Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Non-compete fees received by a non-resident, not taxable in the absence of a PE in India
November 20, 2019
In brief
The Mumbai bench of the Income-tax Appellate Tribunal (Tribunal) held that non-compete fees received by a non-resident individual taxpayer shall not be taxable in India unless such non-resident has a permanent establishment (PE) in India. Mere holding of shares in an Indian company cannot be construed to constitute a PE in India.
In detail
Facts
• The taxpayer1, a non- resident individual, was a director and shareholder of an Indian company. The taxpayer was a resident of Qatar, and tax residency certificate to that effect was filed. The taxpayer sold shares of the Indian company and computed tax on long-term capital gains thereon. The taxpayer had not carried on any business activity in India during the year of sale of shares or in subsequent years.
• Subsequent to the sale of shares, the taxpayer had entered into a separate agreement and received non-compete and non- solicitation fees, pursuant to a separate agreement, restraining him from carrying on any competing
1 ITA No.3985/Mum/2018
business in India for a period of 10 years (non- compete fees).
• The taxpayer originally filed his return of income computing tax on capital gains arising on sale of shares and offered the non-compete fees as business income. The taxpayer filed a revised return continuing to offer the non-compete fees as business income.
• During assessment proceedings, the taxpayer filed submissions claiming that the non-compete fees received by him are not taxable under Article 7 of the India–Qatar Double Taxation Avoidance Agreement (tax treaty) since he is a non-resident in India and had not conducted any business activity in India.
• The Tax Officer (TO)
rejected the taxpayer’s plea on the ground that, in view of holding shares in the Indian company, the taxpayer has a business connection in India and therefore held that the non-compete fees are deemed to accrue or arise in India.
• On appeal, the
Commissioner of Income- tax (Appeals) upheld the taxpayer’s claim.
Issues before the Tribunal
• Whether being
shareholder/ promoter of Indian company and being in control thereof creates a PE and/ or business connection for the taxpayer in India?
• Whether the receipt of non-compete fees was subject to tax as business income under the provisions of the Income- tax Act, 1961 (Act)?
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Taxpayer’s contention
• The non-compete fees are considered to be business income under section 28(va) of the Act.
• Article 7 of the India–Qatar tax treaty provides that business income of a Qatar resident is taxable in Qatar unless business is carried on through a PE in India. In the absence of PE, in view of the provisions of section 90(2) of the Act read with the tax treaty, the business income could not be taxed in his hands in India.
Revenue’s contention The non-compete fees are deemed to accrue in India in terms of the provisions of section 9(1) of the Act and liable to be taxed in India on the following grounds:
• The taxpayer has offered non- compete fees as income in its original and revised return of income.
• The receipt of non-compete fees is interlinked and intertwined with the sale of shares and thus, should be treated as part and parcel of sale consideration.
• Section 9(1)(i) of the Act uses the term “all income,” and
2 Trans Global PLC v. DIT [2016] 158 ITD 230 (Kolkata)
hence, the non-compete fees received by the taxpayer shall be treated as income accruing or arising in India.
• The taxpayer has business connection in India by virtue of the shares held in the Indian company.
Tribunal’s ruling
• The consideration received by the taxpayer for restraint of trade and not to undertake any competing business in India should be taxable as business income under section 28(va) of the Act.
• However, as the taxpayer is a non-resident eligible for tax treaty benefit in terms of section 90(2) of the Act, the business income could be taxed in the hands of the taxpayer in India only if it is established that there is a PE in India.
• The TO has merely stated that holding of shares in an Indian company by a non-resident results in having business connection in India and thereby constitutes PE in India, without bringing in any material to substantiate that the taxpayer had a PE.
• The onus to prove that the taxpayer has any business
connection or any PE in India is on the Revenue.
• In terms of the tax treaty, the business income derived by a non-resident could be brought to tax only if the taxpayer has a business connection or PE in India.
• The non-compete fees received under an independent agreement, entered after sale of shares, shall not be taxable in India as there is no business connection or PE in India.
This view, as confirmed by the Kolkata co-ordinate bench Tribunal2, was relied upon. Therefore, the issue of taxability of non-compete fees was rejected.
The takeaways
This ruling reiterates that business income in the hands of non-resident will not be taxable in the absence of a business connection/ PE in India, and that business connection is not established merely on account of being a shareholder/ promoter in an Indian company.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
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