TMI Blog2017 (8) TMI 731X X X X Extracts X X X X X X X X Extracts X X X X ..... She has explained the reason to leave TSME, as MEW wanted to drop her name from TSME in order to have a competitive advantage in India. She further explained that the money being paid to her as a non-compete fee was not directly related to the remuneration she was receiving from TSME, thus subsequent conclusion of the AO that the money paid to her was not a non-compete fee but a terminal benefit is wholly unsustainable. The Assessee, as clearly ascertainable from the record, was a lady who enjoyed a stature in the advertising industry and the Non-Competition Agreement, by which she agreed not to compete in India with MEW, was clearly not a sham. She is now 82 years of age and considering that the Revenue’s appeal challenges concurrent findings of the CIT (A) and ITAT, we do not find any cause to interfere. In the facts of the present case, this Court is persuaded to follow the decisions in Guffic Chemical Pvt. Ltd (2011 (3) TMI 6 - Supreme Court), Khanna and Annadhanam (2013 (1) TMI 681 - DELHI HIGH COURT) and Rohitasava Chand (2008 (3) TMI 16 - HIGH COURT OF DELHI ) to hold that the Non-Competition Agreement is genuine and the payment made thereunder is indeed a non-compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt on 15th January, 2007 framed the following question of law: Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in holding that the sum of ₹ 3,15,31,7501- is not taxable in the hands of the assessee being a capital receipt? No other question was either pressed or framed. 7. Thus, the only question that is to be decided in this case is as to whether the sum of ₹ 3,15,31,750/-, which was paid as a non-compete fee to the Assessee is to be treated as being taxable or not. Petitioner s Submissions 8. Mr. Zoheb Hossain, learned Senior Standing Counsel appearing for the Petitioner/Revenue, submits that the amount of ₹ 3,15,31,750/- is nothing but a terminal benefit, which was couched as a non-compete fee in order to escape the payment of tax. 9. Mr. Hossain relies on the findings of the AO that the said payment of the non-compete fee and the share transactions were actually a part of a well-orchestrated plan of breaking up the entire package of terminal benefits received by her. Mr. Hossain further relies upon the finding of the AO that all these payments were contiguous in nature i.e., t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court and any camouflage of terminal benefits as a non-compete fee, should be held to be an abusive tax avoidance . 13. Mr. Hossain, urges that the entire amount of ₹ 3,15,31,751/- ought to be treated as a taxable income and the orders of the ITAT and CIT (A) deserve to be set aside. Respondent's Submissions 14. Mr. Rajat Navet, learned counsel appearing for the Respondent, submits that the Respondent was a well acknowledged personality in the field of advertising. She was responsible for setting up the advertising agency of McCann Erickson Pvt. Ltd. in India. She has enjoyed a very high stature in the field to the extent that McCann Erickson started to call their agency in India by prefixing the Assessee s name viz., Tara Sinha McCann Erickson ( TSME ). Her goodwill and reputation in the advertising field was unparalleled and thus, the amount she received as non-compete fee was truly to avoid her taking away the clients of the agency, post her retirement. The amount paid to her was well deserved and the same was not taxable. 15. Mr. Navet further submits that it is settled law as decided in severalcases that non-compete fee is not taxable. He relies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g paid a noncompete fee is not surprising. According to Mr. Navet, in Shiv Raj Gupta (supra), the sum of ₹ 6.6 Crores was paid as a consideration for sale of shares and not as a non-compete fee. He, thus, submits that the present case is covered squarely by the ratio of Khanna and Annadhanam (supra), Rohitasava Chand (supra) and HCL lnfo systems Ltd (supra). Analysis and Findings 17. It is not seriously disputed by the Revenue that Mrs. Tara Sinha the Assessee was an acknowledged personality in the advertising field in India. The Revenue s argument is that the money paid as a non-compete fee is, in fact, a terminal benefit and hence taxable. In order to determine as to whether the amount paid as a non-compete fee is taxable or not, it is necessary to take a look at the relevant Clauses of the Non-Competition Agreement, which read as under: 1. Mrs. Sinha covenants and undertakes that she will not at any time during a period of two years from the date of this Agreement, directly or indirectly, a. be involved in any business in India of marketing communications (advertising, sales promotion, public relations, etc.) as an employee, consultant, partner or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in a manner so as to give the Assessee adequate loopholes to bypass the restrictions with the consent of MEW . He termed the agreement as being non-serious. The AO also appears to have wrongly construed the fact that the payment was received prior to the signing of the agreement and hence it is nothing but a terminal benefit. 20. In the statement of the Assessee, which was recorded by the AO on 9th December, 1997, she had explained to the AO that it was due to her personal efforts that the business of the company had grown and expanded from one office in Delhi to offices in several cities including Mumbai, Bangalore, Calcutta, Chennai and Kathmandu. She has explained the reason to leave TSME, as MEW wanted to drop her name from TSME in order to have a competitive advantage in India. She further explained that the money being paid to her as a non-compete fee was not directly related to the remuneration she was receiving from TSME. The AO acknowledges as under: 5.2 It is clear from the deposition of the assessee that the concern, TSME was actually a brain-child of Mrs. Tara Sinha. In fact, the concern took shape around her dining table . It is because of her efforts th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 is not paid for anything done in performing the services in respect of which Robson is chargeable under Schedule E. The consideration which he has to give under-the covenant is to be given not during the period of his employment, but after its termination. He is giving to the company for a sum of 7,000 the benefit of a covenant which will only come into effect when the service is concluded. I agree with the Court of Appeal in the view that to treat this 7,000 as a profit arising from the respondent's office is to ignore the real nature of the transaction. It is quite true that, if he had not entered into the agreement to serve as a director and manager, he would not have received 7,000. But that is not the same thing as saying that the 7,000 is profit from his office of director so as to attract tax under Schedule E. The Attorney-General points out that it is not uncommon in managerial agreements to include a covenant not to compete after the service is terminated without any separate consideration being allocated to the covenant, and it was suggested that a decision in favour of the respondent in this case might involve the apportionment of the remuneration which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es carrying on business take agencies, simultaneously running the risk of such agencies being terminated with the strong possibility of fresh agencies being taken. In a firm of chartered accountants there, could be separate sources of professional income such as tax work, audit work, certification work, opinion work as also referred work. Under the arrangement with DHS there was a regular inflow of referred work from DHS through the Calcutta firm in respect of clients based in Delhi and nearby areas; There is no evidence that the assessee-firm had entered into similar arrangements with other international firms of chartered accountants. The arrangement with DHS was in vogue for a fairly long period of time (13 years) and had acquired a-kind of permanency as a source of income. When that source was unexpectedly terminated, it amounted to the impairment of the profit-making structure or apparatus of the assessee-firm. It is for that loss of the source-of income that the compensation was calculated and paid to the assessee. The compensation was thus a substitute for the source. In our opinion, the Tribunal was wrong in treating the receipt as being revenue in nature . 30. In Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders' case (supra) . 31. Similar was the view of the Delhi High Court in Rohitasava Chand (supra), which dealt with the payment of non-compete fee to the Assessee which included a transaction for sale of shares. This Court after reviewing the entire case law on the subject, held as under: 24. There is no doubt that the non-compete agreement incorporates a restrictive covenant on the right of the assessed to carry on his activity of development of software. It may not alter the structure of his activity, in the sense that he could carry on the same activity in an organization in which he had a small stake, but it certainly impairs the carrying on of his activity. To that extent it is a loss of a source of income for him and it is of an enduring nature, as contrasted with a transitory or ephemeral loss. During the currency of the non-compete agreement, the assessed was restrained from soliciting, interfering, engaging in or endeavoring to carry on any activity, including supply or services or goods concerning software development. The non-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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