Case Law Details
ITAT AHMEDABAD BENCH ‘D’
Mitsu Ltd.
versus
Assistant Commissioner of Income-tax
IT Appeal Nos. 3088 & 3119 (Ahd.) of 2003
[ASSESSMENT YEAR 2000-01]
Date of Pronouncement- 23.01.2013
ORDER
Mukul Kr. Shrawat, Judicial Member
These cross-appeals have been filed against the order of the ld. CIT(A)-I Surat, dated 23/04/2003. These appeals are consolidated and hereby decided by this common order.
[A] Assessee’s appeal, ITA No.3088/Ahd/2003 – A.Y. 2000-01
2. Ground Nos.1 to 4 read as under:-
1. The order of assessment is contrary to the facts and prejudicial to the assessee.
2. On appreciation of the facts and circumstances of the case and law, the additions made are contrary to law and based on erroneous understanding of the facts.
3. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Asst. CIT of Income tax in making addition of capital receipts received by the appellant company by way of non compete fees to the tune of Rs. 10,00,00,000/- treating the same as income from business. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
4. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) ought to have granted relief to the appellant company by deleting the addition made at the time of assessment pro to the tune of Rs. 10,00,00,000/-.
2.1 At the outset, ld. AR Mr. M.K. Patel has stated that Ground Nos. 1 & 2 are general in nature, hence not pressed. These two grounds are, therefore, dismissed being not pressed. Apropos to Ground No.3, facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the IT Act, 1961 dated 28.11.2002 were that the assessee- company has commenced its manufacturing operation during the year. The assessee has manufactured certain intermediates like Choral, TCSE, non-synthetic pyrethroid, insecticides, etc.
(a) The assessee- company was originally formed under the name M/s. Mitsu Pesticides Ltd.
(b) The assessee- company had purchased “NSP Division” from M/s. Mitsu Industries Ltd. as per assets purchased agreement dated 09/07/1999 (sic. – 3/07/1999). It was noted by the AO that the said purchase was a slump sale within the meaning of section 2(42C) of IT Act, for a lump-sum consideration of Rs. 35 crores. M/s. Mitsu Industries Ltd. was manufacturing synthetic pyrethroid (SP) and non-synthetic pyrethroid (NSP) under two separate divisions, known as “SP Division” and “NSP Division”. The assessee company has purchased only an NSP Division of M/s. Mitsu Industries Ltd. As per the agreement, the NSP Division of M/s. Mitsu Industries Ltd. was transferred to M/s. Mitsu Pesticides Ltd. (assessee).
(c) At the business premises of M/s. Bilag Industries Ltd. a survey u/s.133A of the IT Act dated 19/01/2000 was conducted. A statement of Shri Anjum G.Bilakhia, Director was recorded. There was an enquiry in respect of “non-compete receipts”. A survey report has also been furnished. Certain information were placed on record, briefly discussed here under:
(d) M/s. Bilag Industries was formerly known as M/s. Mitsu Industries Ltd.
(e) The Mitsu Industries Ltd. entered into a Joint Venture in foreign collaboration with AgrEvo S.A. Germany/France. Therein it was named as M/s. Bilag Industries Ltd.
(f) M/s. Mitsu Industries Ltd. had entered into a Jt. Venture with Hoechst Schering AgrEvo S.A. (AgrEvo) by transferring 51% equity shares by individual share holders namely (i) Anjum Bilakhia (ii) Yunus Bilakhia (iii) Zakar Bilakhia to the aforesaid foreign company, and about Rs. 253 crores was received by them in total.
(g) M/s. Mitsu Industries Ltd. was earlier known as M/s. Bilag Industries Ltd.
(h) Apart form the aforesaid amount the said foreign company, i.e. Hoechst Schering AgrEvo has paid a sum of Rs. 25.5 crores as non-compete fees to the following persons:-
|
1. |
Shri Anjum Bilakhia | Rs. 10.00 crs. |
|
2. |
Shri Yunus Bilakhia | Rs. 5.50 crs. |
|
3. |
M/s.Mitsu Pesticides Ltd.(now changed to M/s.Mitsu Ltd.) | Rs. 10.00 crs. |
The AO has summarized that the assessee- company had purchased NSP Division of M/s.Mitsu Industries Ltd. on slump sale basis. Vide para 6.1, it has also been noted by the AO that during the year 51% shares along with management control of M/s. Mitsu Industries Ltd. was purchased by Hoechst Schering AgrEvo S.A. (France) as per a Joint Venture agreement. In the said Joint Venture Agreement, Hoechst Schering AgrEvo S.A. caused the assessee- company through its Director and their family members to undertake non-compete obligation for a period of four years. Therefore, the assessee- company had received a sum of Rs. 10 crores and claimed the same as non-compete fees. A show-cause was issued and in compliance assessee has provided a detailed information in writing; only relevant portion is reproduced below:-
“Letter dated 08.02.2002
(b) M/s.Mitsu Industries Limited was promoted as a closely held company by Shri Anjum G. Bilakhia and Shri Yunus G. Bilakhia in the year 1991. The main object of the company as manufacturing of chemicals especially agro chemicals i.e. Pesticides, Insecticides and Herbicides.
Within a medium span of 8 years the company grew in size and operations and became a leading exporter of various kinds of pesticides. The operational highlights of the company during the Financial Year 97-98, 98-99 and 99-00 is as under:-
|
Year |
Domestic Sales (Rs. in crores) |
Export Sales (Rs.in crores) |
Total Sales (Rs.in crores) |
|
1997-98 |
83.40 |
150.17 |
233.57 |
|
1998-99 |
97.40 |
244.20 |
341.60 |
|
1999-00 |
66.70 |
273.11 |
339.81/- |
The company established itself as a leading player both in India and abroad. At this juncture it’s promoters entered into a joint venture agreement with another global leader in the same product line Hoechst Schering AgrEvo of France. The gist of terms and conditions of the joint venture agreement is as under:-
1. Hoechst Schering AgrEvo purchase 51% shares of M/s. Mitsu Industries Ltd. from its promoters.
2. The Company be renamed as Bilag Industries Pvt. Ltd.
3. The promoters of Mitsu Industries Ltd. be paid a certain sum towards the purchase price of the share sold.
4. The promoters of Mitsu Industries Ltd. and associate companies where the promoters have substantial share holdings and control be bound and subjected to undertake non compete obligation for a period of 4 years. The said obligation as stated in the agreement is reproduced as under.
“Subject to clause (d) below as from the Closing Date, as long as the Confirming parties hold shares in the Company and for as period of four (4) years thereafter, the Confirming Parties themselves or any of them directly or indirectly through any other Affiliate(s) of them or any of them or howsoever shall refrain from any activity which may compete directly or indirectly with the business of the Company relating to the Products.” (Article 13 of the Joint Venture Agreement dtd. 03.07.99, Page no.55 to 58). Copy of the Joint Venture Agreement enclosed here in Annexure-‘A’ attached.
A perusal of the above facts of the case clearly indicates that all the promoters and group companies of the Bilakhia Group have been deprived of their source of income during the period the restrictive covenant is in operation. Accordingly the compensation received from Hoechst Schering AgrEvo, France pursuant to the Joint venture agreement is a capital receipt for loss of source of income which is not liable for tax.”
….
“Letter dated 04.03.2002 (Additional reply on letter dated 01.02.2002]
6.3. “Further to our explanation to non-compete fee vide our submission dated 08.02.2002, we wish to bring to your kind notice that in the recent Union Budget presented by the Honorable Finance Minister, has brought receipts by way of non-compete fees/exclusivity rights under the purview of taxation as business profits. By this it is evident that non-compete fees were not eligible to tax till now and hence he brought this amendment. We therefore request your goodself to treat the said receipt as capital receipt and not liable for tax.”
(i) During the course of survey proceeding, a statement of Shri Anjum G.Bilakhia was recorded. Some of the questions and the answers are reproduced below:-
“Q.No.20 Please read page 8 (ESCROW No.1 page 55 (Article 13(b), Page 36 (Article 13(c) & Exhibit 13(c). Please read out the name of the parties to whom the non-compete fee payable? Ans. I have read page No.8 ESCROW No.1 is as “Rs. 253.09 crorres to be paid towards purchase of MIL shares by AGEVO from the confirming parties and 25.51 crores to be paid towards non-compete covenant by the confirming parties, Mrs. Bilakhia HIL & MINT as set forth in Article 13.
Q.No.21. Please produce “exhibit 13(c)” annexed to the agreement dated 3.7.99 between AgrEvo and Mitsu Industries Ltd. A. I am producing the same in an hour.
Q.No.22. Please confirm that neither Yunus G. Bilakhia nor Anjum G. Bilakhia nor Mitsu Pesticides (MPL) were mentioned as recipient for alleged non-compete fee in the said agreement dtd. 3.7.1999 between AgrEvo and Mitsu Industries Ltd.
A. I do confirm.
Q.No.23. Please show cause as to why such receipt in the hands of Mr. Anjum Bilakhia, Mr. Yunus Bilakhia & in the hand of M/s. Mitsu.
Pesticides be taxed under the head “income from other source” alternatively and without prejudice to applicability of section 2(24) (iv) and section 28(iv) of the I.T. Act.
A. I shall give appropriate reply in an hour.
..
Q.No.25. You have produced original copies of the said agreement dtd. 3.7.99 between AgrEvo & Mitsu Industries show cause why original agreement does not contain any exhibits. Where is exhibit 13(c)? It may be mentioned that you had produced two original agreement, and in none of them accompanied by exhibit?
A. We are searching for the exhibit.
….
Q. No. Shri Bilakhia, you will appreciate that the copy of exhibit 13(c) givien by you is totally unsigned and accordingly the same cannot be treated forming part of the agreement. Please clarify if you have something to say to the contrary.
A. There is a Xerox copy & there is some error on the Xerox copy while Xeroxing.”
(j) The assessee has given a reply that the actual payment of “non-compete fees” was received after obtaining Foreign Investment Promotion Board approval from the Government of India. However, the AO was not convinced and opined that “non-compete fees” was received only by the confirming parties of the said agreement as set forth in Article 13 page 8 of the ESCROW No.1 as also confirmed in Article 13; relevant paragraph from ESCROW No.1 is reproduced below:-
“Rs. 253.09 Crores to be paid towards purchase of MIL Shares AGREvo from confirming parties and Rs. 25.51 Crores to be paid towards non compete covenant by the confirming parties, Mrs. Bilakhias, HIL and MINT as set fort Article 13”.
2.2 After having a detailed discussion and considering the provisions of the Act, AO has finally opined that the impugned sum of Rs. 10 crores, credited in the books of accounts, was not a capital receipt but a business income and to be added in the total income of the assessee u/s.28(v)(ia) of the IT Act. Being aggrieved, the matter was carried before the first appellate authority.
3. At first, ld. CIT(A) has held that the amendment which took place by Finance Act, 2002 was made applicable with effect from 1st March-2003, i.e. A.Y. 2003-04. Ld. CIT(A) has thus held that there was no mention in the said enactment that it was with retrospective effect. The year under assessment was 2000-01, hence that amendment was not applicable for the year under consideration. He has held that section 28(va) was thus not applicable for A.Y. 2000-01. The action of the AO for taxing “non-compete fees” by holding that the amended provisions were applicable for earlier years was held wrong in law. There was yet another aspect of the issue and in that regard, ld. CIT(A) has summarized in para 16.2 that non-compete fees had a direct nexus with the conduct of business. According to him, a lump-sum payment would not change the character of the receipt, instead it was received on year-to-year payment basis. He has held that the impugned non-compete fees was in the nature of Revenue Receipt. The claim of the assessee was rejected.
4. From the side of the Assessee, Mr. M.K. Patel appeared. He has informed that M/s. Mitsu Industries Limited (presently Bilag Industries Pvt. Ltd.) was promoted as a closely held company by Shri Anjum G. Bilakhia and Shri Yunus G. Bilakhia in the year 1991. The main object of the company was manufacturing of chemicals especially agro chemicals i.e. Pesticides, Insecticides and Herbicides. Mitsu Industries Ltd. had entered into a Joint Venture Agreement with Hoechst Schering AgrEvo S.A. (France)dated 3/07/1999 on the terms and conditions that the Hoechst Schering AgrEvo S.A. (France) shall purchase 51% shares of Mitsu Industries Limited from its promoters. Thereafter, the said company shall be renamed as Bilag Industries Pvt. Ltd. The promoters of Mitsu Industries Limited shall be paid an amount towards the purchase price of the shares sold. Ld. AR has contested that the promoters of Mitsu Industries Ltd. and the Associate Companies where the promoters have substantial shareholding were also subjected to undertake non-compete obligation for a period of 4 years. In this connection, ld. AR has drawn our attention on the clauses of non-compete conditions laid down in Article-13 of the Joint Venture. With this background, ld. AR has added that the assessee, i.e. Mitsu Ltd.(formerly known as Mitsu Pesticides Ltd.) is also a company where Bilakia family was holding 100% shareholding and control. As per the said J.V. agreement, the assessee company was also bound to undertake non-compete obligation for 4 years. Ld. AR thus argued that all the promoters and group companies of the Bilakhia group have been deprived of their source of income during the period of restrictive covenant. Therefore, the compensation received from Hoechst Schering AgrEvo S.A. (France) pursuant to agreement was nothing but a capital receipt for the loss of source of income. Ld.AR has placed reliance on the decision of Hon’ble Apex Court in the case of (i) Guffic Chem. (P.) Ltd. v. CIT [2011] 332 ITR 602 and (ii) ITAT Ahmedabad Bench “D” in the case of Yunush G.Bilakhia v. Asstt. CIT in IT Appeal Nos.3086 & 3087/Ahd/2003 [cross-appeals – for AY 2000-01] order dated 4.1.2008.
5. From the side of the Revenue, ld. CIT-DR Mr. Ravindrakumar appeared and vehemently opposed the contention of the assessee that the amount in question received was a capital receipt in the hands of the assessee. A detailed note in this regard was placed on record, relevant portion is extracted below:-
“OFFICE OF THE
COMMISSIONER OF INCOME-TAX (ITAT)-V,
2ND FLOOR, NEPTUNE TOWER, NR. NEHRU BRIDGE,
ASHRAM ROAD, AHMEDABAD- 380009
No. CIT (ITAT)-V/ITAT/ML/’D’ Bench/2012-13
Date: 19.04.2012
To:
The Honorable Members,
ITAT, ‘D’ Bench,
Ahmedabad.
Sirs,
Sub: Written submissions in the case of M/s. Mitsu Limited – A.Y. 2000-01.
Next Date of Hearing : 03/05/2012
In this case the appellant company has claimed that it has received non compete fee of Rs. 10,00,00,000/- which has been claimed to be capital receipt and hence exempt from tax. In this regard the following facts are being brought to your notice which clearly establish that the non compete agreement relied on by the appellant is not genuine and only a facade. The money received is actually proceeds of assets and stock and is clearly business income. The agreement itself is not a non compete agreement between the appellant and the person making the payment.
2. It would be seen that the agreement produced by the appellant in support of its contention that it had received the sum of Rs. 10,00,00,000/- as non compete fee has not been signed by the appellant. In fact the appellant is not a party to this agreement. This agreement has been entered into between Hoechst Schering Agr Evo SMBH, Hoechst Schering Agr Evo SA and M/s. Mitsu Industries Ltd., Yunus Gafulbhai Bilakhia, Mr. Arjun Gafulbhai Bilakhia, Zakir Gafulbhai Bilakhia, Rashida Y. Bhilakhia, Hanifa A. Bilakhia, Jiluben G. Bilakhia and Anima Zakir Bilakhia. These details are mentioned at Page No. 172 of the Paper Book. Thus it is seen that neither the appellant is a party to the agreement nor is the appellant a signatory to the agreement. In fact the appellant is not even mentioned as a confirming party in the agreement.
3. Thus it is clear that the agreement entered into by other persons cannot be binding on the appellant. It is also to be noted that no sane person would make a payment of non compete fees to the extent of Rs. 10,00,00,000/- without making the person who is expected to offer competition sign binding agreements. Neither the appellant company nor any other person or its directors have signed this agreement representing the appellant company. The appellant has thus received the money not as a non compete fees because it never was a party to the non compete agreement. The claim by the AR of the appellant that the company endorsed the agreement which is mentioned in the audit report is clearly an afterthought because no primary evidence has been produced to show that the agreement was signed by the appellant company. It would also not be out of place to mention that the audit report is prepared by the auditor only after the end the Financial Year.
4. Further it would be seen from the Profit and Loss A/c and the Annual Accounts of the appellant for this year at Page 6 of paper book, that the appellant was an existing company since this annual report is the seventh annual report of the company. It would also be seen that the company has started operations only after acquiring the Non Synthetic Pyrethroid Business Division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.)
5. The share capital of the company as on 31.03.1999 was only Rs. 7,000/- and it had no assets what so ever as on 31.03.1999. This is reported in the Balance sheet as on 31.03.2000 at Page 15 of the paper book. Further it would be seen that the profit and loss account does not show any major salary payments, implying thereby that it did not have any employees who could possess such knowledge as to offer any kind of competition to Bilag Industries Ltd. (formerly Mitsu Industries Ltd.). It also had no intangible assets. It would thus be seen that the appellant did not have any assets or expertise or manpower to offer any kind of competition to the competitors from which they have paid Rs.10,00,00,000/-.
6. In fact as per the agreement the purchase is i.e. Hoechst Schering Agr Evo GMBH only wanted to acquire part of the business of M/s. Bilag Industries Ltd. (Formerly Mitsu Industries Ltd.). Thus as per the agreement referred to the company Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) and the Bilakhia family have hived off the Non Synthetic Pyrethroid Business division to the appellant.
7. Thus it is clear that what the purchaser did not want to purchase was given to the appellant. Thus it is clear before this purchase the appellant was in no condition to offer any competition as it did not have any assets or expertise with it. Even after the agreement, the appellant was in no condition to offer any competition as, the employees of the Non Synthetic Pyrethroid Business division of the company Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) were restrained from carrying on any activity which could be considered as offering completion as per clauses a & b of article 13 of the agreement. As per the agreement the appellant has purchased only that part of the business of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) which the purchasers did not want to acquire thus there was no question of competition.
8. The genuineness of the agreement also is questionable as in the affairs of the selling party are not transparent. The valuation reports prepared to arrive at the value of the assets of the enterprise has not been furnished despite directions of the Bench. It would be seen that the purchasers i.e. Hoechst Schering Agr Evo GMBH has purchased 51% of shares of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) which has assets worth Rs. 92 crores for a sum of Rs. 253.09 crores.
9. This figures mentioned in para 3.1.4 of the agreement which is on page 185 of paper book where in it is mentioned that the net worth of the company shall be Rs. 92 Crores. Similarly on para 3.3 of the agreement on page no. 186 of the paper the considerations of 253.09 crores is mentioned alongwith the fact that the shares to be transferred to the purchases is 51%.
10. Thus it would be seen that for a sum of Rs. 253.09 crores the purchaser have purchased assets worth only (Rs. 95 crores X 51/100) = Rs. 48.45 crores. The self serving nature of the arrangement of the sellers i.e. the Bilakhia Family would be obvious when it is seen that the Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) which represented assets worth 35 crores was purchased by the appellant by paying only Rs. 35 crores i.e. almost the book value of the assets. This is as against nearly 5 times the book value charged from the purchasers. It would also be seen that the reserves and surplus of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the extent of Rs. 103.75 crores were transferred to the Bilakhia Family as dividend.
11. Thus it would be seen that while transferring the assets of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the purchaser assets worth Rs. 48.45 crores (being 51 % of assets of Rs. 92 crores) were valued at Rs. 253.09 crores whereas when it came to transferring the Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the appellant in which the Bilakhia family had controlling interest, assets were transferred at almost book value.
12. This is not a genuine transaction would be apparent from the fact in the very first year i.e. A.Y. 2000-2001 the profit of the appellant company was Rs. 127.14 crores after purchasing the business for only Rs. 35 crores. Thus it is clear that the conduct of the Bilakhia Family in transferring the assets of the Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) was prearranged to suit the interest of the family and was clearly not a genuine agreement as far as the mode of arrangement of receipt by the Bilakhia family was concerned.
13. If thus becomes clear that there was no element of competition which was sought to be avoided but a sum of Rs.10 crores was sought to be transferred to the appellant claiming that it was through a restrictive covenant as non complete fees so that the same would not suffer taxation.
14. It would also be seen that though the non complete fee is paid to the appellant. The appellant did not have any business at all before the agreement. Though the agreement stipulated that with effect from 01.06.1999 Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) would be transferred to the appellant, this did not happen at the time of signing the agreement and was never contemplated to happen before signing the agreement. In fact M/s. Mitsu Industries Ltd kept carrying on the business of non pyrethroid items though it was stated to be on behalf of the appellant. Thus the non compete transactions is clearly a sham because one cannot offer competition to oneself.
15. It is also to be seen that non compete fee of Rs. 15,00,00,000/- is paid to two directors Shri Y.G. Bilakhia and Shri A.G. Bilakhia and the confirming parties have been precluded from carrying on any activity which may compete directly or indirectly with the business of the company i.e. Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) further as per the non compete clause in the agreement specifically stipulated as under:
“In particular neither the Confirming Parties themselves or any of themselves or any of them or directly or indirectly through any other Affiliate(s) of them or any of them or howsoever shall, except through the Company.
|
(i) |
Perform directly or indirectly or through contracts with third parties any research, development, manufacture, formulation, marketing, distribution and/or sale of Products; | |
|
(ii) |
grant licenses relating to the Products to any third party in any country whatsoever; | |
|
(iii) |
directly or indirectly mange, operate, joint, or participate or be or become interest in, or be or become connected in any manner with, as a partner, advisor, or otherwise, in any entity engaged in a business competitive with the business of the Company relating to the Products. |
Provided that the aforesaid shall apply only to business of the Company relating to the Products.
Subject to clause (d) below Mitsu shall use its best efforts to cause all directors, officers and senior scientific personnel of MIL and MINT to undertake in writing, with effect no latter than as of the Closing Date, not to engage directly or indirectly in any activity which may compete with the Company Business, during their office, employment or collaboration within the Company or its future Affiliate.”
16. Thus it would be seen that the two directors to whom the non compete fees was also paid were in a position of offer competition. They have already been prohibited by the non compete agreement. Their associates and other entities where they are interested have also been barred from such activity. It is further to be seen that apart from the directors the other entities have not been paid any non compete fees though several entities in which the directors had interest existed. The appellant company was one such entity with no business activity whatsoever. It beats undertaking as to why the appellant company was chosen and singled out as on entity which could offer competition to M/s. Mitsu Industries Ltd. though any case as per clause a(iii) of article 13 of the agreement this appellant was already barred from offering competition since the Shri Y. G. Bilakhia is the chairman of the appellant company and Shri A. G. Bilakhia is a director in the appellant company thus it was clearly a concern where the confirming parties were interested. Further the employees of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) have also been precluded from offering competition as per clause b of article 13 of the agreement. All the employees of the appellant company were earlier employees of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) hence they are also covered by the agreement.
17. In such a situation it is seen that the appellant was also bound by the agreement being an entity in which the Bilakhias were interested. There was no reason to make payment to this entity for non competition since no such payment has been made to other entities.
18. Further the agreement itself is a self serving document as the complete facts have not been presented to the Bench by the AR of the appellant. The Bench during the course of hearing on 13.02.2012 had required the AR to produce the details of valuations of assets for the purpose of purchase of the undertaking which would show the extent of goodwill and mode of determination of the price paid. The case was adjourned by the Bench to 16.02.2012. However, the AR of the appellant did not produce the said details. Even the annexures to the agreement mentioned in the agreement itself have not been furnished. The fact that these details have not been produced clearly indicate the agreement of non compete is truly a sham and only a device to evade tax. This is obvious from the following details which are extracted from the account and agreement and paper books filed by the appellants.
19. In view of the above it is clear that as far as the non compete fee of Rs.10 crore is concerned the money received is not for not offering competition and hence is entirely taxable.
Yours faithfully,
Sd/-
(RAVINDRA KUMAR)
Commissioner of Income Tax-
V, ‘D’ Bench, ITAT, Ahmedabad.”
6. From the side of the assessee, ld. AR Mr. M.K. Patel has submitted a written rejoinder which has been considered by us and the relevant portion of the rejoinder is extracted below:-
“The Honorable Members
ITAT “D” Bench
Ahmedabad
In the case of M/s. Mitsu Limited AY 2000-2001. ITA No. 3088/A/2003 & 3119/A/2003
Honorable Sirs
On direction from the Honorable Bench we are pleased to submit our rejoinder to the written submission filed the Ld. DR dated 19.04.2012
On the outset we would like to place our objections on record to the written submission filed the Ld. DR in view of the following facts and law:-
1. The assessing officer and the CIT (A) had after verifying all the relevant documents on record concluded unequivocally that the receipt of Rs.10 Cr is non-compete fee.
2. The re-appreciation of same set of facts questioning the nature of the receipt itself amounts to reassessment of the case which is not permitted in the proceeding before the appellate tribunal where based upon the arguments and the facts only the grounds of appeal and the cross objections there to can be adjudicated.
3. Legal Aspects
1. New ground of appeal can be raised only on those legal issues wherein all facts are available on record.
2. Once the Assessing Officer and the CIT(Appeals) has given a conclusive fact finding on the basis of which a legal issue is pending for adjudication before the Honorable Tribunal, a new inference cannot be drawn on the basis of the same set of documents on record by giving it a new interpretation leading to a different fact finding.
3. We rely upon the ratio laid down in the following decided case (s)
• 307 ITR 289 ( Gujarat HC)
• 333 ITR 379 ( Andra Pradesh – HC)
• 168 ITR 472 ( Gujarat HC)
4. Our observations and comments on the written submission by the Ld. DR Para. Wise.
1. The learned Departmental representative (DR) has brought forth new inferences on the same set of facts considered by the assessing officer at the time of assessment .The LD DR is stating here that the non-compete agreement is not genuine and only a facade whereas the authorities below have considered the payment received to be the non-competing fee without any dispute.
2. These are mere statements of facts which has been restated by LD DR in such a Manner to suit his point of view.
3. In this paragraph the LD DR is stating that the amount of Rs.10.cr is not non-compete fee.
1. In view of the fact that the appellant was not the party to the agreement.
2. Disclosure of the binding nature of non-compete agreement in the audit report is clearly an after thought
Our Comments:
1. The company has ratified and adopted the non-compete agreement by passing a resolution of board of directors and disclosed the same in the notes to the accounts which has been filed with the return of income and filed with the registrar of companies.
2. The accounts and notes to the accounts reflect facts of the company during the particular year and constitute public documents whose contents are binding upon the company.
3. Even without signing the agreement by adopting a declaration in the meeting of the BOD and by handing over the same to the beneficiary company the non-compute obligations have become statutorily binding on the company, hence the contention of the LD DR about the binding nature of the agreement is not as per law.
Without prejudice we humbly state that the aforementioned contention of the Ld DR amount to re-appreciation of same set of facts to derive a conclusion contrary to that given by the AO and CIT (A).
4. In fact the Ld DR himself acknowledges in para 17 that the appellant is bound by the non-compete agreement.
4. These are factual information on record.
5.1 The promoter directors of the appellant company were in pesticide business from 1992 on wards, and hold 100% shareholding of appellant company. They were manufacturing and selling all kinds of pesticides from 1992 on wards and had become one of the leading manufacturers in the Indian markets when this transaction took place.
5.2 The appellant company had the necessary machinery to manufacture any pesticide and can offer biggest competition to the foreign company.
5.3 Hence the contention of the LD DR that the appellant do not have any assets or expertise or manpower to offer any kind of competition is not correct on facts. 3. Further the word competition is much wider than mere manufacturing, even without a manufacturing setup competition can be given by transferring other business information like, technical know-how, list of customers, development of new products through R&D, and in several other manner by which the competitors business is affected. Hence in industry and trade non-compete fee can is given to any potential competitor and threat of competition has to be evaluated form the perspective of the person affected by it. In the context of appellant company the non-compete agreement has been adhered to in letter and sprits till this date in 2012 as per the agreement and the appellant company has completely wound up its Manufacturing activities. This shows that the contention of LD DR is only an argument not supported by any facts.
6. In Para 6 & 7 the LD DR submitted that as under: As per the agreement the appellant has purchased only that part of the business of Bilag Industries Ltd. (Formerly Mitsu Industries Ltd.) which the purchasers did not want to acquire thus there was no question of competition. In fact the LD DR has wrongly understood the transaction that the Bilakhia family through Mitsulndustries Ltd was manufacturing all kinds of pesticides. For the limited purpose of understanding and classification the products were described as Synthetic Pyrothoid pesticides (i.e SP) and pesticides other than synthetic pyrothoid (i.e. NSP).The Indian promoters at that point of time opted to continue manufacturing NSP and there was no question of purchasing the same business which were owned by them and carried on for last 8 years at that point of time. As per the agreement they hived off manufacturing of NSP products to the appellant company along with all infrastructure including machinery and employees.
The machinery consists of mainly reactors and the appellant company was thus capable of manufacturing and offering competition to the joint venture company being the same field. Without considering the actual facts the Ld DR has kept on repeating in this written submission that the appellant is not capable of offering competition.
7. Same as above.
8. In paragraph 8 & 9 of the rejoinder the LD DR has given the figures of the transaction. He has simply commented that the genuineness of the agreement is questionable; this is mere allegation without any substance.
9. Same as above.
10. In Para 10& 11 the LD DR has mentioned that while the synthetic pyrethoid was sold for 5 times book value to the foreign company the remaining business was taken over at book value. We would like to submit that the Indian promoters were simply continuing the business which was already owned and carried on by them and there was no need to purchase that business from anybody. The LD DR has missed out this important aspect of the transaction.
11. Same as above.
12. In Para 12 the LD DR has alleged that the appellant company has earned a profit of 127.14cr in A.Y. 2000-2001 after purchasing the business for 35 cr. The LD DR continues to allege that in view of this high profit, the agreement is not a genuine agreement. We humbly submit before your honor that this profit has been offered for taxation and taxes have been paid. We would also like to humbly submit that Ld DR has not explained as to how this facts on record has relevance to the nature of non-compete fee received, except making a mere statement which is in the nature of an allegation.
13. Para 13 is again an allegation without any substance.
14. In Para 14. The LD DR has again raised an allegation that the company taken over by the foreigners continues to carry on non pyrothoid items even after payment of non-compete fees. The LD DR observers as under::” Thus the non-compete transaction is clearly a sham because one cannot offer competition to oneself. We humbly submit that the LD Learned Departmental Representative has wrongly understood the transaction. For ensuring continuity of production there were certain enabling clauses in the agreement which facilitated production of non pyrothoids by the appellant company, in its area of factory premises. The comments by the LD DR is not on the basis of correct facts.
15. Para 15 is reproduction of non-compete clause of agreement. After interpreting this non-compete clause the LD DR acknowledges in Para 16 that the shareholders of the appellant company viz. the Bilakhia Family were in a position to offer competition.
16. Same as above.
17. In Para 17 the LD DR states that the appellant company was also bound by the agreement being an entity in which the Bilakhia’s were interested. He has commented without any reason that there was no reason to make payment to this entity for non-competition. Since no such payment has been made to other entities of Bilakhia’s family. In our humble opinion the receipt of non-compete fee is the result of a commercial agreement between the foreign company and the appellant company. The taxability of such receipt which has been disclosed to the Government of India and approved by it is the subject matter of this appeal and the assessment has been completed by the Learned assessing officer after considering all the facts which are on record. The legal aspect of the transaction has been approved by the government of India which is now been characterized by the learned departmental representative as a sham transaction. This is merely an attempt to redirect the proceeding before the bench by characterizing the dispute as a question of genuineness of the transaction. The real ground of appeal is as to whether the non-compete fee received by the appellant is liable for tax during the assessment year 2000-2001.
18. This is evident from Para 18,where in the Ld DR has wrongly mentioned that the appellant company had sold its undertaking. Hence there is no question of valuation of assets, or determination of goodwill as far as the appellant is concerned. The shares were sold by Mr. A &Mr. Y of the Bilakhia family who are 100% shareholder of the appellant company and their cases have been adjudicated by the coordinated bench of this tribunal. All the full annexures of the agreement were brought in full before this bench and the LD DR has wrongly stated in his submission that even the annexure to the agreement have not been furnished. In fact because of the voluminous nature of annexures the appellant was asked to take back the annexures brought for filing to the bench and LD DR for filing during the course of proceedings. Again the LD DR has alleged that the agreement is a self-serving document. This is a wrong allegation made repeatedly trying to impress the bench during the proceedings that the agreement is a sham transaction entered into with an unrelated 3rd Party.
The agreement has been acted upon and adhered to by the appellant company and foreign company. As on today after a lapse of 12 years the appellant company has completely exited the pesticide business and the purchaser company is one of the top manufacturer exporter of pesticides from India, and one of the good tax payers.
The LD DR has classified such a genuine commercial agreement as a sham transaction to support his argument for taxability of non-compete fee received by the appellant company.
Sd/-
(Mehul K.Patel)
Advocate
7.5.12″
7. We have heard both the sides at length. We have also perused the documents filed before us in and case-laws cited. At the outset, it is worth to mention that the income-tax Act witnessed a change in the related provisions, therefore, vide Finance Act, 2002 (with effect from 01/04/2003) [A.Y. 2003-04] a sub-section (va) of section 28 reads as under:-
Profits and gains of business or profession.
Section 28: The following income shall be chargeable to income-tax under the head Profits and gains of business or profession:-
[(va) any sum, whether received or receivable in cash or kind, under an agreement for—
(a) not carrying out any activity in relation to any business; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.
Provided that sub-clause (a) shall not apply to—
(i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head “Capital gains”;
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.
Explanation : For the purposes of this clause,-
(i) “agreement” includes any arrangement or understanding or action in concert,-
(A) whether or not such arrangement, understanding or action is formal or in writing; or
(B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;
(ii) “service” means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.]
7.1 For the purpose of giving certainty to taxation of receipts in the nature of non-compete fees and fees for exclusivity rights, the Finance Act, 2002 had included within the scope of “Profits and Gains of business or profession” any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business. Although it is clear on perusal of above amendment that the intention of the Legislature was to subject the above type/nature of receipts to tax only with effect from A.Y. 2003-04, but it was not mandated that all such receipts shall be taken as non-compete fees. Therefore, it is absolutely necessary to ascertain the nature of the receipts before arriving at any conclusion. First of all, it is necessary to examine the character of the receipt that whether it is a Revenue Receipt or a Capital Receipt. If the capital receipt is having the character of non-compete fees, then the law as pronounced by several Courts prior to the aforesaid amendment shall apply, otherwise not. Therefore, in the following paragraphs, we have endeavoured to ascertain the true nature of the receipt as far as this assessee is concerned. It is also worth to note that a payment changes its character in the hands of the recipients. A uniform decision cannot be taken specially in a circumstance when the involvement of the recipients in a transaction had a different role to play. Therefore, we have examined in detail the terms and conditions of the Joint Venture dated 03/07/1999 executed between Hoechst Schering AgrEvo GmbH, a corporation organized and existing under the laws of Germany and having its Registe4red Office at Miraustrasse 54 13509 Berlin Germany (hereinafter called “AgroEvo GmbH”) Hoechst Schering AgrEvo S.A., a Societe Anonyme with a capital of FF 242,000,000, incorporated under the laws of France, registered with the Commercial Register of Enry under the number B 393 339 585, having its main offices at Les Algorithmes, Immeuble Thales, Saint Aubin, 91197 Gif sur Yvette, France, (hereinafter referred to as “AgrEvo”). Party of the first part and Mitsu Industries Limited, a company organized and existing under the Laws of India with a capital of Rs. 5,00,00,000/-, having its registered office at 304/2, H Phase, GIDC Vapi – Gujarat 396 195, India, (hereinafter referred to as “MIL”) and the following Directors – Mr. Yunus Gafulbhai Bilakhia, born on 13th October, 1957 in Vanda, Bhavnagar, Gujarat, domiciled at “Parishram”, Vapi-Daman Road, Chala, Vapi 396 191; Mr.Anjum Gafulbhai Bilakhia, born on born on 2nd August, 1961 in Vanda, Bhavnagar, Gujarat domiciled at “Parishram”, Vapi-Daman Road, Chala, Vapi 396 191; Mr. Zakir Gafulbhai Bhilahia, born on 20th February, 1970 in Vanda, Bhavnagar, Gujarat, domiciled at “Parishram”, Vapi-Daman Road, Chala, Vapi 396 191; (hereinafter referred to as “the Confirming Parties”, acting jointly and severally) (MIL and the Confirming Parties are hereinafter wherever the context so requires collectively referred to as “Mitsu”), Mr. Rashida Y. Bilakhia, born on 10th August, 1961 in Fifad, Bhavnagar, Gujarat, domiciled at ‘Parishram’, Vapi-Daman Road, Chala, Vapi 396 191; Mrs.Hanifa A.Bilakhia, born on 26th March, 1967 in Mohwa, Bhavnagar, Gujarat, domiciled at ‘Parishram”, Vapi-Daman Road, Chala, Vapi 396 191; Mrs. Jiluben G.Bilakhia, born on 22nd February, 1938 in Jasadan, Rajkot, Gujarat, domiciled at ‘Parishram”, Vapi-Daman Road, Chala, Vapi-396 191; Ms. Anima Zakir Bilakhia, born on 30th July, 1975 in Bharuch, Gujarat, domiciled at ‘Parishram”, Vapi-Damn Road, Chala, Vapi 396 191; (hereinafter collectively referred to as ‘Mrs. Bilakhias’, acting jointly and severally) as party of the second part. It was noted by the AO that the amount of non-compete fees of Rs. 25.5 crores was paid as under:-
|
1. |
Shri Anjum Bilakhia | Rs.10.00 crs. |
|
2. |
Shri Yunus Bilakhia | Rs. 5.50 crs. |
|
3. |
M/s.Mitsu Pesticides Ltd. |
(now changed to M/s.Mitsu Ltd.)Rs.10.00 crs.
7.2 In this regard, one of the Recital No.10 is worth reproduction.
“10. Whereas pursuant to the MOU, AgrEvo GmbH and the Confirming Parties agreed to form a joint venture in MIL for the purpose of researching, developing and manufacturing agrochemical and environmental health products beginning with synthetic pyrethroid products and their intermediates and for the purpose it is agreed that MIL will first transfer its entire non-pyrethroid business to Mitsu Pesticides Limited, a company incorporated under the Companies Act, 1956 so as to make the net book value of the Assets (term defined hereafter) and MIL’s Debts (term defined hereafter) to be Rupees Ninety Two Crores and thereafter AgrEvo will acquire 51% of the paid-up equity share capital of MIL from the Confirming Parties at or for the consideration of Rupees Two Hundred Fifty Three point Zero Nine Crores;”
..
“12. Whereas before the steps of restructuring mentioned in the above recital will be taken, the Parties will enter into an Escrow Agreement whereby AgrEvo will deposit Rs. 278.60 Crores to assure Mitsu that AgrEvo shall acquire 51% of the paid up capital of MIL for Rs. 253.09 crores and pay Rs. 25.51 crores as non-compete fees, after Mitsu shall have taken the agreed steps of restructuring of MIL and complied with other terms and conditions mentioned therein;”
…
“14. Whereas Mrs. Bilakhias are being made parties to this Agreement, as they have been shareholders of MIL, but in the future, may cease to be the shareholders and only for the purpose of the non-compete obligations undertaken by them under Article 13 and the rights and obligations under Article 12 to the extent applicable.”
7.3 As per Article 2 of the said J.V., the position of the share capital of the company as per clause 2.6 was narrated. The objection of the CIT-DR was that as per the pattern of the share capital of the company, there was no reference of holding any share by the assessee, i.e. Mitsu Limited. Further, our attention has also been drawn on clause 3.5, i.e. “Transfer of Shares held by MIL in MINT”. It is mentioned that at the time of transfer of the non-pyrethroid assets of MIL to Mitsu Pesticides Limited, which shall be prior to the Closing Date, Mitsu Pesticides Limited shall pay the entire consideration amount payable for the non-pyrethroid assets, including for the shares held by MIL in MINT and other companies. Provided however, transfer of shares held by MIL in MINT being subject to RBI approval, the same shall be transferred to Mitsu Pesticides Ltd. only after obtainment of the approval of RBI. It is agreed and intended that the shares held by MIL in MINT do not and shall not form part of the Assets and MIL shall hold the shares of MINT in trust for Mitsu Pesticides Limited till obtainment of the RBI approval for transfer of the MINT shares to Mitsu Pesticides Limited. Immediately upon execution hereof, Mitsu hsall make the necessary application to RBI for transfer of the shares of MIL in MINT to Mitsu Pesticides Limited. In the event of the RBI directing any other price for sale and transfer of MINT shares to Mitsu Pesticides Limited, the parties shall give necessary effect thereto by adjustment of price. Before Closing, Mitsu shall cause MINT to enter into a non-compete agreement to AgrEvo’s satisfaction as to the form and content thereof which shall reflect the provisions of Article 13(a) dealing with the Confirming Parties’ obligations of non-compete and a confirmation to the effect that MINT shall not claim any compensation for the action to be taken to give effect to the provisions of Article 3.1.1. On account of this agreement, AgrEvo had agreed to purchase fully paid up equity shares representing 51% of the paid up equity share capital and voting rights of MIL for a price of 253.09 crores. As far as the conduct of the business in THE INTERAGNUM period i.e. from 01/06/1999 was concerned, it was agreed upon between the parties that MIL will carry on non-pyrethroid line of business with effect from 01/06/1999 until the sale is actually transferred for and on behalf of Mitsu Pesticides Ltd. Thereafter, our attention was drawn on the non-competition obligation, i.e. Article 13. The first clause says that as long as the confirming parties hold shares in the company for a period of 4 years, thereafter the confirming parties themselves or any of them directly or indirectly through any other Affiliate(s) of them or any of them or howsoever shall refrain from any activity which may compete directly or indirectly with the business of the Company relating to the Products. Further, our attention has also been drawn on (clause b) according to which Mitsu shall use its best efforts to cause all Directors, Officers, Personnel of MIL and MINT to undertake in writing not to engage directly or indirectly in any activity which may compete with the company business. Thus, ‘clause c’ states that AgrEvo shall pay Rs. 25.5 crores to the persons specified in the “Exhibit” as consideration for non-competition covenant set forth in Article 13. There was a reference of “confirming parties” in one of the clauses of Article 13 and in this connection our attention was drawn on ‘clause f’, reproduced below:-
“(f) Wherever the reference is made to ‘the Confirming Parties’ in this Article, the same shall also include Mrs Bilakhias. Mrs. Bilakhias have been merely shareholders in the Company without being actually involved in the day to day affairs of the Company. Eventhough they may cease to be the shareholders in the Company, they have agreed to be bound by the obligations under this Article. Mrs. Bilakhias, if they remain shareholders of the Company after Closing shall also be bound and be entitled to the obligations and the rights respectively, applicable to the Confirming Parties under Article 12 as well, as if they are the Confirming Parties. Subject to the aforesaid, Mrs. Bilakhias shall have no rights or obligations under any other provisions of this Agreement.”
7.4 Therefore we have examined the signatories of this agreement and we have noted that on one hand, this agreement was signed for Hoechst Schering AgrEvo GmbH and Hoechst Schering AgrEvo S.A. and on the other hand, this agreement was signed by Mitsu Industries Ltd. and following are the confirming parties:-
1. Yunus Gafulbhai Bilakhia,
2. Anjum Gafulbhai Bilakhia and
3. Zakir Gafulbhai Bilakhia
7.5 In the light of the above facts, now it is evident that the assessee-company i.e. Mitsu Limited was promoted by one Shri Anjum G.Bilakhia and his brother Shri Yunus G. Bilakhia during the year 1991. The assessee-company was originally known as “Mitsu Pesticides Ltd.”. Later on, its name was changed as “Mitsu Limited”, the assessee. As we have noted earlier, the assessee-company had purchased on slump-sale basis the Non-Synthetic Pyrethroid division (NSP) of the Mitsu Industries Ltd. Simultaneously, a development took place according to which M/s. Hoechst Schering AgrEvo, a foreign company, acquired controlling interest of Mitsu Industries Ltd. vide JV Agreement dated 03/07/1999. So, a question has been raised that once a division has been siphoned out by Mitsu Industries Ltd. which was purchased as a slump-sale by the assessee, then why a non-compete fees was paid to the assessee. From the JV dated 03/07/1999, the transaction was therefore only in respect of Synthetic Pyrethroid division (SP) which was left for transaction with M/s. Mitsu Industries Ltd. In this situation, it was vehemently argued from the side of the Revenue that the assessee-company had nothing in hand to offer competition to M/s. Hoechst Schering AgrEvo. Rather, there should not be any apprehension in the mind of the Hoechst Schering AgrEvo that the assessee-company shall be in a position to give any competition. According to the argument of ld. DR, it could be an ex-gratia payment but it was not a non-compete fees which can be termed as a capital receipt in the hands of the assessee.
7.6 There are few ingredients which determine whether a payment is in the nature of “non-compete fees” or not. The concept of “non-compete fees” is that an ongoing business entity should be protected from a competition by an outgoing entity. Therefore, the embargo of non-competition has to be provided through an agreement in writing. Such an agreement should be a legal document, so that enforceable in the eyes of law. The clauses of the agreement ought to be clear and specific through which the “transferor” be abstained from competition in respect of the business transferred in favour of a “transferee”.
7.7 Thus, we are of the opinion that the promise of non-competition has to be one-to-one promise. A promise for not to take up any assignment or trade which creates competition has to be made by a “person” and such undertaking ought to satisfy the other “person” who is making the payment in lieu of the said promise.
7.8 We may like to add that one has to keep in mind that non-compete is not an asset such as, franchise, licence, good-will, etc. Non-compete is not an existing asset which is being transferred. It is plainly a promise, rather a gentleman promise, not to compete in that field of business for which on transfer a consideration is received. Therefore, in our humble opinion, the payment of non-compete fees is made with the soul purpose to Ward Off a competitor.
7.9 Applying a common man understanding, a payee should be apprehending a definite and ascertained competition likely to be infested. Because of that certainty a payee consider it imminent as also necessary to pay an amount of non-compete fees to safe-guard its future business prospect.
7.10 In case of a breach, the payee has to be empowered with a suitable legal remedy. Therefore, an agreement should be legally binding on the signatories of both the sides to the effect so that it confers right to sue in case of breach. Hence, it ought to be an enforceable right in the code of law.
7.11 It is worth to clarify that when a business man signs a negative covenant not to carry on any manufacturing activity or a trade activity in respect of a product for a certain period of time, it amounts only to self imposed restriction and the payment received as a fees is not a transfer. Thus, such a clause neither constitute a sale or exchange or relinquishment of an asset. Rather, it is seen in general that in case of acquisitions the amount of non-compete fees is in addition to the amount of consideration settled among the parties.
7.12 Most important is the taxability of non-compete fees, which according to us depends upon certain factors, such as, the position of the recipient of the non-compete fees with regard to the business before and after the non-compete covenant coming to operation. It also depends upon the type of assets transferred with whom the clause of non-competition is attached. Therefore, we have thought it proper to frame certain questions to be answered in the light of the facts of this case.
(a) Whether the recipient of the “non-compete fees” is in a position to offer any competition?
In the present case, on due appreciation of facts, we are of the considered view that the assessee was not the party of the agreement and assessee as a person, i.e. M/s.Mitsu Limited – a company was not a position to offer any competition.
(b) Whether “non-compete fees” is paid along with the consideration for transfer of assets of a business?
On careful reading of the clauses of the impugned agreement, it is evident that no asset was transferred by the assessee. The impugned amount of alleged non-compete fees was not a payment which was found to be linked with any of the asset transferred through the said agreement.
(c) Whether non-compete obligation is a part of the transaction through which certain capital assets are transferred?
As far as the assessee is concerned, he cannot be said to be a party to the transaction through which business were transferred. There was no apparent logic for such payment to the assessee.
(d) Whether the recipient is a signatory, so that under legal obligation to honour the commitment?
As far as the assessee is concerned, no such legally enforceable obligation was created against the assessee. A Company being a separate legal entity is always represented by a legally authorized representative. There was no such legally authorized representation in the said agreement for and on behalf of the assessee-company.
8. At the outset, ld. AR has cited a decision of ITAT “D” Bench Ahmedabad pronounced in the case of the Directors, namely, Shri Yunush G. Bilakhia (supra) and Anjum G. Bilakhia v. Asst. CIT in ITA Nos.3086 & 3087/Ahd/2003 respectively for A.Y. 2000-01 order dated 04/01/2008. The foremost distinction is that these two Directors are the parties of the agreement. In the capacity of Directors of M/s.Mitsu Industries Ltd., they have signed the JV Agreement, therefore the non-compete obligation was applicable on these two signatories. On those facts, it was held that the non-compete fees was not chargeable to tax in the hands of these two persons.
8.1 In this regard, we have also considered a case-law which is heavily relied upon by the assessee. In the case of Guffic Chem (P.) Ltd. (supra), the assessee was carrying on the business of manufacturing and selling of pharmaceutical preparations. The assessee has received a sum of Rs. 50 lacs from Ranbaxy as non-competition fees. The assessee agreed to transfer its trade-mark to Ranbaxy and in consideration for such transfer, the assessee agreed that it shall not carry on directly or indirectly the business hitherto carried on by it. On those facts, the Tribunal had held that the amount was a capital receipt, but the High Court reversed the decision. On appeal, the Hon’ble Apex Court reversed the decision of High Court and held that the payment was in the nature of a capital receipt primarily because of the reason that the payment was prior to April 1, 2003 when Parliament stepped in two specifically tax such receipts. As far as the facts of the present appeal in hand is concerned, there was no transfer of any trade-mark or any asset for which the assessee in question has received any consideration. There was no agreement between the assessee and the Hoechst AgrEvo. Most importantly, there was no restrictive covenant for not carrying on the business of manufacturing of Pesticides by the assessee. We therefore hold that the cited decision of Hon’ble Apex Court by ld. AR is not applicable on the facts of the case. We hereby hold that in the absence of any loss of income on account of existence of a restrictive covenant, there was total absence of holding the receipt in question as capital receipt.
8.2 In the result, we hereby hold that the receipt in question has been rightly taxed in the hands of the assessee as revenue receipt. Grounds raised in this regard are hereby dismissed.
9. Ground No.5 reads as under:-
5. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of learned Assistant Commissioner of Income Tax in disallowing a sum of Rs.4,24,730/- out of contribution to PF/ESIC. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
9.1 On the basis of the month-wise details of payment of PF & ESI AO has noted that the payments have not been made within the due date. As per AO, the payment of PF should be within 15th day and the payment of ESI should be within 21st day of the succeeding month. AO has drawn a conclusion that since the payments were beyond the due dates, therefore the impugned amount was added back in the total income of the assessee. When the matter was carried before the ld. CIT(A), it was held that section 43B does not condone late payment. The disallowance was upheld.
10. Now, before us the assessee has furnished the details of payment which were stated to be placed before the Revenue Authorities as well. The list of payment of ESI shows that the payments have actually been made in the succeeding months and not beyond that. Likewise, in the case of PF payment, it was noticed that the amount was deposited within the succeeding month. In view of the evidence on record, reliance was placed on two decisions; namely CIT v. Vinay Cement Ltd. [2007] 213 CTR 268 (SC) and CIT v. Alom Extrusions [2009] 319 ITR 306. In the case of Alom Extrusions (supra), the Hon’ble Apex Court has held that the omission of second proviso to section 43B and the amendment of first provision by Finance Act, 2003 were made to bring about the uniformity in payment of tax, duty, cess and fees on one hand and contributions to employees’ welfare funds on the other hand. The change in the said provision through amendment was curative in nature and thus effective retrospectively with effect from 1st April-1988. Earlier, in the case of Vinay Cement Ltd. (supra), the Apex Court has held that the contribution made to Provident Fund before filing of the return could not be disallowed u/s.43B of IT Act as it stood prior to the amendment with effect from 01/04/2004. In the light of these decisions and considering the dates of payment, we are of the view that the disallowance was wrongly made by the AO. We hereby direct to delete the addition.
11. Ground No.6 reads as under:
6. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of learned Assistant Commissioner of Income Tax in making addition of Rs. 15,54,260/- out of advances written off during the year. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
11.1 The AO has noted that during the course of assessment proceedings, the assessee-company had vide a letter dated 4/3/2002 voluntarily offered for taxation by disallowing a sum of Rs. 15,54,260/-. In view of the said voluntary offer, the impugned amount was added back to the income of the assessee. When the matter was carried before the first appellate authority, it was held that the impugned amount was offered for taxation and it was not a case of mistaken impression of law, therefore, in the absence of any other material, the action of the AO was upheld. The explanation of the assessee was that the said amount was paid for supply of materials/services. As per the said explanation, the assessee could not avail the services. The assessee was also not in a position to recover the advances. This explanation of the assessee was not supported by any cogent evidence. Merely writing of an amount do not by itself qualifies for deduction unless and until it is proved beyond doubt that the expenditure/claim wholly and exclusively for the purpose of the business. The case of CIT v. Abdul Razak & Co. [1981] 136 ITR 825 was decided by the Hon’ble Court on the facts of the case because in that case the assessee was engaged in the business of Commission Agency. The assessee has advanced the amount to the principle which was written off. On those facts, the Hon’ble Court has held that the written off of the amount was allowable as a business loss. On the contrary, the assessee has not placed any supporting evidence through which it could be established that the said write off was for the purpose of the business. Rather, assessee himself had offered the said amount for tax during the course of assessment proceeding, hence the view taken by the Revenue Authorities for this disallowance is hereby confirmed. This ground is dismissed.
12. Ground No.7 reads as under:-
7. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in not directing the Learned Assistant Commissioner of Income Tax to correctly compute the deduction admissible to the appellant company U/s.80IA/80IB of the Income Tax Act.
12.1 At the outset, ld. AR has informed that the ground in question was a general ground which was later on corrected by filing an additional ground. The additional ground reads as under:-
“02. On appreciation of the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals) ought to have directed to Learned Assessing Officer not to exclude the following items of income for the purpose of calculating deduction U/s.80IA/ 80IB of the Act.
| Export benefit |
69323263 |
| Interest received |
600305 |
| Rent |
95000 |
| Discount |
688696 |
| Exchange difference |
1500103 |
| Misc.Receipt |
137463 |
| Advance license | |
| Benefit receivable |
978959 |
| Insurance Claim |
27930 |
| Sale of scrap |
437903″ |
12.1.1 Even in regard to additional ground, at the outset, ld. AR has informed that the issue was not addressed by ld. CIT(A). Rather, in the concised chart pertaining to grounds of appeal, it is suggested that in the absence of non-adjudication by ld. CIT(A), the matter should be restored to his file. Having considered the submissions as also the relevant orders of the Revenue Authorities, we deem it proper to restore ground No.7 along with the additional ground back to the stage of ld. CIT(A) for de novo adjudication as per law. Resultantly, this ground and the additional ground may be treated as allowed for statistical purposes only.
13. Ground No.8 reads as under:-
8. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of the Learned Assistant Commissioner of Income Tax of excluding interest received to the tune of Rs.6,00,305/- while granting deduction U/s.80HHC of the Income Tax Act, 1961. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
13.1 Assessee has furnished the details of the interest received during the year. It was informed that the interest was in respect of margin money against availing L/C facility. The assessee has received interest from PNB, Dena Bank and State Bank of India. The AO had reduced 90% of the interest from profits of the business while computing the deduction u/s.80HHC. In a cryptic manner, ld. CIT(A) has held that there was no force in the ground, hence action of the AO was upheld. Now, in this regard, the only contention of the assessee before us is that instead of the total interest amount, a netting is to be granted as held in the case of CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475. Once a legal position is now settled, then the sub-ordinate authorities are required to follow the view taken by the Hon’ble Courts. Hence, in the interest of justice, we hereby restore this issue back to the stage of ld. CIT(A). The assessee is directed to furnish the complete interest account, so as to inform the ld. CIT(A) about the nature of interest received and thereafter assessee is also to furnish the details of the interest expenditure which was now claimed to be netted against the interest received. With these remarks, this ground of the assessee may be treated as partly allowed that too for statistical purposes.
14. Ground No.9 reads as under:
9. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in not directing the Learned Assistant Commissioner of Income Tax to correctly compute the deduction admissible to the appellant company U/s.80HHC of the Income Tax Act.
14.1 At the outset, ld.AR has informed that ground No.9 is general in nature, therefore specific ground has been raised by filing additional ground which is now reproduced below:-
“03. On appreciation of the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals) ought to have directed the Learned Assessing Officer to grant deduction U/s.80HHC of the Act by including non compete fees received by the appellant as profits of business in view of the specific findings that such income has got a nexus with the manufacturing business of the appellant company.”
14.2 The assessee is asking for a claim through this additional ground for the first time at the stage of second appeal. We have been informed that no such claim was made in the past either before the AO or before ld. CIT(A). In the light of the decision of Goetz (India) Ltd. v. CIT [2006] 284 ITR 323 now it is very well settled that a claim of deduction is required to be made before AO by filing a return or by filing a revised return. Otherwise also, we are not convinced by this additional ground because the non-compete fee which was held by us as a revenue receipt had anything to do with the export activity. The grant of deduction u/s.80HHC depends upon the export activity of an assessee. Since the alleged non-compete fee had no nexus with the export activity, therefore not entitled for deduction u/s.80HHC of the Act. Resultantly, this additional ground is dismissed.
15. Ground No.10 reads as under:
10. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of learned Assistant Commissioner of Income Tax of including Excise duty and Sale Tax in “total turnover” for the purposes of granting deduction U/s.80HHC of the Income Tax Act, 1961. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
15.1 The AO had included the Sales Tax and Excise Duty in the total turnover while computing the deduction u/s.80HHC. The said action of the AO was confirmed by the ld. CIT(A). Now, this issue is straightway covered by CIT v. Lakshmi Machine Works [2007] 290 ITR 667. It is held that Excise Duty and Sales Tax are not includible in total turnover in the formula contained in section 80HHC(3) of IT Act. We therefore direct the AO to examine the correct factual position and recalculate the computation of deduction u/s.80HHC in the light of the law pronounced by the Hon’ble Supreme Court. This ground is allowed as per the directions.
16. Ground No.11 reads as under:
11. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of learned Assistant Commissioner of Income Tax in not accepting the claim of the appellant company at the time of assessment proceedings i.e. gift given by the appellant company to its employees as an allowable expenditure to the tune of Rs. 1,312,260/-. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted.
16.1 The appellant had given gifts to employees amounting to Rs. 56,71,933/-. It was stated that the amount was treated as perquisite in the hands of the employees. It was also informed that the TDS was deducted. The AO has disallowed the same, which was confirmed by ld. CIT(A).
17. Now, before us a decision of the Tribunal in assessee’s own case is placed, wherein ITAT “A” Bench Ahmedabad vide order dated 19.11.2004 titled as “Bilag Industries (P.) Ltd. v. ITO (in IT Appeal Nos.1584 & 1585/Ahd/2001 for A.Y. 2000-01) has held as under:-
“5. We have duly considered the rival contentions. We do not find any merit in the contentions of the assessee. The ld. Assessing Officer has rightly held that value of articles distributed by the assessee to its employees comes within the ambit of ‘perquisites’ employed in Section 17(2)(iii)(c) of the IT Act which is covered under the definition of ‘Salaries’ as provided in Section 17(i)(iv) of the Act. Therefore, before distributing articles to the employees, the assessee ought to have deducted the tax at source on the value of such articles. How the definition of ‘gift’ employed in Transfer of Property Act has any relevancy with the dispute raised by the Assessing Officer is not discernible from the written submission? As far as the alternative contention is concerned, such prayer was not raised before the Assessing Officer nor has been shown to us that value of such assets have been shown by the assessee in its balance-sheet or at any stage, these articles have taken back by the assessee from its employees. Hence, we do not see any good reason to interfere in the orders of the Revenue authorities below. The ld. Assessing Officer has rightly charged the interest u/s.201(1A) of the Act.”
17.1 In the light of the aforesaid decision, this ground of the assessee is hereby allowed.
[B] Revenue’s appeal, ITA No.3119/Ahd/2003 – A.Y. 2000-01
18. Ground No.1 reads as under:-
1. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in deleting addition on account of sales promotion expenses amounting to Rs. 26,813/-.
18.1 It was noted by the AO that under the head “sales promotion” the assessee had debited the purchase of gift articles for customers or their representatives. The assessee had not furnished the specific details and the purpose of the expenditure. Therefore, 1/5th of the sales promotion expenses amounting to Rs. 26,813/- was disallowed being not wholly and exclusively incurred for the purpose of the business. However, the ld. CIT(A) has reversed the finding of AO. Having heard the submissions of both the sides, we are of the view that ld. CIT(A) has not assigned any cogent reason for disagreeing with the AO specially when the AO had commented that the assessee-company had failed to furnish the specific details. According to us, the action of the AO of 1/5th disallowance was fair and reasonable by holding that the expenditure was not wholly incurred for the purpose of the business. Resultantly, we hereby reverse the finding of CIT(A) and uphold the action of the AO, thus this ground of the Revenue is hereby allowed.
19. Ground No.2 reads as under:
2. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in deleting addition on account of foreign travel expenses amounting to Rs. 1,81,130/-.
19.1 Out of the total traveling expenses of Rs. 28,98,347/-, it was noted by the AO that the assessee had debited foreign travel expenses of Rs. 9,05,648/-. The assessee was asked to furnish the details as prescribed under Rule 6D of IT Rules. According to AO, the duration of the stay in foreign country was not furnished. The AO has thus held that 1/5th of the expenditure was to be disallowed amounting to Rs. 1,81,130/-. The said addition was contested before ld. CIT(A) who has held that the issue was covered by an order of the ITAT Ahmedabad, cited before CIT(A). With this background, we have heard both the sides. In this regard, it is worth to reproduce a portion of the explanation of the assessee, reproduced from the assessment order as under:-
“9. Disallowance out of Foreign Travelling Expenses – Rs. 1,81,130/-
On going through the Profit & Loss account A/c. in schedule – 18 it is observed that the assessee has debited foreign travel expenses of Rs. 9,05,648/- out of traveling expenses of Rs. 28,98,347/-. The assessee was required to furnish name, designation of the person, duration of stay in various cities of foreign countries and justification of the stay of particular number of days in a particular city of foreign countries as required under Rule 6D. In the details filed with the letter dated 08.02.2002, the assessee has though given name of the person and countries visited but has not given duration of stay in each country. For example, Shri Satish Khanna, is a Director has visited Japan, Shri M. Coumara Radja is a Manger, has visited China and Hongkong has not been separately mentioned as well as justification of stay in each of the country has not been furnished. In remarks column only “the total expenses incurred by Shri M. Coumara Radja” is mentioned. Another example is of Shri V.N. Pandya, is a G.M., who has visited Chicago & Humburg City from 14.-2.2000 to 19.02.2000. However, duration to stay in each place has not been separately given. Justification regarding the visit of abroad as well as justification of number of days stayed in a particular city of foreign country either wholly or mainly for the business purpose of the assessee has not been given. Similar is the position as regards to various other visits made by the persons, the expenditure of which has been debited by the assessee. It was contended that the assessee is having export of around Rs. 37.75 crore (gross). Accordingly various Executives are necessarily required to travel to abroad to study the market and development of the market. It may be correct that the assessee is having export business and requires it employees to go abroad. However, the expenditure of foreign travel is allowable only for so many number of days which have been either wholly or mainly used for the purpose of the business of the assessee. In fact, rule 6D has specifically provided aforesaid condition and accordingly the expenditure for those days which have been proved to be spent for the business purpose is to be allowed. In absence of specific justification given by the assessee in respect of various visits to foreign countries, it is held that part of days stayed by different persons is not used for the business purpose of the assessee company. It is further noticed that in most of the cases, the assessee has not even given the total duration of stay in foreign country in a particular visit what to talk that about in stay in particular city and in a particular country separately. From the aforesaid facts, it is very clear that the veracity of aforesaid expenses being incurred wholly and exclusively for the purpose of the business of the assessee is not verifiable. Therefore, 1/5th of the expenditure is disallowed under rule 6D, which comes to Rs. 1,81,130/-.”
20. Considering the export activity of the assessee and the reasons given by the assessee for the visit of the Employees and Managers out of country. It appears that the expenditure towards foreign travel was for the purpose of the assessee’s business. It is not the case of the Revenue that the employees as also one of the Director have visited the foreign country for their personal purposes. The AO has presumed that part of the expenditure was not wholly and exclusively for the purpose of the business but according to us, there was no basis for such presumption. We therefore hold that considering the nature of visits to foreign countries the foreign travel expenditure deserves to be allowed. The view taken by ld. CIT(A) is hereby upheld and this ground of the Revenue is dismissed.
21. Ground No.3 reads as under:-
3. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in deleting addition on account of miscellaneous expenses amounting to Rs. 40,842/-.
21.1 Under the head “miscellaneous expenses” a sum of Rs. 2,04,730/-was stated to be incurred for tea, coffee, etc. 1/5th of the said expenditure, i.e. Rs. 40,842/- was disallowed by the AO. The CIT(A) has reversed the disallowance and directed to allow the claim. We have noted that no specific reason given by the AO and merely disallowed 1/5th of the expenditure, although it was informed that the expenditure was in the nature of providing tea and coffee to the employees and staff. Following the decision of Sayaji Iron & Engg. Co. v. CIT [2002] 121 Taxman 43(Guj.), we hereby affirm the finding of ld. CIT(A) and dismiss this ground of the Revenue.
22. Ground No.4 reads as under:-
4. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in deleting addition on account of registration expenses amounting to Rs.25,000/-.
22.1 The assessee has incurred expenditure as a registration fees for new products. It was noted by the AO that a sum of Rs. 25,000/- was incurred for such registration, which was disallowed by him. When the matter was carried before the first appellate authority, the said expenditure was held as Revenue Expenditure. In the light of the undisputed facts that the assessee is a manufacturer as also exporter of pesticides, therefore it was a business requirement to register its products abroad. In view of this, we hereby confirm the finding of ld. CIT(A) and dismiss this ground of the Revenue.
23. Ground No.5 reads as under:
5. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income tax (Appeals) Surat has erred in deleting addition on account of valuation of closing stock including excise duty on finished goods amounting to Rs.4,84,127/-.
23.1 As per AO, while valuing the closing stock, the assessee has not considered the Excise Duty paid on the goods. Accordingly, the addition was made. Before ld. CIT(A), it was explained that the assessee has consistently valued its stock at cost. Ld. CIT(A) has accepted the assessee’s contention and allowed the claim. Now this issue is squarely covered by the decision of CIT v. Indo Nippon ChemicalsCo. Ltd. [2003] 261 ITR 275. Resultantly, this ground is hereby dismissed.
24. Ground No.6 reads as under:-
6. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in allowing to include the following items while calculating profit of business U/s.80HHC:-
| (1) Scrap Sale | Rs. 437903/- |
| (2) Insurance claim | Rs. 27930/- |
| (3) Exchange Difference | Rs.1500103/- |
| (4) Advance licenses benefit | Rs. 978959/- |
| (5) Discount | Rs. 688696/- |
| (6) Miscellaneous receipts | Rs.137463/- |
24.1 In this regard, the ld. AR Mr. M.K. Patel has informed that each head of receipts have been considered by several Courts and a view has to be taken in the light of the following decisions:-
(a) Scrap Sale – Dy. CIT v. Harjivandas Juthabhai Zaveri [2002] 258 ITR 785
Nirma Industries Ltd. v. Asstt. CIT [2005] 95 ITD 199
(b) Exchange difference – CIT v. Amba Impex [2006] 282 ITR 144
(c) Advance Licence Benefit – United Phosphorous Ltd. v. Jt. CIT [2002] 81 ITD 553 (Ahd.)
CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284
24.2 Further, in respect of Insurance claim, discount and miscellaneous receipts, the main contention of the assessee is that the receipts are having direct nexus with the export activity of the assessee. The ld. CIT(A) has given a finding that these receipts were in fact having a direct nexus with the business activity of the assessee. In the absence of any contrary material as well as following the decisions quoted hereinabove, we find no force in this ground of the Revenue, hence dismissed.
25. Ground No.7 reads as under:-
7. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ought to have upheld the assessment order of the Assessing Officer passed U/s.143(3) of the Income Tax Act.
25.1 This ground is general in nature needs no independent adjudication.
26. In the result, Assessee’s appeal as well as Revenue’s appeal both are partly allowed.
