THE PRINCIPAL COMMISSIONER OF INCOME TAX 2 vs. FERROMATIC MILACRON INDIA PVT LTD

Facts

This Tax Appeal was filed by the Revenue against an order of the Income Tax Appellate Tribunal (ITAT), Ahmedabad, dated October 26, 2018, for Assessment Year 2013-14. The appeal challenges the ITAT's decision to uphold the Commissioner of Income Tax (Appeals) [CIT(A)] order deleting two additions made by the Assessing Officer (AO). The first deletion concerned Rs. 1,68,48,562/- on account of disallowance of depreciation on non-compete fees. The second deletion related to an addition of Rs. 1,38,19,875/- made under Section 40(a)(ia) for non-deduction of tax on commission payable to foreign agents. The High Court noted that these issues were no longer res integra in view of its prior decision in the case of the same assessee.

Held

The High Court held that both substantial questions of law were no longer res integra, having been decided in its previous judgment in the case of the same assessee, Principal Commissioner of Income-tax v. Ferromatic Milacron India (P.) Ltd. [2018] 99 taxmann.com 154 (Gujarat). On the first issue concerning depreciation on non-compete fees, the Court reiterated its earlier finding that the non-compete fee payment acquired enduring benefits and protected the assessee's business. The rights acquired were held to be wide enough to include the situation under the expression "or any other business or commercial rights of similar nature" in Explanation 3 to Section 32(1)(ii), thus qualifying for depreciation. The AO's view that non-compete fees did not fit the specific categories of intangible assets was rejected, citing Supreme Court and Delhi High Court precedents. On the second issue regarding disallowance under Section 40(a)(ia) for non-deduction of tax on commission to foreign agents, the Court affirmed its prior decision. It was held that the primary requirement for Section 195 to apply is that the payment to the non-resident must be a sum chargeable under the Act. Since the non-resident agents did not have a permanent establishment in India and their activities were carried out outside India, no part of the income accrued or arose in India. Therefore, the assessee was not liable to deduct tax at source, and the disallowance under Section 40(a)(ia) was not justified. The Tribunal's finding that there was no liability on the assessee to deduct tax at source was upheld.

Key Issues

The Tribunal had to decide the following substantial questions of law proposed by the Revenue: 1. Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the CIT(A) deleting the addition of Rs. 1,68,48,562/- made on account of disallowance of depreciation on non-compete fees, as per Section 32(1)(ii) of the Income Tax Act, 1961? 2. Whether the Appellate Tribunal has erred in law and on facts in upholding the order of the CIT(A) deleting the addition made on account of disallowance u/s. 40(a)(ia) of the Act for non-deduction of tax on commission payable to foreign agents of Rs. 1,38,19,875/-? Assessee's Contentions (as inferred from the High Court's discussion of prior decisions): - Regarding non-compete fees: The non-compete fee payment acquired enduring benefits and protected the assessee's business against competition. The rights acquired fall within the scope of "any other business or commercial rights of similar nature" under Explanation 3 to Section 32(1)(ii). - Regarding commission to foreign agents: Services were rendered by non-residents outside India, and therefore, no part of the income accrued or arose in India. Consequently, there was no liability to deduct tax at source under Section 195, relying on the Supreme Court decision in GE India Technology Center P. Ltd. vs. CIT. Revenue's Contentions (as inferred from the High Court's discussion of prior decisions): - Regarding non-compete fees: The AO was of the opinion that non-compete fees do not qualify as depreciable intangible assets under Section 32(1)(ii) as they do not fit the specific categories listed. - Regarding commission to foreign agents: The AO made the addition under Section 40(a)(ia) for failure to deduct tax at source. The CIT(A) partially agreed, holding that commission related to machines sold in India was taxable in India under Section 9(1)(I).