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2016 (4) TMI 673 - ITAT KOLKATA

2016 (4) TMI 673 - ITAT KOLKATA - TMI - Revision u/s 263 - whether Non-compete premium is taxable in the hands of the assessee under the head capital gains u/s. 55(2)(a) read with proviso (i) to section 28(va) - assessee is a non-resident company of UK in term of Article-7 of Double Taxation Avoidance Agreement (DTAA) with UK - Held 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 Article-7 of DTAA, being non- compete .....

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rroneous and prejudicial to the interest of revenue for not assessing non-compete premium as capital gains. The assessee clearly accepted that the provisions of section 28(v)(a) of the Act will apply to this non-compete section 28(va) premium being business income but that will be taxed in UK being assessee a non-resident British Company having no permanent establishment in India in term of Article-7 of DTAA.

Thus we hold that the above said non-compete premium received by assessee is .....

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ed in favour of assessee - IT APPEAL NO. 943 (KOL.) OF 2013 - Dated:- 16-3-2016 - MAHAVIR SINGH, JUDICIAL MEMBER AND M. BALAGANESH, ACCOUNTANT MEMBER JJ. For the Respondent : R.N. Bajoria, For the Appellant : A.K. Gupta ORDER Mahavir Singh, Judicial Member - This appeal by assessee is arising out of revision order of CIT, Kolkata vide M. No. DIT(IT&TP)/Kol/263/139/2012-13 dated 21.02.2013. Assessment was framed by ADIT(IT)- 3(1), Kolkata u/s. 143(3) of the Income Tax Act, 1961 (hereinafter r .....

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the matter on frivolous ground. In view of this fact, we proceed to hear the matter ex parte for the reason that the revenue is seeking adjournment on frivolous ground and this is a regular feature, which is a matter of record. Hence, without giving adjournment, as the appeal is pending since 2013, we proceeded to decide it ex parte. 3. The only issue in this appeal of assessee is against the order of DIT(IT), Kolkata revising the assessment u/s. 263 of the Act is "Whether the non-compete p .....

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short IT) from assessment records noticed that the assessee has received £ 750000 (converted in Indian currency i.e. ₹ 6,05,25,000) as non-compete premium. According to DIT, this receipt was not disclosed by the assessee in its return of income and not included as income in total income. Accordingly, he issued show cause notice (SCN) u/s. 263 of the Act dated 14.11.2012, wherein he show caused the assessee as to why this non-compete premium received be not assessed as capital gains .....

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within seven (7) days of the effective dated (18.01.2007). Thus, the aforesaid amount in Pound Sterling was paid or accrued to you in January, 2007. 4. As per Clause 6.3.1(f) at page 22 of the SPA, the seller (the assessee) was required to execute a Non-Compete Agreement with the purchaser (M/s. Mcleod Russel India Ltd.) and the balance Non- compete Premium, after adjustment of the advance, was to be paid through wire transfer to the bank account of the seller maintained with the ICICI Bank in a .....

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ndia Ltd was required to pay the Non- Compete Premium of M/s Mc1eod Russel India Ltd British £ 7,50,000 i.e. converted in Indian Rupees to ₹ 6,05,25,000. The SPA thus contained a prohibitory/restrictive covenant in the form of the Non-Compete Agreement and the compensation in the form of Non-Compete Premium of British £ 7,50,000 is thus clearly a capital receipt. This sum of capital receipt is required to be charged to tax under the head 'income from Capital Gains'. Sup .....

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nufacture, produce or process any article or thing is to- be treated as nil in accordance with the provisions of section 55(2)(a) of the Act. Erroneous & prejudicial to the interests of Revenue 7. While making the assessment under section 143(3) of the Act, the Assessing Officer, ADIT - 3(1), Kolkata did not make any enquiry regarding the taxability of the above sum of Non-Compete Premium of Rs, 6,05,25,000 nor did he examine the issue and apply his mind thereto in the light of the facts of .....

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ia. According to assessee, the assessment order is neither erroneous nor prejudicial to the interest of revenue inasmuch as the assessment was fully in accordance with the provisions of the Act. According to him, the AO duly applied his mind to the facts of the case and in view of the clear provisions of section 28(va) of the Act read with Article 7 of DTAA, this amount was not taxable. In accordance to this reply, the AO issued another show cause letter rebutting the challenge of the assessee o .....

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l gains. The above sum is considered taxable under the head capital gains in accordance with the proviso to section 55(2)(a) read with proviso to section 28(va) of the Act." The assessee also replied and reiterated the same submissions. But the DIT(IT) finally directed the AO to revise the assessment and tax the non-compete premium under the head capital gains u/s. 55(2)(a) read with proviso (i) to section 28(va) of the Act by observing in para 19 and 20, which read as under: '19. The a .....

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its rights to carry out its business or activities of business - to engage of participate in, financially, technically or otherwise, in any manner whatsoever, in the manufacture, production, distribution and sale of the product in five countries, namely, India, Bangladesh, Sri Lanka, Bhutan and Nepal for a period of 5 years in favour of a different entity is within the meaning of transfer of capital assets, and would not fall under Section 28(va) of the Act, rather it would be covered under the .....

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ee. That being the case, the process of surrender of rights was complete. Circular No. 8 of 2002 dated 27.8.2002 explaining the provisions of the Finance Act, 2002 by which clause (va) was inserted in Section 28 of the Act, clarifies that receipts for transfer of rights to manufacture, produce or process any article or thing or right to carry on any business would be chargeable to tax under the head capital gain and would not be taxable as profits and gains of business. As per Section 55(2)(a) o .....

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t.' Aggrieved, now assessee is in appeal before Tribunal. 6. We have Ld. Sr. counsel Shri R. N. Bajoria and gone through facts and circumstances of the case. Before us, the issue is limited whether the receipt of non-compete premium is taxable as capital gains u/s. 55(2)(a) read with proviso (1) of section 28(va) of the Act, when the assessee is a non-resident company of UK in term of Article-7 of Double Taxation Avoidance Agreement (DTAA) with UK. Admittedly, the assessee is a non-resident .....

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nance Act, 2002 w.e.f. 01.04.2003. The assessee also pleaded that this can be assessed as business income but assessee being a non-resident having no permanent establishment in India and accordingly, in term of Article-7 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 .....

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y Co. Ltd. v. CIT [1978] 113 ITR 655 wherein the transfer has been discussed and not the taxability in term of DTAA. The another precedent cited by Ld. DIT (IT) of Hon'ble Supreme Court in the case of CIT v. Narayan Dairy Products [1996] 219 ITR 478 wherein the similar word transfer was interpreted. Further, he also referred to the decision of Hon'ble Kerala High Court in the case of Blue Bay Fisheries (P.) Ltd. v. CIT [1987] 166 ITR 1, wherein the same issue of transfer is discussed. Ac .....

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nd prejudicial to the interest of revenue for not assessing non-compete premium as capital gains. The assessee clearly accepted that the provisions of section 28(v)(a) of the Act will apply to this non-compete section 28(va) premium being business income but that will be taxed in UK being assessee a non-resident British Company having no permanent establishment in India in term of Article-7 of DTAA. 8. Before us, Ld. Counsel for the assessee having relied on the decision of Hon'ble Supreme C .....

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tal receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present .....

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s that during the relevant assessment year compensation received by the assessee under non- competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1.4.2003. It is well settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide Section 28(va) and that too with .....

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