[2018] 94 taxmann.com 193 (AAR – New Delhi)
HM Publishers Holdings Ltd., In re
A.A.R. No. 1238 of 2012
Date of Order: 6th June, 2018
Facts
The Applicant was a company incorporated in
UK. The Applicant owned majority equity shares of an Indian Company (“ICo”).
Shares of ICo were listed on stock exchanges in India. The Applicant entered
into a Share Purchase Agreement (“SPA”) with an Indian company for sale of its
shareholding in ICo. Under the SPA, the purchaser agreed to pay the
consideration towards purchase price of shares (INR 37.38 crore), which was
computed on the basis of the price of the shares on the stock exchange and
non-compete fee (INR 9.30 crore). The non-compete fee was to be paid in
consideration of the Applicant not competing with the business of ICo, not
soliciting employees of ICo and generally not disclosing any information about
ICo.
Before the AAR, the Applicant contended
that: the non-compete fee received by it from the purchaser was in the nature
of business income u/s. 28(va) of the Act2; and since it did not
have any PE in India, such income was not taxable in terms of Article 7 of
India-UK DTAA3.
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2
The Applicant relied on the decision in CIT vs. Chemtech Laboratories Ltd [Tax
case appeal No 1492 of 2007] (Madras)
3 The Applicant relied on the decision in Trans
Global PLC vs. DIT [2016] 158 ITD 230 (Kolkata – Trib)
Held
(i) Whether non-compete fee covered u/s
28(va)?
– The Applicant
was a shareholder of ICo but did not have any legally enforceable right to
carry on business which could be treated as ‘capital asset’ u/s. 2(14) of the
Act. Hence, question of transfer of right to carry on business did not arise.
– The fee
received by the Applicant was for a negative covenant (i.e., not to compete
with ICo) and not for transfer of a right to carry on business to the
purchaser.
– Since there was
no right, there was no extinguishment of right in a capital asset. Hence,
question of ‘transfer’ u/s. 2(47)(ii) of the Act did not arise. The term ‘extinguishment’ denotes
permanent destruction. The negative covenant was for a period of three years.
Thus, the right of the Applicant to carry on business was restricted only for
three years but was not permanently destroyed. Accordingly, such restriction
could not be said to be extinguishment. Consequently, there was no income
chargeable under the head ‘Capital Gains’.
– Section 28(va)
is attracted in case where consideration is for agreeing not to carry on any
activity in relation to any business. It is not required that the recipient
should already be carrying on business. Accordingly, it is irrelevant whether
the recipient was carrying on the same business or a different business than
that of the payer.
– Therefore,
non-compete fee received by the Applicant was taxable as business income u/s.
28(va) of the Act.
(ii) Whether non-compete fee taxable in
India?
– The Applicant
did not have any PE in India. Hence, in terms of Article 7 of India-UK DTAA,
the business income (i.e., non-compete fee) of the Applicant will not be
taxable in India.
