TMI Blog2021 (8) TMI 501X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the appellant to Mr. Patel is a capital expenditure and the appellant has acquired an intangible right which is depreciable and depreciation claimed is allowable under section 32(1)(ii) of the Act. The asset is depreciable as the contract is enforceable only for three years and it is not forever. The disallowance made by the AO is therefore, directed to be deleted. - Decided in favour of assessee. - ITA. No. 62/Ahd/2019 - - - Dated:- 29-7-2021 - Mahavir Prasad , Member ( J ) And Waseem Ahmed , Member ( A ) Appellant by : Shri S. S. Shukla , Sr. D.R. Respondent by : Written Submission ORDER Per Mahavir Prasad, JM 1. This appeal has been filed by the Revenue is directed against the order of the Commissioner of Income Tax ('hereinafter called CIT(A)') order No. CIT(A)-2/10385/DC. Cir. 2(1)(1)/2017-18 order dated 31/10/2018 arising out of assessment order dated 22/12/2017. Revenue has taken following grounds of appeal: 1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 92,29,916/- made on account of commission paid to non-resident u/s. 40(a)(ia) of the IT Act. 2. The CIT(A) erred in law and on facts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll and cited several case laws. 10. Ld. A.O. held that in the case of ACIT vs. GE Plastics India Ltd. 137 ITD 309 (ITAT-Ahmedabad), the revenue has not accepted the order of the ITAT, Ahmedabad and accordingly, an appeal against the order of Hon'ble Gujarat High Court which has yet not been adjudicated. 11. Thereafter, assessee preferred first statutory appeal before the ld. CIT(A) who granted relief to the assessee and in its order, Ld. CIT(A) has held that his predecessor in 2011-12 and 2012-13 has held that such expenditure is capital expenditure and allowed depreciation treating it intangible assets and Co-ordinate Bench in Assessment Year 2011-12 has also upheld the order of the Ld. CIT(A) for allowing the depreciation as under: 13. We have heard the rival contention on this issue and perused the material on record. After considering the facts and the detailed findings along with various judicial pronouncements elaborated in the order of the Ld. CIT(A), we consider that the non-compete fee paid by the assessee to Mr. Patel is a capital expenditure and the assessee has acquired an intangible right which is depreciable and depreciation claimed is allowable under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officer has noticed that assessee has paid commission of ₹ 1,20,72,972/- to non-resident out of total commission of ₹ 1,49,64,769/- paid during the year. On scrutiny, the assessing officer noticed that assessee has not deducted TDS on commission payment made to non-resident. The assessee has responded that all the services were rendered outside India therefore as per provision of section 5 and section 9 of the income tax act, no part of commission income was received or deemed to be received in India. It has stated that being non-residents no income accrues or arises or is deemed to accrued or arises in India. It has also placed reliance on the decision of Supreme Court in the case of GE Technology Centre Pvt. Ltd. Vs. CIT (2010) 327 ITR 456 (SC). The assessee has also referred CBDT Circular No. 786 dated 7th Feb, 2000 pertaining to deduction of tax u/s. 195 of the act. It was stated that the circular has clarified that where the non-resident agent operates outside the country, no part of his income arose in India. The assessing officer has not accepted the explanation of the assessee by stating that in the case of the assessee the income accruing or arising directly or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y statutory obligation to deduct tax at source on any part of thereof. While deciding the I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed the commission paid to foreign agents by holding that the income arising on account of commission payable to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the Provisions 5(2) (b) read with section 9(1)(i) of Income Tax Act. It has further by the AO that the appellant company had failed to $ with the Provisions of section 195(2). The appellant on the other hand, in its detailed written submission, has claimed that the Provisions of Section 5(2)(b) read with section 9(1)(i) of Income Tax Act were not applicable in its case. The income has been earned abroad and is therefore, not taxable in India. The issues which ore to be examined and decided are:- 1. Whether the commission paid to foreign agents is taxable in India by virtue of the provisions of sections 5(2)(b) read with section 9(1)(i) of Income Tax Act. 2. Whether the provisions of section 195(2) were applicable on the appellant and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise in India by applying the provisions of section 9(1)(i) if is seen that there is no fact on record of indicate that any of the agents had any permanent establishment in India. All the agents had their offices on the foreign soil and the correspondence which, has been placed before me indicate that they had no PE in India. Further the assessing officer has also not pointed out any such fact in its order which indicate that there were any such offices which attract the deeming provisions. Further the observation that the source of income was in India is also not proper as it has clearly been discussed in the preceding paragraphs that none of the services have been rendered in India and source of income cannot be said to be in India as the source of income is the services rendered and not the sales. There is no business connection in India from which the income has been earned, there is no property through or from which the income has been earned. Therefore, the provisions of section 9(1)(i) also cannot be applied. The appellant has rightly placed reliance on the Judgment of honourable Supreme Court in the case of GE India Technology Centre Private Limited 327 ITR 456. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utside India and there was no permanent establishment or business connection in India. The submission given by the appellant dearly demonstrates its bona fide belief. Therefore, considering the above discussion there was no liability on the part of the appellant to deduct tax under section 195 or approach the I.T. Authorities for a no deduction tax certificate. The AO has also placed reliance on the decision of Hon'ble Authority of Advance Rulings in the case of SKF Boilers and Driers (P.) Ltd. (2012) 18 Taxmann 325 and Rajive Malhotra (2006) 284 ITR judgments are not applicable to the present facts as there are several other decisions which hold that such kind of commission is not taxable in India and accordingly no liability to deduct tax was there. Further the decision of honourable Supreme Court of India in the case of Hon'ble Supreme Court in the case of CIJ vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of TDS provisions to commission paid to overseas/nonresident agents by Indian Exporters. In view of the preceding discussion it is clear that the appellant was not liable to deduct tax on the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 - 10. The Ld. Counsel has also placed reliance on the decision of the coordinate bench in the case of Welspun Corporation Ltd. 77 taxman.com 165 (Ahd.) On the other hand ld. DR has supported the order of assessing officer. 6. We have heard both the sides and perused the material on record carefully. We have noticed that the identical issue has been decided in the case of the assessee by the coordinate bench of the ITAT for the assessment year 2009-10 in favour of the assessee. The relevant part of the decision is reproduced as under:- 22. We have duly considered rival contentions and gone through the record carefully. As far as genuineness of the transactions is concerned, the AO has not raised any dispute. The details of commission payments were produced before the AO. He compiled all these details in Annexure-A attached with the assessment order. The dispute between the parties relates to whether the TDS was to be deducted on commission payment or not. The AO was of the view that income arisen on account of commission payable to overseas agents was deemed to accrue or arise in India, and is accordingly taxable under section 5(2)(b) r.w.s. 9(1)(i) of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the following statutory provisions are relevant in this context: Section 9-Incomes deemed to accrue or arise in India (1) The following incomes will be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, Explanation: For the purpose of this clause [i.e. 9(1)(i)], (a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India; (b) (c) (d) ..... * (vii) income by way of fees for technical services payable by- (a) .............. * (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) .... ........ * Explanation 1-.. ........... * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive the commission arises in India only when exhibitor participates in the India International Food Wine Show (to be held in India), and makes full and final payment to the applicant in India and that the commission income would, therefore, be taxable under section 5(2)(b) read with section 9(1)(i) of the Act . The Authority for Advance Ruling also held that the fact that the agent renders services abroad in the form of pursuing and soliciting participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining situs of his income . We do not consider this approach to be correct. When no operations of the business of commission agent is carried on in India, the Explanation 1 to Section 9(1)(i) takes the entire commission income from outside the ambit of deeming fiction under section 9(1)(i), and, in effect, outside the ambit of income 'deemed to accrue or arise in India' for the purpose of Section 5(2)(b). The point of time when commission agent's right to receive the commission fructifies is irrelevant to decide the scope of Explanation 1 to Section 9(1)(i), which is what is material in the context of the situation th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct as also the relevant tax treaty provisions. 8. Learned Departmental Representative nevertheless relies upon the stand of the Assessing Officer. For the detailed reasons set out above in these extracts from Welspun order (supra), his argument cannot be accepted. In any event, we see no reasons to take any other view of the matter than the view so taken by us above. Respectfully following the same, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. 9. Ground No. 1 in revenue's appeal is thus dismissed. Respectfully following the decision of coordinate bench, we allow the appeal of the assessee and appeal of the revenue is dismissed. 7. During the course of appellate proceedings, the assessing officer has noticed that assessee has shown sale of five machines on CIF basis for ₹ 4,21,26,084/- as machines in transit at closing stock value of ₹ 2,61,82,234/-. The assessing officer observed that as against sale value of ₹ 4,21,26,084/- inclusive of profit of ₹ 1,59,43,850/- the assessee had shown the value of machines in transit at ₹ 2,61,82,234/-. The assessing officer was of the view that assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uent years arid my predecessors have upheld the addition made by the AO. The appellant has made appeal before ITAT Ahmedabad and the issue is sub-judice at that level. Since the issue is covered by the decisions of my predecessors in earlier years and the facts are also identical, it would be prudent to follow the decisions taken at first appellate level by my predecessors. In view of these facts and circumstances, the addition made by the AO on account of difference of sale bill issued and the value taken in the closing stock is upheld. The appellant has also raised an alternative plea for the addition made on account of suppressed sales. It has submitted that in case the stand taken by the AO is upheld, the effect of suppress sales taken for A.Y. 2011-12 should be given in A.Y. 2012-13. It has been requested by the appellant that the sales treated as suppressed sales in present year should be deducted from the sales of the next year shown by the appellant otherwise, it would result in double taxation of income. The plea of the appellant is justified. An income can only be taxed in one year. Once certain items have been treated as part of the sales in earlier assessment year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 2010 Civil Appeal No. 3245 of 2005, in which it was stated that the provisions of Sales of Goods Act 1930 relevant to the transfer of the property in goods to the purchaser specially in FOB transaction is transferred to the buyer at such time as the parties to contract intend it to be transferred. Section 26 of the Act provides that unless otherwise agreed, the goods remain at the seller risk. In case of FOB contracts the goods are delivered free on board the ship once the seller has placed the goods safely on board at his cost and thereby handed over the possession of the goods to the ship in transfer of the Bill of Landing or other document, the responsibility of the seller ceases on the delivery of the goods to the buyer is complete. After considering the above facts and legal findings we considered that sale was executed under FOB as per which the risk was transferred from the seller to the buyer when the goods put on ship or rail. In view of above, we are not inclined with the decision of the Ld. CIT(A) and we are of the view that when the sale was executed under FOB, CIF terms as per which the risk was transferred from the seller to the buyer when the goods put on ship or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly evident that it does not fall within the ambit of any of the above intangible assets or business or commercial rights of similar nature pertaining to the above intangible assets. Therefore, the clam of depreciation of the assessee by treating non-compete fees as intangible assets was rejected by the assessing officer. 12. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee by observing as under:- 4.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The appellant has made payment of non-compete fee of ₹ 10.29 crores to Shri M.N. Patel to protect its business interest and ward off potential competition from him. It has been held by the AO that the claim of depreciation on non-compete fee was not justified because payment of the same did not merely facilitate the conduct of business but in fact ensured that the assessee's market position and the customer base was not threatened by the completion from the erstwhile partner. Therefore, the same should be taken as capital expenditure. The non-compete fee does not fall withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vert or seek to cause any party to refrain from doing any business with FMIL, within the Restricted Territory. e. He shall not during the term, directly or indirectly, solicit, seek business from, entice, persuade or induce any person or entity which has a business relationship with FMIL as to the existing business within the restricted territory to direct or transfer away any business, patronage or source of supply from FMIL. f. He shall not, during the term, hire, identify for solicitation or solicit, directly or indirectly, any employee of FMIL for employment by any person or entity other than FMIL (assessee) and g. He shall not disclose any confidential information. The confidential information means with respect to or concerning FMIL and the past, current or planned operation of the existing business: (i) any and all trade secrets (ii) customer lists, customer locations, current and anticipated customer requirements, customer preferences, pricing information, customer contacts, price lists, market studies, service records, business plans, marketing plans and advertising materials, (iii) any and all other confidential and/or proprietary information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset entitled for depreciation. The head note of the judgment is reproduced hereunder.- Section 32, read with section 28(va), of the Income-tax Act, 196] -Depreciation - Allowance/rate of (Intangible assets] - Assessment year 2006-07 - Whether right to carry on business without competition has an economic interest and money value - Held, yes - Whether whenever assessee makes payment for non-compete fee, commercial right comes into existence and, therefore, that right which assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trade marks, licences, franchises - Held, yes - Whether commercial right so acquired by assessee unambiguously falls in category of an 'intangible asset' and, consequently, depreciation provided under section 32(1)(ii) is to be allowed - Held, yes While deciding the case honourable High Court referred to decision of the Delhi High Court in the case of Areva T. D. India Ltd. v. Dy. CIT [2012] 345 ITR 421/208 Taxman 252/20 taxmann.com 29 explaining the principles of Ejusdem Generis with reference to Section 32(1)(ii) of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid intangible assets, the assessee would have had to commence business from scratch and go through the gestation period whereas by acquiring the aforesaid business rights along with the tangible assets, the assessee got an up and running business. This view is fortified by the ratio of the decision of the Supreme Court in Techno Shares and Stocks Ltd. [2010] 327/TR 323 ISO wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a licence or akin to a licence which is one of the items falling in Section 32(1)(ii) of the Act.' The High Court has further held that:- A non-compete right encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Chennai ITAT, noted that:- When a bus/ness man pays money to another business man for restraining the other business man from competing with the Assessee, he gets a vested right which can be enforced under law and without that the other business man can compete with the first business man. When by payment of non-compete fee, the business man gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. It is just like separating big plant from other plants affecting the growth of the big I plant. Generally, non-compete fee is paid for a definite period which in this case is five years. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the Assessee makes payment for non-compete fee. The Hon'ble Tribunal has further observed that- Now, the second question is whether such right can be termed as or any other business of commercial rights of similar nature for construing the same as intangible asset . Here, the doctrine of ejusdem generis would come into operation. The te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the rival submissions carefully and find that in the case of Real Image Tech (?) Ltd. [supra], after analyzing the provisions of sec. 32[1][ii] if was held that non compete fee would constitute capital asset and depreciation was ultimately held to be allowable. However, we find that the AO vide para-8 of his order has observed that non compete fee was not mentioned in the agreement as a separate payment. Therefore, he should find out the amount of non compete fee determined by the assessee and accordingly allow depreciation in view of the decision the Chennai Tribunal in the case of Real Image Tech (P) Ltd. 5. In case of Serum Institute of India Ltd. vs. ACIT 147 TTJ 594 (Pune) : 135 ITD 69, Hon'ble Pune ITAT has held that:- It is if is evident so long as the 'non Compete fee' in question is a 'capital expenditure, the same is entitled for depreciation as held by the Apex Court in the case of Techno Shares Stock Ltd. v. CIT [2010] 193 Taxman 248. The ITAT further observed that the limited disputed for adjudication before us relates to if the capital expenditure by way of 'non compete fee' in question is an 'intangible asset and if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know-how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced overnight but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customers associate with such assets and held that assessee's claim of depreciation is allowable. 8. In the case of ACIT vs. GE Plastics India Ltd. 137 ITD 309, the ITAT (Ahmedabad) has also held that the depreciation of non - compete fee paid by the assessee was allowable. In view of the above discussion, various judgments mentioned above and preponderant judicial opinion, I am of the considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who responded by suggesting that all services were rendered by the non-residents outside India and therefore, no part of the income had accrued or arose in India. Such income was therefore, not taxable in India. The assessee relied on the decision of Supreme Court in case of GE India Technology Center P. Ltd. vs. Commissioner of Income Tax and Anr. reported in 327 ITR 456 and contended that, in such a case, there was no liability to deduct tax at source. 3. The Assessing Officer did not accept such explanation and made the addition of entire amount in terms of section 40(a)(ia) of the Act. The assessee carried the matter in appeal. CIT(A) gave substantial relief to the assessee. All additions, barring commission payment of ₹ 18.80 lacs (rounded off) were deleted. With respect to the said sum of ₹ 18.80 lacs, Commissioner was of the opinion that this related to the machines which were sold in India. He did not accept the assessee's contention that the non-resident commission agents did not have any permanent establishment in India and the services were also rendered by them outside India. He was of the opinion that the activity of the sale had taken place in In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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