AI Drafter 
TaxTMI 
TaxTMI 
2021 (8) TMI 501
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....ase are that the assessee is in the business of manufacturing 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 p....
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.... the assessee written submissions were filed by the assessee wherein similar facts and 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 f....
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....t assessee company has made payment of export commission to the parties in Nigeria, Saudi Arab, UAE, Singapore etc. and payment was for realizing 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 hel....
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....arding the first issue it is noted from the evidences given by the appellant as well as noted by the AO in his order that the services have been rendered by the foreign agents outside India. The sales were booked by them 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 carr....
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....ents was deemed to accrue or arise in India and is taxable under the Act in view of the specific provisions of sections 5(2)(b) read with section 9(1)(i) of Income Tax Act. 4.3.2 Regarding the issue of obtaining no deduction certificate 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 certifi....
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....ade by the AO is directed to be deleted." The fact of the present year are almost identical to the A.Y. 2009-10 except for certain commission that has been paid to non-resident agents in respect of sales made in India. It has been submitted by the appellant that commission 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 dec....
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....ived from the activities of soliciting sales on behalf of the assessee-company by the agent; they are non-residents, and do not have any establishment in India and no activities was carried out in India. This aspect has been examined lucidly by the Tribunal in the case of Welspun Corporation Ltd. (supra), wherein one of us (Accountant 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 ....
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....urposes of this clause," fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the 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 o....
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.... of. The revenue's case before us hinges on the applicability of Section 9(1)(i) and, it is, therefore important to ascertain as to what extent would the rigour of Section 9(1)(i) be relaxed by Explanation 1 to Section 9(1)(i). When we examine things from this perspective, the inevitable conclusion is that since no part of the operations of the business of the commission agent is carried out in India, no part of the income of the commission 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 c....
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.... to the extent of Rs. 1,59,43,850/- during the year under consideration. The assessee has responded that these st machines were in transit for shipment as on 31 March, 2011 and machines were actually shipped in next year with bill of lading date ranging from 5th April, 2011 to 9th April, 2011 therefore, these machines were treated as part of closing stock as per value of Rs. 2,61,82,234/- on 31st March, 2011. The assessee has further submitted that the assesee remained 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 ....
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.... treated as part of the same in Assessment Year 2012-13 and, therefore, the same should be excluded from the sales of the next assessment year. The AO is accordingly directed to exclude the sales which have been treated as suppressed sales in present assessment year from the sales shown by the appellant in A.Y. 2012-13. The ground of appeal is accordingly, partly allowed." The ld. counsel has furnished paper book containing invoices of sale goods along with bill of lading and meaning of various 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....
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....p or rail. Therefore, the appeal of the assessee is allowed on this issue." Respectfully following the decision of the coordinate bench of the ITAT as supra, the appeal of the assessee is allowed. Accordingly, the appeal of the assessee is allowed. ITA No. 2616/Ahd/2016 9. The revenue has raised following grounds of appeal:- "1. The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 11,01,41,584/- made on account of disallowance of commission on export I sale paid to Non-residents u/s. 40(a)(ia) of the Act 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 assesse....
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....mpete fee does not fall within the ambit of the assets mentioned in section 32(1)(ii) of the Act and accordingly, he disallowed the claim of depreciation. The appellant on the other hand has submitted that Shri Patel is one of the founder of the company and is widely known in plastic industry. On termination of his association as promoter and shareholder the appellant company wanted to protect its business interest. Mr. Patel has agreed to various terms of the contract in which he has agreed to not do any activity which would harm the interest of the appellant company. He has agreed for non-competition, non-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 deductio....
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.... (iii) any and all other confidential and/or proprietary information concerning the company (FMIL) and the existing business, including without limitation financial statements, financial projections, budgets and historical and projected sales and (iv) any and all notes, analysis, compilations, studies, summaries and other material prepared by or for FMIL in connection with the existing business. It is further noted that the contract was for a period of three years and shall lapse after that period. It is clear from the terms and conditions of the contract that agreement is for preventing Shri Patel from doing similar nature of business or promoting similar nature of business in some 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 sho....
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..../20 taxmann.com 29 explaining the principles of Ejusdem Generis with reference to Section 32(1)(ii) of the Income Tax Act, 1961. In para 13 of the order the honourable Delhi High Court has held that- "In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression "business or commercial rights of similar nature" specified in Section 32(1)(ii) of the Act. It is seen that such rights need not answer the description of "know-how, patents, trademarks, licences or franchises" but must be of similar nature as the specified assets. On a perusal 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 ad....
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....on is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trade marks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same i.e., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being 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 ....
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.... similar nature for construing the same as intangible asset". Here, the doctrine of ejusdem generis would come into operation. The term "or any other business of commercial rights of similar nature" has to be interpreted in such a way that it would have same similarities as other assets mentioned in clause (b) of Explanation 3. The other assets mentioned are know-how, patents, copyrights, trade marks, licences, franchises, licence etc. In all these cases no physical asset comes into possession of the assessee. What comes in is only a right to carry on the business smoothly and successfully, and in our view even the right obtained by way of non-compete fee would also be covered by the term "or any other business of commercial rights of similar nature" because after obtaining non-compete right, 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 as....
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....ted for adjudication before us relates to if the capital expenditure by way of 'non compete fee' in question is an 'intangible asset and if the same is depreciable asset for the benefits u/s. 32 of the Act. There is no dispute on the capital nature of the impugned 'non compete fee' in view of the reported judgment of the Supreme Court in case of Guffic Chem (P) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 781 10 faxmann.com 105, which is adopted in the judgment in the case of/-far/Shankar Bhartia v. CIT (2011] 203 Taxman 6 (Mag.)/15 taxmann.com 113 (Cal.)." If further held that "the, by payment of non compete fee to another person to reduce the business or commercial competition for a period, the assessee acquires a right and it is a capital asset, which is a business or a commercial right..." and further 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 ....
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....ompete fee paid by the assessee was allowable. In view of the above discussion, various judgments mentioned above and preponderant judicial opinion, I am of the considered opinion that the non-compete fee paid by the appellant to Mr. Patel is a capital expenditure and the appellant has acquired an intangible right which is depreciable and depreciation claimed is allowable under section 32(1)(ii) of the Act. The asset is depreciable as the contract is enforceable only for three years and it is not forever. The disallowance made by the AO is therefore, directed to be deleted. The ground of appeal is accordingly allowed." 13. We have heard the rival contention on this issue and perused the material on record. After considering the facts and the detailed findings along with various judicial pronouncements elaborated in the order of the Ld. CIT(A), we consider that 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.....
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....ion agents did not have any permanent establishment in India and the services were also rendered by them outside India. He was of the opinion that the activity of the sale had taken place in India and that therefore the case would fall within section 9(1)(i) of the Act. 4. The assessee carried the matter in appeal before the Tribunal. The Tribunal allowed the appeal on the ground that no part of the income had arisen or accrued in India. The payee was not liable to pay tax at such income. Requirement of TDS therefore would not arise. 5. As is well known, section 195 of the Act imposes requirement of deduction of tax at source on any person responsible for paying to a non-resident any sum chargeable under the provisions of the Act. The prime requirement therefore for applicability of the section is that the payment to the non-resident should be a sum chargeable under the provisions of the Act. In other words, the payment is not an income which is chargeable to tax in India. Requirement of deducting tax at source under section 195 of the Act would not arise. This aspect was elaborated by the Supreme Court in case of GE India Technology Center P. Ltd. (supra) holding....