Section 9, Article 7 of India-Qatar DTAA – Non-compete fees received under an independent agreement executed after sale of shares was business income which, in absence of PE / business connection in India, was not taxable in India – Shareholding in Indian company by itself would not trigger business connection in India

12. TS-683-ITAT-2019 (Mum.) ITO vs. Mr. Prabhakar Raghavendra Rao ITA No.: 3985/Mum/2018 A.Y.: 2014-15 Date of order: 6^th November, 2019

Section 9, Article 7 of India-Qatar DTAA –
Non-compete fees received under an independent agreement executed after sale of
shares was business income which, in absence of PE / business connection in
India, was not taxable in India – Shareholding in Indian company by itself
would not trigger business connection in India

FACTS

The assessee, a
non-resident individual, was a director and shareholder in an Indian company
(ICo). During the relevant accounting year, he sold the shares of ICo and
offered the same to tax as capital gains. Subsequently, he entered into a
non-compete and non-solicitation agreement with the buyer for not carrying on
similar business in India for ten years.

The assessee contended that the non-compete fee received by him was in
the nature of business income. Since he did not have any business connection in
India, the fee was not taxable in India under Article 7 of the India-Qatar
DTAA.

But the AO
contended that shareholding in the Indian company had resulted in a business
connection in India. Hence, the non-compete fee received from the sale of
shares was to be deemed to accrue or arise in India. Alternatively, such fee
was part and parcel of the share sale transaction and hence was to be taxed as
capital gains.

On appeal, the
CIT(A) ruled in favour of the assessee. Aggrieved, the AO filed an appeal
before the Tribunal.

HELD

(i)     The assessee first transferred the shares
held in ICo. Subsequently, independent of the share transfer, he entered into a
non-compete and non-solicitation fee agreement for not carrying on similar
business in India for ten years;

(ii)     The non-compete fee was business income
since it was received for restraint from trade for a period of ten years.
Hence, it could not be considered part and parcel of the share sale
transaction;

(iii)    Business income is taxable in India only if
the assessee has a business connection or PE in India. Shareholding in an
Indian company by itself would not result in a business connection in India;

(iv)    In the absence of a business connection or PE
in India, the non-compete fee was not taxable in India.