TaxTMI 
TaxTMI 
2021 (8) TMI 501
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....ing of plastic processing machinery. 3. During the year under consideration, the assessee paid Rs. 92,29,916/- made on account of commission paid to non-resident India u/s. 40(a)(ia) of the Act for export of sales of machine and commission paid to non-resident. 4. In reply to the A.O., assessee submitted that all services are rendered outside India. As per provisions of section 5 and section 9 of the Income Tax Act, no part of commission income is received or deemed to be received in India. And stated that Hon'ble Supreme Court has held in the matter of CIT vs. Toshoku Ltd. 125 ITR 525 that commission amount which were earned by the non-resident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. 5. But Ld. A.O. did not agree with the plea of the assessee and made disallowance of Rs. 92,29,916/-. 6. Thereafter in appeal Ld. CIT(A) granted relief to the assessee. 7. So far ground No. 2 is concerned, Ld. A.O. made disallowance of Rs. 1,26,36,422/- on account of disallowance of depreciation on non-compete fees. 8. From the perusal of details, it was noticed that during the year under considera....
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....d circumstances in assessee's own case for A.Y. 2011-12, ITAT granted relief to the assessee and order of the Co-ordinate Bench is reproduced as under: This cross appeal filed by assessee and Revenue for A.Y. 2011-12, arises from order of the CIT(A)-2, Ahmedabad dated 12-06-2015, in proceedings under section 143(3) of the Income Tax Act, 1961; in short "the Act". 2. The assessee has raised following grounds of appeal:- "1. Ld. CIT(A) erred in law and on facts in confirming disallowance made by AO to the extent of Rs. 18,80,876/- of commission paid to non-resident agents towards machines sold in India applying provisions of sec. 9(1)(i) of the Act. Ld. CIT (A) erred in not appreciating that no obligation to deduct tax from commission to non-resident agents is cast on the assessee so far as the services are rendered outside India even for the local sales. Ld. CIT (A) ought to 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 est....
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....zing their services for procuring orders through the overseas company. Nonresident overseas agents are said to have offered their services to procure the export sale order. The assessing officer was of the view that assessee was under obligation to deduct tax at source as envisaged u/s. 195 of the act from the payment of commission made to non-resident agents towards services rendered by them. Consequently, the assessing officer has disallowed the commission payment made to non-resident u/s. 40(a)(i) to the amount of Rs. 1,20,72,972/- and added back to the total income of the assessee. 4. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by observing as under:- "2.3. Decision: I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made 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 195 were applicable in the case of the appellant. The appellant, on the other hand, has submitted that it was not liable to....
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....em in their country or for the country for which they have been appointed as commission agents. None of the activity of soliciting the clients and procuring the orders is in 'India. The goods are being delivered by the appellant company in the other country. The activities of procuring the payment on behalf of the appellant company are also done abroad. The AO was therefore, incorrect to hold that the "source of income lies in India as the sales have been made from India. The provisions of Income Tax Act dearly provide that the tax would be deducted on the income which is taxable in India. The activity of earning the income is not the sale but soliciting the sales by commission agents. Though this activity is linked to the sales of the company but it cannot be said that the income has 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 br....
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....under section 195 if is seen that for the applicability of the provisions of this must be chargeable under the provisions of the Income Section 195 provides for deduction of fax by the person responsible for paying to a non-resident any interest or any other sum chargeable under the Provisions of the Act. It is clear that the payment was not the interest. It has to be seen whether the payment is covered under the term "any other sum chargeable under the provision of this Act". It has been observed in the preceding discussion that income was not chargeable to tax as it has not been received in India nor it has accrued or arisen in India directly or indirectly. Therefore, once the income is not taxable there is no liability to deduct tax and therefore, it was 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 ITAT in the case of Prasad Productions reported in....
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....mmission of Rs. 1880876 has been paid towards machines sold in India. It has been submitted that all services were rendered by non-resident entities outside India and the agents do not have any permanent establishment in India. It has therefore been submitted that the amount was not taxable. The submission of the appellant regarding commission paid in respect of machines sold in India is not acceptable as the activity of sale has taken place in India. The logic taken by the AO that there is a connection of the income earned by the agent in India is applicable here. The order has been executed in India as the machines have been supplied in India and therefore, income has accrued in India. The provisions of section 9(1)(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 in 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 H....
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....Member) was author of the order. The discussion made by the Tribunal reads as under: "7. We find that once the agreements and related invoices have been furnished by the assessee at the assessment as also at the appellate stage, and no specific defects have been pointed out in the same, it cannot be open to the revenue to contend that genuineness of commission payments is not established. The commission payments are made with regulatory approvals and through banking channels, and all the requisite documentation is furnished for perusal. In these circumstances, we are of the considered view that the CIT(A) was indeed justified in his well reasoned conclusions on this aspect of the matter. 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) 77 taxman. 165 (Ahd)], speaking through one of us, has observed as follows: 31. The scheme of taxability in India, so far as the non residents....
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.... recipient chargeable under the head" Salaries". * Not relevant for our purposes 32. So far as deeming fiction under section 9(1)(i) is concerned, it cannot be invoked in the present case since no part of the operations of the recipient's business, as commission agent, was carried out in India. Even though deeming fiction under section 9(1)(i) is triggered on the facts of this case, on account of commission agent's business connection in India, it has no impact on taxability in the hands of commission agent because admittedly no business operations were carried out in India, and, therefore Explanation 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(1)(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 i....
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....ission agent can be brought to tax in India. In this view of the matter, views expressed by the Hon'ble AAR, which do not fetter our independent opinion anyway in view of its limited binding force under s. 245S of the Act, do not impress us, and we decline to be guided by the same. The stand of the revenue, however, is that these rulings, being from such a high quasi-judicial forum, even if not binding, cannot simply be brushed aside either, and that these rulings at least have persuasive value. We have no quarrel with this proposition. We have, with utmost care and deepest respect, perused the above rulings rendered 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 no....
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....ned owner of the goods till sailing of ships. A bill of lading is issued on sailing of ships. Thus, the company remains owner of the goods till the date of issue of bill of lading. Therefore, these goods were treated as inventory and sale is recognized with bill of lading is issued by the shipping company. The assessing officer has not accepted the explanation of the assessee by stating that assessee has followed mercantile system of accounting as invoices were prepared and the machines were dispatched from the factory premises therefore, the assessee should have shown the same as sale. Consequently, 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 assessee 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 accordingl....
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....ous commercial terms as per guidelines of International Chamber of Commerce. On the other hand, the ld. departmental representative supported the order of ld. CIT(A). 8. We have heard both the sides and perused the material on record carefully. We have noticed that the identical issue has been decided by the coordinate bench of the ITAT in the case of assessee itself for the assessment year 2004-05 to A.Y. 2010-11 and the decision vide ITA No. 337/Ahd/2008 for A.Y. 2004-05 is reproduced as under:- "14. We have heard both the sides and perused the 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....
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....t for failure to deduct 1 tax at source, without properly appreciating the facts of the case and the material brought on record. 2. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,28,37,000/- made on account of disallowance of depreciation on non-compete fees, without properly appreciating the facts of the case and the material brought on record." 10. This ground No. 1 of appeal of the revenue has been adjudicated under the ground No. 1 and 2 of the appeal of assessee's as supra in this 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 non-competition 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 o....
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....solicitation of business, non-solicitation of employees and non-disclosure clauses. Accordingly, the appellant has submitted that this would ultimately result in growth in business revenue and profit. The appellant has further placed reliance on certain decisions in which non-compete fee has been held to be an intangible asset and the depreciation has been allowed. The appellant has also raised an alternative plea in which it has been claimed that in case the claim of depreciation is not considered to be allowable 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 otherwis....
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....ome other company. Accordingly, this payment has rightly been claimed by the appellant as non-compete fee. The question which is now to be decided is that whether this non-compete fee is a capital asset or revenue expenditure and in case it is treated as capital expenditure, whether the same can be treated as intangible asset and depreciation be allowed on it. The appellant has quoted number of case laws in support of its claim. A perusal 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 ....
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....sal of the meaning of the categories of specific intangible assets referred to in section 32(1)(ii) of the Act preceding the term "business, 'or commercial rights of similar nature", it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words "business or commercial rights of 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 & 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 ....
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....acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with the person receiving the non-compete fee to do business with a person who is directly or indirectly in competition with the business 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 generi....
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....ght, the assessee can develop and run his business without bothering about the competition" The Hon'ble Tribunal has further mentioned that:- "In the case of Radaaj Media Works India Ltd., we had also referred to the decision of the Mumbai Bench of the Tribunal in the case of Techno Shares & Stocks Ltd. v. ITO [2006] 101 TTJ 349A whereby stock 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 non-competition 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/....
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....held that it is a settled issue that the non compete fee is intangible and depreciable asset as held by the cited supreme court's judgments". 6. In case of Pentasoft Technologies Ltd. vs. Dy. CIT 264 CTR 187, Hon'ble Madras High Court observed that:- "The only issue is whether non-compete 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 Mumbai ITAT noted that- 'The Ld. DR has submitted that the entire consideration for acquiring the network also includes the payment for ....
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....at 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 section 32(1)(ii) of the Act. Therefore, we do not find any reason to interfere in the decision of the Ld. CIT(A). Accordingly, the appeal of the revenue is dismissed. 14. In the result, the grounds of appeal 1 to 3 of the assessee are allowed and ground of appeal 1 to 2 of the revenue are dismissed. The grounds of appeal No. 3 to 5 of the revenue are general which do not require any adjudication. 13. Thereafter in appeal by the Revenue in assessee's own case wherein Hon'ble Gujarat High Court has dismissed the appeal of the Revenue for commission paid to nonresident India u/s. 40(a)(ia) of the Act and relevant portion of the said judgment is reproduced: 1. Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 19.04.2018 raising following questions for our consideration: "Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs. 18,80,876/- made on account of Commission paid to non-resident u/s. 40(a)(ia) of....