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2018 (6) TMI 617

e payer of non-compete fee or the transferor of shares - Held that:- Revenue’s interpretation of section 28(va) to hold that recipient of non-compete should already have been carrying on the business which he has agreed not to carry on further is erroneous and contrary to the provisions of the Act. - In order to attract section 28(va)(a), there is no condition of receiving a non-compete fee for agreeing not to carry on a business which the assessee was already carrying on. Hence, we do not agree with the Revenue that the fee received by the Applicant cannot be taxable under section 28(va) because the Applicant and MPS were carrying on different businesses. - As non-compete fees received by the Applicant from ADI BPO Services Private Ltd., an Indian Company, as a part of the consideration for transfer of the shares held in MPS Ltd. an Indian Company, though income from “Profits and gains of business or profession” as provided under Section 28(va) of the Act, shall not be chargeable to tax in India in the absence of any Permanent Establishment of the Applicant in India, by virtue of Article 7 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and United Kingdom .....

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etary information relating to the business and operations of MPS. This information is material to the business of MPS and shall continue to be so after the consumption of the transactions contemplated in the SPA. Disclosure of this information to others, especially competitors of MPS, or the unauthorized use of this information by others would cause substantial loss and harm to MPS and its shareholders. b. For a period of three years commencing from the completion date of the share purchase, the Applicant shall not, and shall procure that no member of the Macmillan Group, directly or indirectly, alone or jointly with any other person, and whether as a shareholder, partner, director, principal, consultant, agent, employee, manager, adviser , consultant or otherwise: i. carryon or is engaged in, concerned or interested with or otherwise competes with the business of MPS in India as such involvement would have a detrimental effect, and cause irreparable harm to the business of the MPS; or ii. solicit or entice away or offer employment to or endeavour to solicit or entice away or offer employment to any employee or officer of MPS. c. Point (b) above will not prohibit the Applicant and .....

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tion to the publishing of the journals. 4.1.3 ADI BPO knew that HMPHL had contacts, expertise and production departments in other parts of the Group, and hence they were concerned that they could set up another operation to provide publishing solution services and simply terminate MPL s contracts with MPS Limited. Hence, ADI BPO in order to protect its customer base stipulated the non-compete fee to be paid to the Applicant for not carrying out any business activity which can compete with MPS for a period of three years. 4.2 It was submitted that the provisions of Section 28(va) of the Act treat the consideration received for not carrying out any activity in relation to any business as Income from Business or Professions . Accordingly, since the non-compete fee was received by the Applicant for not carrying out any activity in relation to any business (in this case, in relation to not carrying out business of publishing BPO services), the said sum should be held to be business income as per section 28(va) of the Act. The Applicant relied on the Hon ble Madras High Court s decision in Commissioner of Income-tax vs. M/s. Chemtech Laboratories Ltd. [Tax case appeal no. 1492 of 2007] [ .....

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of right to carry on business and hence not chargeable under Capital Gains . Accordingly, the non-compete fee is not covered by the proviso to section 28(va), and the case of the Applicant squarely falls under the provisions of Section 28(va)(a). Therefore, the non-compete fee received would be business profits in the hands of the Applicant. 4.4 It is further submitted that as per section 90 sub-section (2) of the Act, the assessee has an option of being taxed as per the provisions of the India-UK Treaty, should such provisions be more beneficial to it. Accordingly, the Applicant contended that once it is ruled that non- compete fees would be chargeable to tax under the head Income from Business or Profession , then as per Article 7 of the Treaty, such business profits would be taxable in India only if it carries out any business activity through a permanent establishment (PE) in India. In the absence of any PE in India, the non-compete fees receivable would not be chargeable to tax in India. In support of its contention, the Applicant relied on the decision of Trans Global PLC vs. Director of Income tax (International taxation) [158 ITD 230] [Kol. Trib.], wherein non - compete fe .....

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SC) 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 1/31 Taxman 393 (Ker), wherein the same issue of transfer is discussed. According to DIT(IT), transfer of shares of Moran Tea Co. (I) Ltd., transferring the controlling interest in the business of the said company and accordingly, the resultant receipt is capital gains taxable u/s. 55(2)(a) of the Act. 7. In view of the above facts, we are of the view that a perusal of noncompete agreement clearly shows that by any stretch of imagination it cannot be held that there is a transfer within the meaning of section 2(47) of the Act resulting in assessment being erroneous and prejudicial to the interest of revenue for not assessing noncompete premium as capital gains. The assessee clearly accepted that the provisions of section 28(v)(a) of the Act will apply to this noncompete section 28(va) premium being business income but that will be taxed in UK being assessee a nonresident British Company having no permanent establishment in India in term of Article7 of DTAA. 8. Before us, Ld. Counsel for th .....

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a particular income under appropriate heads of income under Income-tax Act. Further, reliance was placed on the case of Savita Mandhan 2011-LL-1007-51 (Mum. ITAT) which has followed the ratio of Hami Aspi Balsara Vs. ACIT (30 DTR 576) to hold that amounts attributable to non-compete obligations are taxable as capital gains and not as business income where the assessee was not carrying on a business. 5.3 It is submitted, on a without prejudice basis, that the entire consideration of non-compete fee is not towards non-compete agreement and some amount should be allotted to transfer of controlling interest by the Applicant. Thus, in case the non-compete fee is held as business income, then according to the Revenue, the entire consideration of INR 9.3 crores does not represent non-compete fee. It was contended that since the Applicant has sold shares along with controlling interest and the shares have been sold at market price, no consideration has been allotted to the control and management which has been transferred. Reliance was placed on the decision of the Delhi High Court in case of Shiv Raj Gupta [2014] 52 taxmann.com 425 (Delhi). 6. In its rejoinder to the above contentions of .....

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sessee signed the negative covenant not to carry on manufacture or trade in product for certain period of time, it amounted only to self-imposed restriction and not a transfer. Similar reliance was placed on decisions in the case of Ramesh D. Tainwala vs. ITO 48 SOT 324 (Mum. Trib.) (AY 2006-07) and John D souza vs. CIT (226 CTR 540) (Bombay High Court). 6.2 As regards Revenue s second argument that non-compete fee is taxable under the head business income only if the receiver of non-compete fee is already carrying on business which he has agreed not to carry on further, the Applicant submitted that the argument is incorrect and without any basis on the following counts: 6.2.1 The taxation of non-compete fee under the head business income has been specifically provided under section 28(va) of the Act, and it nowhere provides or in any way implies that the recipient of non-compete fee must already be carrying on business which he has agreed not carry on further. The section applies to any person who has received or is entitled to receive a sum in consideration for agreeing not to carry out any activity in relation to any business and is not restricted to only that business which he .....

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s no separate consideration provided for non-compete clause. In contrast, in the present case, the Applicant s SPA provides for a separate non-compete fee payment under clause 5 of the SPA. 6.2.3.3 The assessee in those decisions did not have any knowledge or expertise of the business carried out by the companies whose shares they sold. In contrast, in the present case, the Applicant, due to the nature of its association with MPS, had confidential and proprietary information relating to the business and operations of MPS. This information was material to the business of MPS and would continue to be so after the consummation of the transactions contemplated in the SPA. Disclosure of this information to others, especially competitors of MPS, or the unauthorised use of this information by others would cause substantial loss and harm to MPS and its shareholders. Hence there was justification for payment of non-compete provided under Clause 5 of the SPA. 6.2.4 The Applicant further submitted that the decision of Hami Aspi Balsara has been distinguished by the subsequent decision of Hon ble Mumbai Tribunal in Anurag Toshniwal and Arun Toshniwal (supra) as follows: 15. Before parting, the .....

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in any manner. Also, Revenue s reliance on the decision of Shiv Raj Gupta (supra) was misplaced since the Revenue failed to consider the facts and circumstances under which the High Court delivered the said decision. 7. We have considered the question raised before us, the arguments of the Applicant and the Revenue, and gone through the decisions relied upon by both sides. 7.1 We may first look at the relevant provisions of the Income-tax Act, 1961 and the India-UK DTAA governing the taxability of the non-compete fee received by the Applicant as business income. Section 28(va) of the Act - (va) 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 .....

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immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or vi. any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation - For the purposes of sub-clauses (v) and (vi), immovable property shall have the same meaning as in clause (d) of section 269UA. 7.4 Before answering the question involved in this application, let us also examine the Special Bench decision in the case of Addl. CIT vs. Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB) which has elaborately dealt with taxability under section 28(va) under various scenarios, which shall be relevant for answering the question put before us for a ruling. 37. CAPITAL GAIN OR NON-COMPETE FEE: The conclusion that emerges from the aforesaid discussion is that when a business is sold and the purchaser enters into agreements to ensure that there is no competition, he ma .....

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chargeable to tax u/s.28(va)(a) of the Act. Therefore the law as it prevails on the date on which a person agrees to desist from doing certain acts in relation to any business would be relevant. 39. If a payment is in the nature of non-compete fee received by the transferor when he sells his business and agrees not to carry on the business which he transfers then that would fall for consideration under (category (b) referred to earlier) section 55(2)(a) "right to carry on business". If the non-compete fee is paid to persons associated with the transferor then the same would fall for consideration only under Sec.28(va)(a) of the Act introduced by the Finance Act, 2002, w.e.f 1-4-2003. It is significant to note that the words used in Sec.28(va) (a) of the Act are "not carrying out any activity in relation to any business". The proviso (i) to Section 28(va)(a) provides for exception to cases where such receipts are taxable as capital gain viz., where any sum is received for transfer of a right to carry on any business which is chargeable to tax as capital gain. When the transferor is already carrying on business and agrees not to carry on business transferred, then .....

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ee, manager, adviser, consultant or otherwise: 5.2.1 carries on or is engaged in, concerned or interested with or otherwise competes with the Business in the jurisdiction in which the Company currently operates on the Closing Date as such involvement would have a detrimental effect on, and cause irreparable harm to the Business and the Company; or 5.2.2 solicits or entices away or offers employment to or endeavours to solicit or entice away or offer employment to any employee or officer of the Company, whether or not such person would commit a breach of contract by reason of leaving service or office. 5.3 Nothing contained in Clause 5.2 shall prohibit the Seller and/ or the Macmillan Group from, directly or indirectly: 5.3.1 enhancing and developing its educational and information businesses in India which is being carried out on the date of this Agreement or which may be carried out after the date of this Agreement; and 5.3.2 holding any interest in any securities of a company listed in or dealt on any stock exchanges, if the Seller and any entity Controlled by the Seller are together interested in securities which amount to less than 10% (ten percent) of the issued share capital .....

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eeds to be considered is whether consideration received by the Applicant is for a restrictive/negative covenant or is it for a transfer of a positive right to carry on business. We note that it is explicit from the non-compete clause quoted above, that the non- compete fee received by the Applicant was a consideration for the Applicant agreeing to not carry on or be engaged or compete with the business of MPS in India for a period of 3 years. The non-compete clause as provided in the SPA nowhere contemplates a transfer of right to carry on business from the Applicant to the payer of non-compete fee. The Applicant had only imposed a restriction upon itself to not compete with MPS since it was in possession of confidential and proprietary information relating to the business and operations of MPS. Moreover, the Applicant being a publishing house, it was capable of competing with MPS which provides publishing BPO services, both businesses being inter connected and belonging to same industry. Such use of information could cause substantial loss and harm to MPS and its shareholders (including the payer). Thus, the payer entered into a non-compete clause with the Applicant to protect its .....

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rising out of a negative covenant not to carry on a business is taxable as business income under section 28 (va). The ratio held in Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB) clearly supports this view. We also gain support from the Hon ble Madras High Court in Commissioner of Income-tax vs. M/s. Chemech Laboratories Ltd. (supra) wherein it has been held as follows: 11. Legislature has thus made a conscious and clear distinction between the positive right to carry on a business or the activity of manufacture, production or process, consideration for the transfer of which would be chargeable under the head capital gains and a negative right, being a covenant against the carrying on of any activity in relation to a business, the consideration for which would be taxable as business income. Thus, post 1.4.2003, consideration received towards a negative covenant, as contra-distinguishable to consideration received towards the transfer of business rights, would be liable to tax as business profits. The question whether the activity of non- compete was incidental or dominant was thus irrelevant, and the Tribunal mis-directed itself in addressing itself to the same. This is particularly so s .....

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orted by the decisions in the case of Anurag Toshniwal & Arun Toshniwal vs. DCIT (supra), affirmed by the Hon ble Bombay High Court in 375 ITR 270, wherein it has been held as under: 12. A perusal of this provision clearly shows that for the applicability of Cl. (1), the profits and gains should arise from the business carried on by the assessee. However in Cl. (va) of Sec. 28, no such mandate as "carried on by the assessee" is provided. On the contrary, Cl. [Va] refers to "any business" which means not necessarily the business of the assessee. Moreover, it is the company, in which the assessee was only a Director, has transferred one of its divisions on a slump sale basis. Assuming, yet denying, that carrying of business is a necessity even on that note, it has to be kept in mind that the transferor company Chemito Technologies Pvt. Ltd has only transferred one of its division to M/s. Thermo Electron LLS India Pvt. Ltd. and not the entire business which negates the submission of the Counsel for the assessee. The ITAT Hyderabad Special Bench had the occasion to deal in similar issue in the case of Dr. B.V. Raju (supra) wherein the Tribunal was seized with th .....

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no. 1492 of 2007] [Madras HC] and Trans Global PLC vs. Director of Income -tax (International taxation) [158 ITD 230] [Kol. Trib.], the facts therein fall within scenario (i) above and it was held by the courts that non-compete fee was taxable as business income under section 28(va). 9.4.2 In the cases of Anurag Toshniwal & Arun Toshniwal vs. DCIT (56 SOT 52) (Mum. ITAT) (affirmed by Bombay HC), Ramesh D. Tainwala vs. ITO 48 SOT 324 (Mum. Trib.), Sterling Re-rolling Mills (P.) Ltd. v. ACIT (53 SOT 41) (Mumbai ITAT) and Addl. CIT vs. Late Dr. B.V. Raju (14 ITR 387) (Hyd.SB), the facts therein fall within scenario (ii) above and even in these decisions it was held that the non-compete fee was taxable as business income under section 28(va). 9.5 In view of the above, where the courts have arrived at the same conclusion of taxing a receipt under section 28(va) in both the above scenarios, it appears that in order to attract section 28(va)(a), there is no condition of receiving a non-compete fee for agreeing not to carry on a business which the assessee was already carrying on. Hence, we do not agree with the Revenue that the fee received by the Applicant cannot be taxable under sec .....

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ares held by the Applicant in MPS were listed on the National Stock Exchange of India Limited, BSE Limited and Madras Stock Exchange Limited. These shares have been sold at the then prevalent market price calculated as per the SEBI circular dated 2 September, 2005 bearing circular no. MRD/DoP/SE/Cir - 19/05, on the basis of a price of INR 36.15 per share aggregating to INR 37,37,90,277. The SPA also provides the same share price for the sale of shares transaction. Also, a separate non-compete fee consideration of ₹ 9,30,00,000 has been provided in the SPA. It is well settled that when the document is plain and clear, and when the legitimacy and genuineness of the document has not been questioned there is no scope to suspect the legal character of the transaction. Hence, the Revenue cannot be allowed to delve into attributing any amount for transfer of controlling interest from the non- compete consideration and question the genuineness of the SPA in any manner. 10.2 Also, the reliance placed on the case of Shiv Raj Gupta is misplaced. We find that the facts of the said decision are vastly different from the facts in the Applicant s case. In that case, the assessee had transfe .....

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