N. Mohan Raju breaches the aforesaid covenant of giving a right of first refusal, then he has to pay the entire consideration of Rs.5 crores together with interest @ 12% p.a. 5. It is not in dispute that the aforesaid sum of Rs.5 crores was paid by the assessee to Shri G.N. Mohan Raju in the following manner:- "P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of tax deductible and interest on tax not deducted was determined by the AO as follows:- A.Y. 201(1) (Rs.) 201(1A) (Rs.) Total (Rs.) 2006-07 11,02,000 7,21,810 18,23,810 2007-08 44,08,000 26,08,433 70,16,443 8. Aggrieved by the order of the AO, the assessee preferred appeal before the CIT(Appeals). 9. Before the CIT(Appeals), the assessee submitted that the order of the AO does not spell out as to how the payment made by the assessee to Shri G.N. Mohan Raju is royalty. The assessee submitted that the payment in question is not royalty as the payment in question was made for first right of refusal to participate upto 74% economic interest in any future business initiative of the promoter i.e., Shri G.N. Mohan Raju. The assessee also pointed out that the payment of Rs.5 crores was a one-time payment for offering 74% economic interest any new business initiative that might be taken up by Shri G.N. Mohan Raju during his lifetime. It was therefore submitted that the payment was for outright purchase of capital asset and cannot be regarded as a royalty. It was further pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (vi) of the Act. 11. The assessee filed rejoinder to the report of the AO in which the assessee pointed out as to how the stand taken by the AO in the remand report is untenable. We are not elaborating on the rejoinder of the assessee for the reason that the issue in this appeal, in our view, can also be considered from a different perspective as will be elaborated in the succeeding paragraphs. 12. The CIT(Appeals) on a consideration of the submissions of the assessee and the AO, came to conclusion that the payment in question was a payment falling within clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. The following were the relevant observations of the CIT(Appeals):- "3.6 To summarise the facts, in the appellant s case, the amount of Rs.5 crores was made by it to Shri Mohan Raju towards the right of first refusal made due to his knowledge of process related to technology in the field of networking and by agreeing to give the right of first refusal in favour of the company Shri Mohan Raju has parted with his right related to the knowledge of the process. The appellant s case is also covered by clause (iv) of Explanation 2 to section 9 of the Act as by giving t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent of such sum as income-tax on income comprised therein : Provided that no deduction shall be made under this section- (A) from any sums as aforesaid credited or paid before the 1st day of July, 1995; or (B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed- (i) thirty thousand rupees, in the case of fees for professional services referred to in clause (a), or (ii) thirty thousand rupees, in the case of fees for technical services referred to in clause (b), or (iii) thirty thousand rupees, in the case of royalty referred to in clause (c), or (iv) thirty thousand rupees, in the case of sum referred to in clause (d): Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovides as follows: "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"; (ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation.-For the purposes of this clause,- (i) "agreement" includes any arrangement or understanding or action in concert,- (A) whether or not such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment on the ground that they were capital receipts not chargeable to tax. In the present case, even if we assume that the stand of the revenue that the payment was non-compete fee falling u/s. 28(va) of the Act, the obligation of the assessee to deduct tax at source, if at all, will be applicable only from 13.07.2006. 20. The ld. counsel for the assessee submitted that the liability to deduct tax at source u/s. 194J of the Act is at the time of credit of any sum payable by way of royalty or non-compete fee falling u/s. 28(va) of the Act or at the time of making payment, whichever is earlier. According to the ld. counsel for the assessee, the assessee had credited the amount payable to Shri G.N. Mohan Raju in its books of accounts as on the date of the oral agreement dated 01.02.2006. As on the date of credit in the books of accounts of the assessee of the sum payable to Shri G.N. Mohan Raju, the provisions of section 194J of the Act were not applicable. Even assuming (without considering) that the payment in question is royalty as held by the Revenue or non compete fee u/s.28(va) of the Act, there was no obligation on the part of the assessee to deduct tax at source at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X
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