The New Delhi Bench of the Authority for Advance Rulings (AAR) in the application filed by the applicant HM Publishers Holdings Limited held that the receipts arising out of a negative covenant not to carry on a business is taxable as business income under Section 28 (va) of the Income Tax Act.
The Applicant is a company incorporated under the Company laws of England and Wales, United Kingdom is the holding company of the Macmillan Group and its control and management of the affairs are situated wholly outside of India. MPS Limited is a limited company incorporated under the laws of India and has its registered office in Chennai, India. ADI BPO Services Private Limited (ADI), a company incorporated under the laws of India with its registered office at New Delhi, is in the business of publishing BPO services in India. The Applicant and ADI had entered into a Share Purchase Agreement dated October 11, 2011 (SPA) whereby ADI will purchase all the shares held by the Applicant in MPS. Applicant received the non-compete fee for not carrying out any business activity which can compete with MPS for a period of three years as per the terms and consideration set out in Clause 5 of the SPA.
The issue before the present authority is that whether the non-compete fees received by the Applicant from ADI BPO Services Private Ltd., an Indian Company, as a part of the consideration for transfer of the shares held in MPS Ltd. an Indian Company, shall be chargeable under the head “Profits and gains of business or profession” as provided under Section 28(va) of the Income-tax Act read with Article 7 of the Double Tax Avoidance Agreement (DTAA) between India and United Kingdom, in absence of any Permanent Establishment of the Applicant in India?”
The Applicant has submitted that the non-compete fees received by it from ADI though would be business income under section 28(va) of the Income-tax Act, 1961, and in absence of any permanent establishment in India, would not be taxable in India as per Article 7 of the DTAA. Furthermore, the Applicant had simply imposed a restriction upon itself and not transferred any right to ADI BPO. The Applicant is only a shareholder of MPS with controlling interest in it and was not carrying on nor had the right to carry on business of MPS. Being a shareholder, it enjoyed rights such as right to profits, right to dividend, right to vote, etc.
The Revenue contended that extinguishment of any right in a capital asset amounts to transfer. In the case of non-compete fee, the right to carry on a business is a capital asset and that right is extinguished when the payment is made to a person for not carrying out that business. Thus, there is a transfer within the meaning of Section 2(47) of the Act.
After hearing the rival contentions, it was held by the Authority that the Applicant does not hold a legally enforceable right which can be treated as a ‘capital asset’ within the meaning of section 2(14). In view of this position, there can be no question of transfer of any right to carry on business from the Applicant to ADI BPO. With respect to the non-compete clause, it was held that the fee received by the Applicant is for a negative covenant to not compete with MPS and not for transfer of any right to carry on business to the payer as contended by the Revenue. The Authority finally concluded that in absence of any permanent establishment of the Applicant in India, such business income will not be taxable in India by virtue of Article 7 of the India-UK DTAA which provides that business income shall be taxable only in the UK in absence of a permanent establishment in India.
Hence, the Authority was of the view that the receipts arising out of a negative covenant not to carry on a business is taxable as business income under section 28 (va).
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