AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 1879
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....o have deleted disallowance made by AO in toto. 2. Ld. CIT (A) further erred in law and on facts in confirming disallowance of commission for activity of sale in India whereas commission is for activity of procuring orders to non-resident agents rendering services outside India without any permanent establishment in India. Ld. CIT (A) ought to have held commission to non-resident agents not exigible to tax at source for all sales so far as the services are rendered outside India. 3. Ld. CIT (A) erred in law and on facts in confirming addition made by AO of Rs. 1, 59, 43, 850/- towards alleged suppressed sales against legal principles. Ld. CIT (A) confirmed the addition simply following orders of his predecessors without appreciating various submissions, evidences and documents submitted by the Appellant. Ld. CIT (A) ought to have deleted addition of alleged suppression of sales made ignoring tenets of law. 4. Levy of Interest u/s 234A/234B/234C & 234D is not justified. 5. Initiation of penalty proceedings u/s 271(1)(c) of the Act is not justified." 3. Assessment u/s. 143(3) of the act was completed on 9th Feb, 2015. During the course of assess....
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....ission of the appellant. The AO has made a disallowance u/s. 40(a)(ia) by holding that the appellant was liable to deduct tax on the commission paid to non-resident agents. It has been held by the AO that Provisions of Section 1 95 were applicable in the case of the appellant. The appellant, on the other hand, has submitted that it was not liable to deduct any tax as the commission paid to all the nonresident agents was not liable to tax in India as it had neither accrued or arose in India. The services have been rendered outside India. The provisions of section 195 were not applicable in the case of the appellant On careful examination of the relevant facts, it is noted that the similar issue has been decided by me in the case of the appellant while deciding the appeal for A.Y 2009 - 10 vide Appeal No.CIT(A)-VIII/JCIT/R.4/141/12-13 order dated 31/12/2013. The facts of the present case are also identical to the earlier year. The commission has been paid \ to non-resident agents who have rendered the services abroad, the agents does not have any PE or any other establishment in India. For the sake of clarity the decision given by me in that appeal is reproduced as under: - ....
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.... been derived from sales which has been made from India. The income has been derived from the activity of soliciting the sales on behalf of the appellant company. The agents have carried out all the activity on the foreign soil and none of their activity is in India therefore, it cannot be said that the income has accrued or arisen in India and the source of income was in India. There is no fact brought out by the AO in the order as well as observed by me during the course proceedings to indicate that the services have been rendered in India. The appellant has rightly relied on the judgement of honourable Supreme Court in the case of Toshoku supra wherein if has been held that commission earned by the non-resident for acting as the selling agent for the Indian exporter, wherein such non-resident was rendering services from outside India does not accrue in India. In the present case before me also, the foreign selling commission agent is resident of foreign country, from where the procurement service has been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision. "" Regarding the observ....
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.... not obligatory for the appellant to deduct tax in view of this there was no violation of the provisions of section 195 and the appellant also was not required to pay no deduction certificate from the AO. The issue whether the payer has to apply for a certificate under section 195 if some payment has been made, has been considered by various courts. The Special Bench of Chennai /TAT in the case of Prasad Productions reported in 125ITD 263 has held in para-35 of the order that if the assessee has not applied to the Assessing Officer under section 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, e case the honourable bench has considered several cases which were relevant to the issue. In the present case the appellant did not deduct the tax or approached the AO for low/no deduction of tax certificate as there are several judicial pronouncements-in support of the appellant which have been relied by it in the written submission. It has submitted that the commission paid to nonresident agent was not liable to tax under the provisions of the Act when the services were ren....
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....(i) would therefore be applicable. Accordingly the disallowance of Rs. 1880876/- Regarding the remaining amount of commission paid to foreign agents the facts are similar to the decision given by me in A.Y. 2009 - 10. Accordingly, the disallowance of the commissions paid to non-resident n agent made by the AO under section 40(a)(ia) directed to be deleted except the disallowance of Rs. 1880876 as discussed above. Reliance is also placed on the recent decision of Hyderabad ITAT in the case of IVAX Paper Chemicals Ltd 44 taxmann.com 173[2014] wherein similar issue has been decided in the manner indicated above. The ground of appeal is accordingly, partly allowed." 5. During the course of appellate proceedings before us, ld. counsel has submitted paper book, written submission made before the ld. CIT(A), circular no. 786 and circular no. 7 etc. He has also furnished additional evidences vide application dated 15.12.2018 as under:- (i) Declaration from Ferroatik Milacron GmbH regarding tax resident in Germany having no permanent establishment (PE) in India. (ii) Service provided and Non-competition Agreement. He has placed reliance on the decision....
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....atter. We approve the same. As regards the question as to whether the assessee had any obligations to deduct tax at source from these payments of commission to non resident agents, as learned representatives fairly agree, the issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of DCIT Vs Welspun Corporation Ltd [(2017) 77taxman.165 (Ahd)], speaking through one of us, has observed as follows: 31. The scheme of taxability in India, so far as the non residents, are concerned, is like this. Section 5 (2), which deals with the taxability of income in the hands of a nonresident, provides that "the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year". There is no dispute that since no part of the operations of the recipient non-residents is carried out in India, no income accrues to these non-residents in India. The case of the revenue hinges on income which is "deemed to accrue or ari....
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....lanation 1 to Section 9(1)(i) comes into play. 33. There are a couple of rulings by the Authority for Advance Ruling, which support taxability of commission paid to non-residents under section 9(!)(i), but, neither these rulings are binding precedents for us nor are we persuaded by the line of reasoning adopted in these rulings. As for the AAR ruling in the case of SKF Boilers & Driers Pvt Ltd [(2012) 343 ITR 385 (AAR)], we find that this decision merely follows the earlier ruling in the case of Rajiv Malhotra [(2006) 284 ITR 564] which, in our considered view, does not take into account the impact of Explanation 1 to Section 9(1)(i) properly. That was a case in which the non-resident commission agent worked for procuring participation by other non-resident entities in a food and wine show in India, and the claim of the assessee was that since the agent has not carried out any business operations in India, the commission agent was not chargeable to tax in India, and, accordingly, the assessee had no obligation to deduct tax at source from such commission payments to the non-resident agent. On these facts, the Authority for Advance Ruling, inter alia, opined that "no doubt ....
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....d by the Hon'ble Authority for Advance Ruling. With greatest respect, but without slightest hesitation, we humbly come to the conclusion that we are not persuaded by these ruling. ................... Once we come to the conclusion that the income embedded in these payments did not have any tax implications in India, no fault can be found in not deducting tax at source from these payments or, for that purpose, even not approaching the Assessing Officer for order under section 195. In our considered view, the assessee, for the detailed reasons set our above, did not have tax withholding liability from these payments. As held by Hon'ble Supreme Court in the case of GE India Technology Centre Pvt Ltd Vs CIT [(2010) 327 ITR 456 (SC)], payer is bound to withhold tax from the foreign remittance only if the sum paid is assessable to tax in India. The assessee cannot, therefore, be faulted for not approaching the Assessing Officer under section 195 either. As regards the withdrawal of the CBDT circular holding that the commission payments to non resident agents are not taxable in India, nothing really turns on the circular, as de hors the aforesaid circular, we have adjudicated upo....
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....the assessing officer has added Rs. 1,59,43,850/- treating as suppression of sale. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assesse by observing as under: "3.3. Decision: I have carefully considered the facts of the, case, the assessment order .and the written submission of the appellant. The AO has made an addition on account of suppressed sales. The appellant has issued the invoice for sale of the machines but the same was shown as pending shipment at the port. The AO considered it as the sales made and accordingly added the difference of the sale invoice value and the amount shown by the appellant in the closing stock for that machine. The appellant has submitted that it was the owner of the goods till sailing of the ship and till the bill of lading was issued. It accordingly treated these goods as inventory and the sale was recognised when the bill of lading was issued by the shipping company. The goods were treated as sold during the month of April 2011 as the bills of lading were issued on that date. After considering the various details, it is noted that the similar addition is being....
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....e material on record. We have perused the judgment of the Hon'ble Supreme Court wherein it was held that the goods remains the seller's property till those have been brought and loaded on board the ship and so the sales were exempted before tax under Art 286(1) of the Constitution. We noticed that where the sales were made under FOB contracts the seller continued to be owner of the goods till those crossed the custom barrier and entered the export stream. In the case of B.K.Wadeyar vs. M/s Daulatram Rameshwarlal On 27th September, 1961: 1961 AIR 311, 1961 SCR (1) 924 It was stated as under:- "We have therefore come to the conclusion that there is no circumstance which would justify a conclusion that the parties came to a special agreement that though the sales were on FOB contracts property in the goods would pass to the buyer at some point of time before shipment. We think that the learned judges who heard the appeal in the Bombay High Court were right in their conclusion that the goods remained the sellers' property till the goods had been brought and loaded on board the ship and so the sales were exempted from tax under Art. 286(i)fb) of the Constitution." ....
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.... order. Looking to the findings given in the ground no. 1 and 2 of the appeal of assessee's the ground of appeal of the revenue stands dismissed. Ground no. 2 regarding deletion of addition made of Rs. 1,28,37000/- on account of disallowance of depreciation. 11. The brief fact to the issue under appeal is that on scrutiny the assessing officer has noticed that assessee has entered into services provided and noncompetition agreement on 28th August, 2010. As per agreement a non-compete fees of Rs. 10.96 crore was payable to M.N. Patel. The assessee has claimed depreciation of this non-compete fees by treating the same as intangible assets. The assessing officer was of the view that claim of depreciation on non-compete fees is not justified because the payment of non-compete fees did not merely facilitate conduct of business as it would be a capital expenditure by merely because of capital expenditure it would not be necessary that it is eligible for depreciation. The assessing officer has further stated that as per provision of section 32(1)(ii) depreciation can be claimed in respect of know-how, patents, copy right trade-marks, license, franchise or any other business, commerc....
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....llowable the entire non-compete fee should be allowed as deduction under section 37(1) of the Act. On a careful consideration of entire facts of the case, it is noted that the salient features of the agreement between the appellant and Shri Patel, to whom non-compete fee has been paid are as under: - a. He shall not, directly or indirectly seek or accept employment or other work, in any capacity (including, without limitation, as agent), with any person, entity or business similar to, or which directly or indirectly is competitive with FMIL's existing business within India, Africa or the Middle East, (the "Restricted Territory"). b. He shall not conspire, plan or otherwise agree with any person, entity or business to organize or develop any business or entity that directly or indirectly is competitive with or engages in business similar to, the FMIL's existing business within the restricted territory. c. He shall not directly or indirectly own, manage, operate, control be employed by, or participate in the ownership, management, operation or control of any person, entity or business similar to, or which directly or indirectly is competiti....
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....rusal of various judgments show that non-compete fee is a capital asset and same can be considered as an intangible asset and depreciation can be allowed on the same. In some cases, it has even been held that it was a revenue expenditure. The perusal of various judgments relied by the appellant clearly show that the rights which has been acquired by the appellant by restricting Shri Patel, directly or indirectly, participating in a business which are similar to that of appellant, from directly or indirectly soliciting or influencing clients, the customers and other similar activity which can create competition for the appellant in the business. The fee had been paid by the appellant to carry on the business without competition and indirectly confer a right to carry on business smoothly. This right is capital in nature and would also fall within the ambit of section 32(1)(ii) of the Act and consequently depreciation would be allowable. It is to be noted that agreement is only for three years. The appellant has rightly placed reliance on the following judgements and the relevant extracts from those judgements are quoted as under: - 1. In case of CIT Vs Ingersoll Ran....
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....similar nature" have been additionally used, clearly demonstrates that the Legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of "business or commercial rights" cannot be restricted to only the aforesaid six categories of assets, viz., know-how, patents, trade-marks, copyrights, licences &r franchises. The nature of "business or commercial rights" can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in the case of the assessee, intangible assets, viz., business claims; business information; business records; contracts; employees; and know-how, are all assets, which are invaluable and result in carrying on the transmission and distribution business by the assessee, which was hitherto being carried out by the transferor, without any interruption. The aforesaid intangible assets....
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....ss which is being acquired. The right is acquired for carrying on the business and therefore it is a business right." Therefore that right which the assesses 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. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset'. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in turn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the asse....
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.... exchange card was held to be intangible asset. If a stock exchange card is construed as intangible asset, we are of the view that the right acquired by payment of non-compete fee is definitely intangible asset. Moreover, this right (asset) will evaporate over a period of time of five years in this case because after that the protection of noncompetition will not be available to the Assessee. This means, this right is subject to wear and tear by the passage of time, in the sense, that after the lapse of a definite period of five years, this asset will not be available to the assessee and, therefore, this asset must be held to be subject to depreciation." 3. In case of ITO Vs Medicorp Technologies India Ltd. 122 TTJ 0394, Hon'ble Chennai ITAT has observed that "if the business/commercial right of a patent, copyright trade mark, I/cense, and franchise, fulfils the conditions of 'being intangible asset', then surely the impugned business/commercial right acquired by the assessee also fulfils that condition, by way of a logical corollary". The ITAJ has held that "the impugned 'non-compete right' acquired by the assessee-company, was eligible for de....
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....mpete agreement/arrangement would fall within the ambit of clause (ii) of Section 32(1) of the Act". It further observed that "Learned counsel for the assessee contended that the non-compete is in effect an indirect licence. However, we are not inclined to agree with the said submission since non compete, at best could be a commercial right because that right is relatable to the transfer of trade mark, copy rights and patents and further held that the earlier transfer of the trade mark, patents and other rights in favour of the assessee was undoubtedly the transfer of intangible assets, which in terms of section 32(1 )(ii) of the Act would be a capital asset entitled to depreciation. 7. In case of DCIT Vs Weizmann Forex Ltd. 51 SOT 0525, Hon'ble Mumjpai ITAT noted that - 'The Id DR has submitted that the entire consideration for acquiring the network also includes the payment for non-compete fee. However, the assessee has not shown any bifurcation of the consideration paid for non-compete fee to AFL" The ITAT further observed that "The Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra) has held in para 24 as under: ....