M/S TRANS GLOBAL PLC( EARLY KNOWN AS MORAN HOLDINGS PLC),KOLKATA vs. D,I,T (IT) 3(1),KOLKATA, KOLKATA

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 referred to as “the Act”) for Assessment Year 2008-09 vide his order dated 24.12.2010.

We have heard this matter ex parte because none is present for and on behalf of the revenue. Revenue has filed a petition for adjournment asking for adjournment in eight matters. The reason given by revenue in its petition dated 02.03.2016. Ld. Counsel for the assessee vehemently opposed the adjournment petition stating the reasons that the appeal is pending since 2013 and revenue wants to adjourn 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.

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 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) of the Act in the given facts and circumstances of the case or not?”

Briefly stated facts are that the assessee is a non-resident company furnished its return of income for the relevant AY 2008-09 on 31.03.2010. The assessment was completed u/s. 143(3) of the Act by the ADIT(IT)-3(1), Kolkata vide his order dated 24.12.2010. The DIT- International Taxation (in short IT) from assessment records noticed that the assessee has received £ 750000 (converted in Indian currency i.e. Rs.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 in term of provision of section 55(2)(a) read with section 28(va) of the Act. The relevant para 3 to 7 of the SCN read under: “3. On perusal of the assessment order along with the material available on record, it is seen that as per the ‘Sale Purchase Agreement’(in short, SPA) dated 18.01.2007, the purchaser was to pay the seller (the assessee) an advance for Non-compete Premium of British £ 7,50,000 (para 5.6 of page 19 of SPA) and the said Non-compete premium was to be paid 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 accordance with the terms and conditions of the Non-Compete Agreement. Reason for this notice 5. The aforementioned amount of Non-Compete Premium is chargeable to tax under the head 'income from Capital Gains' in accordance with the provisions of section 55(2)(a) of the Act. In the case under review, it is found that there was an agreement "Not- To-Compete" with the purchaser according to the specific terms as provided in the Non- Compete Agreement, for which M/s Mc1eod Russel India 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 Rs. 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'. Support for the above contention is drawn from the judgement of the Hon'ble Supreme Court of India in the case of Gufic Chem P. Ltd. reported in 332 ITR 602 [2011], wherein the Apex Court has held that payments received as non-competition fee under a negative covenant is in the nature of capital receipts. 6. The above mentioned amount of Rs.6,05,25,000/- is therefore taxable under the head capital gains inasmuch as the cost of acquisition of such right to carry on any business or right to manufacture, 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-

The assessee replied to the SCN by stating that the receipt of non-compete premium was taxable in the hands of the assessee as business receipts u/s. 28(va) of the Act. It was further explained that the assessee was tax resident in United Kingdom (UK) and it did not have any permanent establishment in India. 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 of the revision proceedings and holding that – “To sum up, the assessee transferred shares of MTCIL thereby transferring the controlling interest in the business of the said company. The resultant receipt was disclosed as capital gains. The assessee received a non-compete premium of British £ 750000 by surrendering/transferring its right to carry on any business for five years in five countries. However, this sum was not disclosed in the return of income as income under the head capital 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 rights are assets. The assessee surrendered its rights to carry out business in the five countries for 5 years. Such surrender was compensated by the third party, and in lieu of that the assessee received a sum of £ 7,50,000/- (Pound Sterling seven lakh fifty thousand only) as Non- Compete Premium. Also, for this surrender of the rights all the formalities had been gone through.

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 British Company liable to tax in UK only and does not have a permanent establishment in India. The assessee received non-compete premium during the relevant AY 2008-09 and claimed that the amount received on account of non-compete fee is not for transfer of any right to carry on any business or for transfer of any right to manufacture. According to assessee, this non-compete fee premium is a mere refraining from carrying on activity, which can be taxed u/s. 28(va) of the Act as amended by the Finance 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 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 premium received by assessee cannot be taxed in India. The AO while framing assessment u/s. 143(3) of the Act, after considering the provisions has not taxed the non- compete premium in accordance with the provisions of the Act and the provisions of the DTAA. The DIT(IT) has relied on the case law of Hon’ble Supreme Court in the case Mangalore Electric Supply Co. Ltd. Vs. CIT (1978) 113 ITR 655 (SC) wherein the transfer has been discussed and not the taxability in term of DTAA. The another precedent cited by Ld. DIT (IT)

In view of the above facts, we are of the view that a perusal of non-compete 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 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 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.

Before us, Ld. Counsel for the assessee having relied on the decision of Hon’ble Supreme Court in the case of Guffic Chem P. Ltd. Vs. CIT (2011) 332 ITR 602 (SC), wherein it is held as under: “7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital 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 case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Finance Act, 2002 itself indicates 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 effect from 1.4.2003. Hence, the said Section 28(va) is amendatory and not clarificatory. Lastly, in Commissioner of Income-Tax, Nagpur v. Rai Bahadur Jairam Valji reported in 35 ITR 148 it was held by this Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the present case, both CIT (A) as well as the Tribunal, came to the conclusion that the agreement entered into by the assessee with M/s. Trans Global PLC AY 2008-09 Ranbaxy led to loss of source of business; that payment was received under the negative covenant and therefore the receipt of `50 lakhs by the assessee from Ranbaxy was in the nature of capital receipt. In fact, in order to put an end to the litigation, Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from 1.4.2003.”

In view of the above facts and circumstances and case law of Hon’ble Supreme Court in the case of Guffic Chem P. Ltd., supra, we hold that the above said non-compete premium received by assessee is a business receipt assessable u/s. 28(va) of the Act but in term of Article- 7 of DTAA any business income arising to the enterprise of a contracting state is taxable only in that state, assessee being a non-resident company and does not have a permanent establishment in India, liable to tax in UK only. Accordingly, the assessment framed by AO is neither erroneous nor prejudicial to the interest of revenue and hence, the revision order passed by DIT(IT) is without any basis and quashed.

In the result, appeal of assessee is allowed.