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2016 (2) TMI 413 - BOMBAY HIGH COURT

2016 (2) TMI 413 - BOMBAY HIGH COURT - TMI - Non-compete fees - whether classifiable under Section 17 of the Act as profits in lieu of salary? - AO observed that payment for noncompete fees with Grasim is only a camouflage - Held that:- In the present facts, the Assessing Officer in his order has after negativing the Appellant's claim is a non-compete fee held that the same is classifiable as profit in lieu of salary under Section 17 of the Act. This determination by the Assessing Officer was no .....

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Mane JUDGMENT PER M. S. SANKLECHAJ.: This appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 9th May, 2006 of the Income Tax Appellate Tribunal (Tribunal). This appeal relates to Assessment Year 200203. 2 This appeal was admitted on 22nd August, 2008 on the following substantial question of law: Whether on the facts and in the circumstances of the case, the finding of the Tribunal that the amount received by the Appellant was not in the nature of noncompe .....

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s of more than ₹ 95 lakhs from Grasim. A monthly pension of ₹ 3 lakhs per month for life, reimbursement of medical expenses for life etc. Besides, the above, in addition, the Appellant received an amount of ₹ 3,80,48,100/which the Appellant claimed was noncompete fees and in support, relied upon an Agreement dated 31st March, 2002 entered into by the Appellant with Grasim; (c) The amount of ₹ 3,80,48,100/was received by the Appellant prior to the execution of the Agreemen .....

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ct noted the following further facts:( i) Grasim had deducted Tax at Source (TDS) of ₹ 1,16,42,719/on the amount of ₹ 3,80,48,100/paid to the Appellant; (ii) Appellant continued as an Advisor with Grasim from 1st April, 2002 to 31st December, 2002 on payment of ₹ 3.53 lakhs per month. (f) On merits, the Assessment Order records that amount of ₹ 3,80,48,100/claimed as noncompete fees was not a lumsum figure but an odd figure which was claimed to have been arrived after neg .....

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pay tax on the same. In the circumstances, the payment of Rs,3,80,48,100/was held to be not noncompete fees and was brought to tax under the head 'salary' and in particular, under Section 17(3)(ii) of the Act; (g) Being aggrieved, the Appellant carried the issue in appeal to the Commissioner of Income tax (Appeals) [CIT(A)]. By order dated 31st March, 2005, the CIT(A) found that the amount aggregating to ₹ 3,80,48,100/was received in installment of ₹ 2.00 Crore on 30th Octob .....

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of transaction. All this with a view to not pay legitimate tax on it. It was further held that the Appellant had retired from Grasim at the age of 81, having got benefit of more than ₹ 95 lakhs from his employer with monthly pension of ₹ 3 lakhs for life, along with reimbursement of medical expenses. In these circumstances, the order of the CIT(A) held that it is highly unlikely that the person having put in such a long service with Grasim and granted generous postretirement benefit .....

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unal. The Tribunal by the impugned order took in to consideration the following facts:S. (i) payment as noncompete fees of ₹ 3,80,48,100/was made much before the date of retirement and also before the date of agreement i.e. 31st March, 2002; (ii) the Appellant was 81 years old when he retired from the service. Therefore, was not in a position to compete with Grasim; (iii) ₹ 3,80,48,100/paid as noncompete fees was an odd figure and in spite of specific request, seeking a breakup of th .....

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ent of ₹ 3,80,48,100/at ₹ 1,16,42,719/. This was accepted by the Appellant as there was no protest on the part of the Appellant with Grasim on the deduction of TDS in respect of the payment of ₹ 3,80,48,100/as noncompete fees; and (vi) The letter dated 29th October, 2001 - wherein Grasim has been directed by the Aditya Birla Group to make a payment of ₹ 2.00 Crore subject to tax deduction as applicable as advance against noncompete fees/ exgratia, other fees etc., payable .....

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er:( a) The payment received as noncompete fees is not taxable in the subject Assessment Year as settled by the order of the Supreme Court in Guffic Chem P. Ltd. V/s. CIT 332 ITR 602; (b) The impugned order of the Tribunal relies upon six circumstances as set out herein above to conclude that the amount of ₹ 3,80,48,100/received by the Appellant is not noncompete fees. All the six circumstances either individually or collectively, would not result in the amount of ₹ 3,80,48,100/being .....

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ent dated 31st March, 2002 is to return the same if there is a breach of the Agreement on the part of the Appellant. 5 Per contra, Mr. Kotangale, learned Counsel appearing for the Revenue in support the impugned order of the Tribunal submits as under:( a) All the three authorities have independently rendered a finding of fact that the amount of ₹ 3,80,48,100/received by the Appellant is not a noncompete fee. This finding of fact was on the basis of the evidence placed before it. This findi .....

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48,100/if held to be a noncompete fees in respect of Assessment Year 200203, then the same is not chargeable to tax. This issue stands settled by the decision of the Apex Court in Guffic Chem P. Ltd. (supra). The Revenue also does not dispute the aforesaid position in law. The only issue before us is whether the amount of ₹ 3,80,48,100/paid in terms of the agreement dated 31st March, 2002 can be said to be a payment made as noncompete fees. 7 It is a settled position in law that where the .....

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the authorities. We shall now examine the submissions keeping in mind the above broad test. 8 In the present facts, the Assessing Officer in his order dated 30th January, 2004 had held that the agreement dated 31st March, 2002 is not believable and the whole amount shown as payment for noncompete fees with Grasim is only a camouflage. This is particularly so in view of the failure of the Appellant to explain the manner in which the compensation arrived at an odd figure of ₹ 3,80,48,100/ev .....

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ever, it is only one of the factors which the authorities have been relied upon to determine whether or not the amount of ₹ 3,80,48,100/is in fact a noncompete fee. In fact, the Appellant had claimed that an amount of ₹ 3,80,48,100/was arrived at after negotiations. Thus, if it was so, the Appellant ought to have made available the breakup of the constituents of the odd figure of ₹ 3,80,48,100/as noncompete fees. This is particularly so, when it was specifically sought for by t .....

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fact that the character of payment does not undergo a change, depending upon timing of its receipt, cannot be disputed. However, in the normal course of business before any person agrees to pay such a large amount of ₹ 3,80,48,100/as noncompete fees, it would ensure that the nature of obligation a person would not undertake and if done, would fall within the meaning of competition. This would have to be first determined and the terms set out and accepted by the parties in writing before a .....

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7; 3,80,48,100/is not a noncompete fees. This on the basis that it referred to an advance of ₹ 2.00 Crore to be given by Grasim to the Appellant against noncompete fees, exgratia and other fees. It is submitted that on 29th October, 2001 i.e. when advance was directed to be paid, the payment of noncompete fees was under negotiation. In any case, it is submitted that the letter dated 29th October, 2001 is not determinative of the character of payment. We find that the advance of ₹ 2.0 .....

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ads to the view that it is improbable the payment was for noncompete fees as claimed by the Appellant. 11 Mr. Murlidharan, learned Counsel appearing for the Appellant next submits that the impugned order has incorrectly relied upon the fact that Grasim had deducted the TDS on the payment of noncompete fees of ₹ 3,80,48,100/made to the Appellant. The Appellant accepted the TDS without any protest. This itself evidences the fact that the Appellant accepts the fact that payment is not for non .....

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the payment is made not on account of noncompete fees, is a reasonable and possible view. This view cannot be considered to be perverse in any way. 12 Mr. Murlidharan, learned Counsel appearing for the Appellant next points out that the impugned order relies upon the fact that the Appellant was 81 years of age at the time of retirement and thereafter, incorrectly concludes that he is unlikely to compete with his employer. Moreover, the impugned order records the fact that the Appellant was reap .....

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ences and business tactics with Grasim's competitors. We understand. However, the fact is that in normal human conduct, where a person has worked with his employer for over 33 years and himself is over 80 years of age, has received a handsome retirement package, would not compete with his former employer. Thus, this conclusion of the Tribunal is a possible view and cannot be said to be perverse and/or arbitrary. 13 It was next submitted by the Appellant that the classification of the amount .....

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