Non-compete premium of a non-resident was business income, but DTAA residence rules barred Indian taxation.

A non-compete premium received by a UK resident company without a permanent establishment in India was treated as business income rather than capital gains, because it did not involve transfer of a capital asset and fell within section 28(va). However, Article 7 of the applicable DTAA allocated taxing rights over that business income to the State of residence, so the amount was not taxable in India. On that basis, the assessment order was not erroneous or prejudicial to the Revenue, and revision under section 263 was unsustainable.

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Issues: Whether the non-compete premium received by a non-resident company, which had no permanent establishment in India, was taxable in India as capital gains or as business income, and whether the revisionary order under section 263 was sustainable.

Analysis: The receipt arose from a non-compete arrangement and did not amount to a transfer of a capital asset so as to be assessed as capital gains under section 55(2)(a). The receipt was, in substance, a business receipt falling within section 28(va). However, as the assessee was a UK resident with no permanent establishment in India, Article 7 of the DTAA allocated taxing over such business income to the State of residence. In these circumstances, the assessment order could not be said to be erroneous and prejudicial to the interests of the Revenue.

Conclusion: The non-compete premium was not taxable in India in the assessee's hands, and the revisionary order was unsustainable.

Ratio Decidendi: A non-compete receipt of a non-resident without a permanent establishment in India, though taxable as business income in principle, cannot be brought to tax in India where the applicable DTAA assigns taxing rights to the State of residence.

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