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2015 (11) TMI 1302 - ITAT DELHI

2015 (11) TMI 1302 - ITAT DELHI - TMI - Profits in lieu of salary - chargeable to tax under section 17(3) or section 28(va) or any other section of the Income-tax Act - Held that:- The wide amplitude of the role assigned to the appellant clearly show that he was not subject to the direct control or supervision of Suzuki India, but was managing all affairs of the company; evolving business strategies; and advising the company. His role was clearly that of a joint venture partner in Suzuki India a .....

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regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment” it cannot be regarded as non-competition fee because it has not been paid for not competing with the payer, but for not providing the benefit of his knowledge, expertise, skills etc. to any other person in the two wheeler segment. Thus compensation attributable to a negative/restrictive covenant is a capital receipt. Hence, as the sum received by the appellant does not .....

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ng the order of the Income-tax Officer, Ward 24(3), New Delhi, that the sum of ₹ 1,32,00,000 received by the appellant from M/s Suzuki Motorcycle India Pvt. Ltd. ( Suzuki India ) is chargeable to tax under section 17(3) of the Income-tax Act, 1961 as profits in lieu of salary , and rejecting the claim of the appellant that the said sum was not chargeable to tax under section 17(3) or section 28(va) or any other section of the Income-tax Act. 2. The facts relevant for a consideration of the .....

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tegra was changed to M/s Suzuki Motorcycle India Pvt. Ltd. The appellant continued as managing director of the re-named company. In March, 2010, the appellant decided to terminate his relationship as a joint venture partner in Suzuki India and, consequently, stepped down as managing director of Suzuki India. On 31 March, 2010, the appellant and Suzuki India entered into an Agreement where under Suzuki India agreed to pay a sum of ₹ 1,32,00,000 to the appellant, in consideration of the appe .....

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in the course of the assessment proceedings, an Opinion dated 7 October, 2011 given by Shri O. P. Bhardwaj, Senior Partner, Associated Law Advisers. The said Opinion, which has been reproduced in the assessment order, is to the effect that the sum of ₹ 1,32,00,000 received by the appellant from Suzuki India is not chargeable to income-tax under section 17(3) or section 28(va) or any other section of the Income-tax Act. 4. Before making his submissions, the learned Senior Advocate, Shri C. .....

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ki India and the appellant are very significant:- WHEREAS Suzuki Motor Corporation, Japan ( SMC ) and Mr. Sheel have been joint venture partners in the Company; AND WHEREAS pursuant to a joint venture agreement between Mr. Sheel and SMC, Mr. Sheel was appointed as the managing director of the Company by virtue of his being the Indian joint venture partner; AND WHEREAS Mr. Sheel wishes to step down as managing director of the Company as he is no longer the joint venture partner of SMC; According .....

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. 5. Shri Aggarwal further urged that if the appellant was an employee of Suzuki India, there would have been a Service Agreement between Suzuki India and the appellant, laying down the terms of his employment, including the salary, perquisites and benefits to be paid and provided to him; the duration of his employment; the circumstances in which the employment could be terminated; and the amount payable on retirement from or termination of employment. The fact that there was no such Service Agr .....

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e it is stated that Tax was deducted under section 194J; however, to avoid any future dispute we deducted the maximum rate applicable i.e. 30% . Shri Aggarwal contended that if the company regarded the appellant as an employee, it would have stated in its reply that tax was deducted under section 192. It is also relevant to point out that paragraph 3 of the Agreement between Suzuki India and the appellant shows that the appellant had contended that no income-tax is deductible from the amount pay .....

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f 30 per cent and has arbitrarily concluded that the company regarded the appellant as an employee. 7. In July, 2007 the appellant s tenure as managing director was extended for a further period of three years. The I.T.O. has cited the resolution passed by the shareholders to this effect as an argument to support the contention that the appellant was an employee of the company. Shri Aggarwal pointed out that the conclusion drawn by the I.T.O. is clearly fallacious. Under section 319 of the Compa .....

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re is not an iota of evidence to show that the appellant was an employee of Suzuki India. 8. Shri Aggarwal then dealt with the issue whether the amount received by the appellant fell within the ambit of clause (va) which was inserted in section 28 of the Income-tax Act by the Finance Act, 2002. He pointed out that the Memorandum Explaining the Provisions in the Finance Bill, 2002, prepared by the Central Board of Direct Taxes and laid on the Table of both Houses of Parliament states (at page 15) .....

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his knowledge, skill and expertise to others. 9. Shri Aggarwal contended that the expressions business and profession have been used in the Act in a mutually exclusive sense. The activity of providing the benefit of one s knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person would be regarded as an activity in relation to a profession, and not an activity in relation to a business. Besides, the appellant was not carrying on any such professiona .....

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received for a restrictive covenant in relation to a business, but not a profession. On page 679 of Volume- 1 of the said treatise, it has been stated that Though the word business is a word of wide import, it would not take in its ambit activities which may constitute profession because the two expressions business and profession have been used in the Act, in a mutually exclusive sense and that being so, even if the word business , on a wider interpretation, can include within its scope profess .....

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n the nature of a capital receipt and could be taxed only if it was covered by section 28 (va) of the Income-tax Act which, he urged, it is not. 12. Ground Nos 3 to 8 relate to the following observations made by the learned CIT (A) in paragraph 4.1.13 of his order regarding the Opinion of Shri Bhardwaj:- This Opinion cannot have a cloak of substantial view for it makes incomplete references to the agreement between the parties and such deliberate incomplete references help in no insignificant me .....

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tion of this Agreement . The clause (sic) 5 and 6 of the opinion appear to be diversionary and would not help the appellant in view of the facts as per the agreement between the parties in totality . Shri Aggarwal has urged that the observation by the learned CIT (A) that the Opinion of Shri Bhardwaj makes deliberate incomplete references to the agreement between the parties is based on the incorrect assumption that the Opinion has omitted to refer to the words in italics in the above cited pass .....

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ed observations made by the learned CIT (A) on the integrity of the Advocate need to be condemned. 13. In his reply, the learned Departmental Representative urged that the learned counsel for the appellant has not been able to establish that the appellant was not an employee of Suzuki India and the mere fact that he did not receive any salary or perquisites from Suzuki India does not justify the conclusion he was not an employee of the company. He also contended that the resignation of the appel .....

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WHEREAS clauses in the Agreement dated 31 March, 2010 between the appellant and Suzuki India establish that the appellant was not an employee of Suzuki India. The fact that there was no Service Agreement between Suzuki India and the appellant and that during the entire period between March, 2003 to March, 2010 in which the appellant was managing director he did not receive any salary or perquisites from Integra or Suzuki India reinforces that the appellant was not an employee of Suzuki India. T .....

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d the arguments given by the I.T.O. in his assessment order and by the learned CIT (A) in his appellate order; the Opinion of Shri Bhardwaj; and the submissions made, and Synopsis provided, by the learned Senior Advocate; the arguments advanced in his reply by the Departmental Representative; and Shri Aggarwal s rejoinder. Two main issues need to be considered. The first and the principal issue is whether the sum of ₹ 1,32,00,000 received by the appellant from Suzuki India is taxable as pr .....

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Ram Prashad v. Commissioner of Income-tax, New Delhi (1972) 86 ITR 122, the Supreme Court has observed at page 126 that: A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal. In the course of th .....

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tude of the role assigned to the appellant clearly show that he was not subject to the direct control or supervision of Suzuki India, but was managing all affairs of the company; evolving business strategies; and advising the company. His role was clearly that of a joint venture partner in Suzuki India and not that of an employee of the company. In view of the foregoing and the submissions made by Shri Aggarwal, summarized in paragraphs 4 to 7 above, we are of Opinion that the appellant was not .....

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(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 proce .....

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he amount received by the appellant falls under sub-clause (a) of clause (va) of section 28 of the Income-tax Act. We find that the following observations of the Supreme Court of India in Guffic Chem. P. Ltd. vs. Commissioner of Income-tax (2011) 332 ITR 602 at page 607 support the views expressed by Shri Bhardwaj and the contention of Shri Aggarwal that the amendment made by the Finance Act, 2002 was intended to bring non-competition fee within the ambit of taxation:- Payment received as non-co .....

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of ₹ 1,32,00,000 was paid by Suzuki India to the appellant in consideration of not providing the benefit of his knowledge of regulatory matters, negotiating skills and strategic planning expertise to any other person in India in the two wheeler segment it cannot be regarded as non-competition fee because it has not been paid for not competing with the payer, but for not providing the benefit of his knowledge, expertise, skills etc. to any other person in the two wheeler segment. The views .....

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