Case Law Details
IN THE ITAT DELHI BENCH ‘B’
Control & Switchgear Contractors Ltd.
V/s.
Deputy Commissioner of Income-tax, Circle-3(1)
IT Appeal No. 697 (Delhi) of 2010
[Assessment Year 2004-05]
AUGUST 9, 2012
ORDER
K.D. Ranjan, Accountant Member
This appeal by the assessee for Assessment Year 2004-05 arises out of the order of the Commissioner of Income-tax (Appeals)-VI, New Delhi. The grounds of appeal raised by the assessee are reproduced as under:-
“1. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in upholding the action of the learned Assessing Officer in wrongly assuming jurisdiction in terms of Section 147 of the Income Tax Act, 1961. Further the reasons recorded for issue of notice u/s 148 were fully and truly disclosed in the return of income filed for the assessment year under appeal which was assessed u/s 143(1) of the Act and in the absence of any new material or new facts the Assessing Officer is not empowered to reopen an assessment u/s 147 irrespective of whether it is made under Section 143(1) or 143(3) as held by the Hon’ble Delhi High Court in ITA 109/2008.
2. The learned Commissioner of Income Tax (Appeals) has further erred both on facts and in law in upholding the action of the learned Assessing Officer in wrongly assessing u/s 28(va)(a) of the Act capital compensation received by the appellant company in lieu of giving up inter alia their right under Press note 18m to debar the collaboration from carrying out business in India without the permission of the Indian joint venture partner.
2.1 The learned Commissioner of Income Tax (Appeals) has further erred both on facts and in law in not considering that the ingredients of clause v(a) of Section 28 were not present in the impugned transaction and that the amount received was not a revenue receipts hit by the provisions of the aforesaid section.
2.2 The learned Commissioner of Income Tax (Appeals) has further erred both on facts and in law in upholding the action of the learned Assessing Officer in not substantiating his perception that the appellant stopped carrying out any activity in relation to any business and erred in ignoring the business results achieved by the appellant post the agreement, thereby not proving the condition precedent for applying the provision of Section 28(va)(a) of the Act.
3. The learned Commissioner of Income Tax (Appeals) has further erred both on facts and in law in not considering the appellant’s claim that in any case the impugned amount was a capital receipt in view of the fact that there was damage to the profit earning apparatus of the appellant.
4. The learned Commissioner of Income Tax (Appeals) has erred both on facts and in law in not considering the alternate plea of the appellant that the impugned transaction was covered by the provisions of Section 2(47) and Section 55(2) of the Income Tax Act and the resultant amount was taxable under the head “Capital Gains”, and as the appellant had deposited the capital gains in tax saving bonds as prescribed u/s 54(e) of the Income Tax act no tax was leviable.”
2. The first issue for consideration relates to reopening of assessment under sec. 147 of the Act. Facts of the case relevant to this ground of appeal are that the assessee filed its return of income declaring income of Rs. 3,88,72,503/- on 30.11.2004. The return of income was processed under sec. 143(1) on 28.02.2006. The assessee during the assessment proceedings for Assessment Year 2005-06 submitted that there were agreements between the assessee and La Telemecanique Electrique SA (TE), a French company namely for supply of technical information dated 28.11.1984; an agreement for technical services dated 28.11.1984; and a name license agreement dated 08.02.1985 and the agency agreement dated 01.11.1986. The assessee commenced commercial production in October, 1985. In September, 1988 some serious disputes arose between the Assessee Company and TE and both initiated legal proceedings against each other. With this background a multi-party settlement agreement was signed including Schneider Electric S.A. (SE). As a result of this agreement both agreed to put an end to legal proceedings and in view of the same payment of Rs. 12,12,18,990/- was made. However, the assessee in computation of total income furnished along with the return of income had shown the sum of Rs. 12,12,18,990/- as capital gain taking the cost of acquisition as ‘Nil’. The assessee had invested the said sum in capital gain bonds and claimed deduction under sec. 54EC of the equivalent amount which resulted in chargeable capital gains at ‘Nil’. The receipt has been claimed to be capital in nature (not taxable) as per the foot note to the computation of income. The Assessing Officer was of the opinion that the assessee’s case fell within the scope of (va) of sec. 28 and the agreement signed by the assessee did not envisage transfer of any rights covered by the proviso to clause (va) of sec. 28 of the Act. The AO therefore, after recording reasons initiated proceedings under sec. 147 of the Act. The assessing officer completed assessment by treating the sum of Rs. 12,12,18,990/- chargeable to tax u/s 28(va) of the Act.
3. Before the CIT(A) it was submitted by the assessee that proceedings under sec. 147 could not be initiated on the reasons which are not based on any new information/material suggesting income escaping assessment, coming to the possession of the AO subsequent to expiry of time limit for scrutinizing the return of income for regular assessment under sec. 143(3) of the Act. It was also submitted that a reading of reasons recorded did not disclose whether the AO, in fact, had any material or information based upon which he had reason to believe that any income had escaped assessment. It was not the belief of the AO that is material but such a belief must be based on certain reasons which in turn have to be based upon certain material. There was no indication to suggest as to on what new information or on what new material the AO had harboured the belief that the claim of the assessee of capital gains resulted in income escaping assessment. The AO merely wanted to verify the claim of capital gains made by the assessee and he had no information in his possession and did not have any material to form a belief that claim made by the assessee was erroneous or incorrect.
4. The learned CIT (A) on the facts and in the circumstance of the case observed that the assessee’s case fell within the main provisions of sec. 147 as the return of income was processed under sec. 143(1) of the Act. He placed reliance on the decision of the Hon’ble Supreme Court in the case of ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. 291 ITR 500, wherein it has been held that intimation under sec. 143(1)(a) could not be said that an assessment had been done. Since no assessment under sec. 143(1)(a) was made, the question of change of opinion would not arise. As regards the decision of Hon’ble Delhi High Court in the case of Batra Bhatta Co., 174 Taxman 444, it was observed that in that case the AO initiated proceedings under sec. 147 on the ground that the claim of the assessee required much deeper scrutiny. However, the facts of the assessee’s case were different. The reasons recorded gives indication during the proceedings for subsequent assessment years, that the assessee had filed letter dated 27.11.2007 thereby giving details of agreement between the assessee and TE. In view of the agreement and the resultant receipt, the AO had reason to believe that those receipts were taxable receipts under the profits and gains of business or procession and hence the income had escaped the assessment. The learned CIT(A) therefore, upheld the reopening of the assessment.
5. Before us it was submitted by the ld. AR of the assessee that jurisdiction under sec. 147 of the Act could not be exercised to make assessment on issue in respect of which there is no new material coming to the possession of the AO subsequently. He placed reliance on the decision of Hon’ble Delhi High Court in the case of Batra Bhatta Co. (supra). He further submitted that initiation of re-assessment proceedings on the basis of new material coming to the possession of the AO is sine qua non for assuming valid jurisdiction under sec. 147 of the Act, notwithstanding that re-assessment proceedings have been initiated pursuant to completion of regular assessment under sec. 143(3) or processing of return under sec. 143(1) of the Act. It was also submitted that all the material facts including the entry into the joint venture settlement agreement were fully and truly disclosed by the assessee in the notes to audited accounts for the Financial Year ending on 31st March, 2004 as also in the notes appended to computation of income for Assessment Year 2004-05. Similarly the material facts relating to the position adopted for claiming deduction of delayed payment of employer’s contribution to Provident Fund was also disclosed in the computation of income. Thus there was no new material that came to the knowledge of the AO during the course of assessment proceedings for Assessment Year 2005-06 which was not disclosed by the assessee in the return of income for Assessment Year 2004-05 that led to belief that income of the assessee had escaped assessment. The aforesaid material/information was before the AO when the AO decided not to select the return of income for regular assessment under sec. 143(3) though the issue of notice under sec. 143(2) of the Act was within the stipulated time. It was on the basis of reappraisal of existing information/material available on record that the re-assessment proceedings were initiated, which is not permissible. The learned AR of the assessee therefore, submitted that reopening of the assessment was bad in law.
6. On the other hand, the learned CIT-DR submitted that the return of income was simply processed under sec. 143(1) of the Act and therefore, no assessment under sec. 143(3) was completed prior to issue of notice under sec. 148 and hence initiation of re-assessment proceedings was valid. It was also submitted that during the course of assessment proceedings for Assessment Year 2005-06 the AO came to know about the settlement agreement between the assessee and TE. It was in this background that the AO examined the agreement and the nature of receipts of Rs. 12,12,18,990/-and found that the assessee’s case fell within the scope of sec, 28(va)(a) and the aforesaid sum was chargeable under the head “Profits & gains of business or profession” and not under the head “Capital gains”. The learned CIT-DR further submitted that the AO had also reason to believe that income to the tune of Rs. 2,08,800/- had escaped assessment in the light of decision of Hon’ble Madras High Court in the case of CIT v. Synergy Financial Exchange Ltd. 288 ITR 366 and also because the benefit of amendment to sec. 43B was available for employer’s contribution. Therefore, the AO had reason to believe that income for the year under reference had escaped assessment. The AO reopened the assessment on two grounds. The first ground for reopening the assessment related to taxability of revenue receipts of Rs. 12,12,18,990/- received from SEI and second ground of appeal was taxability of PF & ESI paid beyond the due date and was therefore, taxable under sec. 2(24)(x) read with sec. 36(1)(va). The assessee company had not challenged the second ground either before the CIT(A) or before the Tribunal. The learned CIT-DR has further submitted that the assessee’s case fell under main provision of sec. 147 and therefore, in view of decision of Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd., 291 ITR 500, processing of return under sec. 143(1) could not be treated as assessment. Therefore, there was no application of mind by the AO at the time of processing the return and hence question of change of opinion would not arise. The learned CIT-DR further submitted that the decision of Hon’ble Delhi High Court in the case of CIT v. Batra Bhatta Co. (supra) was not applicable to the facts of the assessee’s case. In that case the reopening of assessment was made on the ground that the claim of the assessee required much deeper scrutiny. He further submitted that during the course of assessment proceedings for Assessment Year 2005-06, the assessee filed letter dated 27.11.2007 thereby giving details of joint venture settlement dated 10.04.2003 between the assessee and TE. In view of the agreement and resultant receipts the AO had reason to believe that receipts were taxable under the head “Profits & gains of business or profession” and hence income had escaped assessment. The learned CIT-DR relying on the decision of Hon’ble Delhi High Court in the case of Rakesh Aggarwal v. CIT, 225 ITR 496, submitted that the findings in assessment for another year will constitute the material for reopening the case under sec. 147. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of Diwakar Engineers Ltd. v. ITO, 329 ITR 28 wherein assessment for Assessment Year 1977-78 to 1980-81 were based on the scrutiny of returns for Assessment Years 1981-82 to 1982-83 wherein certain cash credits were found in the books of accounts which were not genuine. The reopening of assessment was held to be valid. The learned CIT-DR also placed reliance on the following decisions:-
1. Raymond Woollen Mills Ltd. v. ITO 236 ITR 34 (SC).
2. Claggett Brachi Co. Ltd. v. CIT 177 ITR 409 (SC).
3. Bharat B. Patel v. Union of India 268 ITR 116 (Guj.).
4. Raj Woolen Industries v. ACIT 7 ITR (Trib) 339 (Del).
5. KKSK Leather Processor P. Ltd. 9 ITR (Trib) 788.
6. Ramesh Chander Singla v. CIT 330 ITR 288 (P&H).
7. Kalyanji Mavoji Co. v. CIT 102 ITR 287.
7. We have heard both the parties and gone through the material available on record. There is no dispute about the fact that return of income for the assessment year under consideration i.e. A.Y. 2004-05 was processed under sec. 143(1) of the Act. During the course of assessment proceedings for Assessment Year 2005-06 the assessee vide letter dated 27.11.2007 submitted the details of agreement between the assessee and TE according to which a sum of Rs. 12,12,18,990/- was received by the assessee. Based on this information, the AO reopened assessment under sec. 147 of the Act. Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra) has held that income escaping assessment in the case of an intimation under sec. 143(1)(a) is covered by the main provision of sec. 147 as substituted with effect from 1-04-1989 and initiating re-assessment proceedings in the case of intimation would be covered by the main provision of section 147 and not the proviso thereto. Only one condition has to be satisfied. Failure to take steps under sec. 143(3) will not render the AO powerless to initiate re-assessment proceedings when intimation under sec. 143(1) has been issued. The Hon’ble Supreme Court also held that the expression “reason to believe” in sec. 147 would mean cause or justification. If the AO has cause or justification that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression “reason to believe” cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. What is required is “reason to believe” but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer. As regards the contention of the assessee that all the material was available on record and therefore, reopening of assessment is based on re-appraisal of the material available on record, in this regard we would like to mention the observation of the Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers P. Ltd. (supra) is relevant wherein it has been observed as under(Head Note):-
“Under the first proviso to the newly substitute section 143(1) with effect from June 1, 1999, except as provided in the provision itself, the acknowledgement of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgement is not done by any Assessing Officer, but mostly by ministerial staff. It cannot therefore be said that an “assessment” is done by them. The initiation under section 143(1)(a) was deemed to be a notice of demand under section 156 for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. Nothing more can be inferred from the deeming provisions. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion does not arise.”
From the decision of the Hon’ble Supreme Court it is clear that when the Assessing Officer sends an intimation after processing the return, there is no application of mind by the AO. Therefore, the note given in the computation of income cannot be said that the AO had taken decision not to select such case for scrutiny. At the time of processing of a return, the AO is required to make certain adjustments permitted under law. The AO is not required to record a finding that a particular case is not fit for scrutiny. Therefore, it cannot be said that when the AO has initiated proceedings under sec. 147, he had reappraised the facts. The Hon’ble Supreme Court has clearly held that failure to take steps under sec. 143(3) will not render the AO powerless to initiate re-assessment proceedings when intimation under sec.143(1) has been issued.
8. Moreover, in this case, the assessee vide letter dated 27.11.2007 had submitted details of agreement between the assessee and TE on the basis of which AO came to the prima facie belief that the amount received by the assessee of Rs. 12,12,18,990/- was taxable as revenue receipt and not as capital gains. Hon’ble Delhi High Court in the case of Rakesh Aggarwal v. ACIT (supra) has held that findings in assessment for another year will constitute material for re-opening the case u/s 147. The facts of the assessee’s case are squarely covered by the decision of Hon’ble Delhi High Court in the case of Rakesh Aggarwal (supra) and also by the decision of Hon’ble Delhi High Court in the case of Diwakar Engineers Ltd. (supra). In view of above, we are of the considered opinion that it is neither the case of change of opinion nor there is re-appraisal of the material available on record. If the contention of the assessee is accepted, then no proceedings under sec. 147 can be initiated where return of income has been processed under sec. 143(1) of the Act. Accordingly, we do not find any infirmity in the order of the CIT(A) confirming the reopening of assessment. Hence the grounds relating to reopening of assessment are dismissed.
9. Next issue for consideration relates to upholding the action of the AO assessing the receipts under sec. 28(va)(a) of the Act. Facts of the case stated in brief are that the assessee was incorporated on 3rd September, 1984 as a joint venture between Telemecanique Electrique SA (TE), a French company and Control & Switchgear Co. Ltd. (CS), an Indian company pursuant to a share holder agreement dated 22nd February, 1984 for manufacture of, inter alia, electrical equipments. Subsequent to incorporation, the assessee in order to establish the business of manufacturing electrical equipments, entered into the following agreements with TE:-
(1) Agreement for Supply of Technical Information dated 28th November, 1984.
(2) Agreement for Technical Services dated 28th November, 1984.
(3) Name License Agreement dated 8th February, 1985.
As a result of aforesaid agreements, the assessee started commercial production in October, 1985. In the year 1989, TE was acquired globally by another French company, viz. Schneider Electric Industries SAS (Schneider), pursuant to which TE got merged into Schneider. The serious disputes arose between TE/Schneider, on one hand, and the assessee and CS on the other hand, which were subject matter of legal proceedings initiated by the parties against each other in various Courts. Subsequently, Schneider incorporated a wholly-owned subsidiary company in India to carry on competing business of manufacturing electrical equipments, pursuant to approval dated 31st August, 1994 granted by FIPB. The said approval was taken by Schneider, allegedly without disclosing to FIPB the fact of Schneider being part of existing joint venture in India, viz., the assessee company as required under Press Note No.18 of 1998 issued by FIPB. Under the Press Note No.18 issued by FIPB, foreign companies having an existing joint venture in India were allowed to set up wholly owned subsidiary company in India in the same field, only after FIPB being satisfied that interests of existing JV will not be jeopardized. In view thereof, TE/Schneider, could establish new venture in competing business in India, only after ensuring that interests of existing JV were not jeopardized. As per the assessee since Schneider incorporated wholly owned subsidiary company in India without obtaining necessary/mandatory no objection from the assessee, the assessee vide letters dated 8.03.1999 and 26.09.2002 brought the aforesaid violation to the notice of FIPB. Proceedings were initiated against Schneider by FIPB in the year 2002. Vide letter dated 24th February, 2003, FIPB directed Schneider not to undertake any activity detrimental to the interest of the assessee, until conclusion of proceedings initiated by FIPB.
10. Pursuant to the aforesaid directions by FIPB restraining Schneider from carrying on competing business in India, Schneider approached the assessee company to put an end to the impasse created by virtue of the direction issued by FIPB. After mutual discussion and negotiations, the parties entered into a Settlement Agreement on 10th April, 2003, whereby it was agreed as under:-
(1) Schneider would pay compensation of Rs. 12,12,18,990/- to the assessee;
(2) The assessee would give its no objection permitting Schneider to carry on competing business through its wholly-owned subsidiary company in India and communicate the same to FIPB.
(3) Schneider agreed to exit from the assessee company as joint venture partner;
(4) The assessee agreed not to use Telemecanique as part of its corporate name; &
(5) Both the parties agreed to put an end to all pending legal proceedings.
11. The Assessing Officer in view of the provisions of sec. 28(va)(a) inserted in the Statute with effect from 1.04.2003 which seeks to bring any sum whether received or receivable in cash or kind under an agreement for carrying out any activity in relation to any business was of the opinion that such receipts would be chargeable to tax under the head “Profits and gains of business or profession”. The AO noted that sub-clause (a) of clause (va) of sec. 28 has very wide connotation to bring in its purview the sum received by the assessee under an agreement for not carrying out any activity in relation to any business. The amount received by the assessee therefore, fell within the ambit of sub-clause (a) of section 28(va). The AO also took note of the clause (i) of Proviso to clause (va) which provides for certain exceptions to applicability of sub-clause (a). According to clause (i) of Proviso to clause (va), the provisions of clause (a) shall not apply to 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”. The AO therefore, came to the conclusion that the amount received by the assessee was assessable under sec. 28(va)(a) under the head “Profits and gains of business or profession” and not as “Capital gain” as claimed by the assessee. The AO therefore, added the amount of Rs. 12,12,18,990/-.
12. Before the ld. CIT(A) it was submitted that agreement dated 28th November, 1984 for Technical Services and the Name Licence Agreement dated 8.02.1985 constitute a composite arrangement for joint venture between the assessee company and TE. Though the Name Licence Agreement has allowed the assessee company to use trade names “Telemecanique” and “TE” for no consideration, it could not be said that this agreement stood on a footing separate from the other two. The rights and liabilities under these three agreements were formed part of a composite and indivisible arrangement. The Joint Venture Settlement Agreement dated 10.04.2003 settled various disputes that arose between the parties. As a result thereof the Joint Venture came to an end. Thus the consideration received by the assessee was to remove the obstacle for operation of their business in India. Because of Press Note No.18 of 14.12.1998, a foreign joint venture partner could not set up its business in India in direct competition with the joint venture entity without obtaining a specific “No objection” from the Indian partner. When Schneider had set up business in India directly competing with the business of the assessee, the assessee company had lodged a complaint against Schneider India Pvt. Ltd. with the Government of India. The Government had advised SEIPL from operating its business till the decision was taken on a complaint lodged by the assessee company. As part of the Joint Venture the assessee company has agreed to give up its opposition to SEIPL operating its business in India. From the point of view of assessee, it lost a valuable association with SE/SEI and in addition to this, faced direct competition from them. This has resulted in impairing the profit earning apparatus of the assessee company. Therefore, the compensation for such impairment was a capital receipt since the receipt was not for transfer of any capital asset.
13. He has further submitted that the Assessing Officer had wrongly held that the amount was received for not carrying out any activity in relation to business and therefore, the amount was chargeable to tax u/s 28(va)(a) of the Act. Further the AO was not correct in his conclusion that the assessee company did not have ownership of the capital assets, which was the right to use the trade names “Telemecanique” and “TE”. The Name Licence Agreement specifically allowed the assessee company to use the trade names and the terms of Joint Venture Settlement Agreement also acknowledged the right to use such names till the Joint Venture Settlement agreement came into effect. Giving up right to use such trade names was “transfer” of capital asset as defined in sec. 2(47) of the Act. If the entire consideration is regarded as remuneration for agreeing not to use those trade names, the same would be taxable as capital gains. This conclusion of the AO was based on the assumption that the entire consideration was for giving up the right to use the trade names. The consideration was for ending the joint venture and allowing SEIPL to operate in India. Giving up the right to use the trade names was only a component of the composite agreement. The amount paid to the assessee company was for allowing carrying on business in India and not for Assessee Company not carrying out any activity in relation to the business. In view of above reasons the Assessing Officer was not legally right to tax the amount received by the assessee company u/s 28(va)(a) of the Act. Even if it was considered as a capital gain, the assessee company had deposited the capital gain in the Capital Gains Exemption Scheme Bond u/s 54EC of the Act.
14. The learned CIT(A) noted that the assessee company started its commercial production in October, 1985. On 10th June, 1987, TE was merged with Schneider. Serious disputes arose between TE and Assessee Company in September, 1988 and they initiated certain legal proceedings against each other. The parties to Joint Venture Settlement Agreement agreed to put an end to the disputes and legal proceedings and reached an amicable global settlement on the terms and conditions as set out in Joint Venture Settlement Agreement dated 10.04.2003,. The assessee admitted and recognized SE as the shareholder of TC as a successor in interest of TE and SEI as the rightful and legal owner of the patents and designs and the name and trademark “Telemecanique” and “TE”. It also recognized SEIPL as the wholly owned subsidiary of SEI having an unhindered and unrestricted right to carry on business in India in the fields, inter alia, of industrial control and automation and electrical distribution. SE/SEI agreed to exist from the joint venture with TC as a result of the expiry/termination thereof. TC admitted and acknowledged SEI’s full ownership rights in the name and trademark “Telemacanique” and “TE”. TC seized to use of “Telemecanique” as part of its corporate name and the new corporate name of “TC” was “Control and Switchgear Contractors Ltd” or such other corporate name which would not contain the name “Telemecanique” or “TE” or any other similar word or name. Upon TC’s change of corporate name, TC and its affiliate companies would not use or make any reference to “Telemecanique”, TE, its logo trade mark, copy right and design relating to the artistic work with respect of its logo, commercial references or use any word, name, logo or copy right/design similar or likely to be confused with them. In consideration and full compensation of TC’s commitments and other undertakings with this Agreement, a sum of Euro 2,229.700 was paid as ‘TC Settlement Sum’. The learned CIT(A) further noted that from the perusal of the Joint Venture Settlement Agreement, it was evident that by entering into this agreement, the assessee company had agreed not to carry out any activity in relation to the business by using the “Telemecanique” as part of its corporate name and any other similar word or name which was deceptively similar or likely to be compared with them and thus, the present case got covered by the provisions of sec. 28(va)(a) of the Act. As regards the contention of the assessee that the consideration for ending joint venture and allowing SEIPL to operate in India and giving up the right to use the trade name was only a component of the composite agreement, the learned CIT(A) held that from the perusal of the agreement, it was clear that the dominant factor was the assessee company’s commitment for not using the name of “Telemecanique”, or “TE” as its logo etc. It was the admitted and acknowledged SEI’s full ownership rights in the name and trade mark “Telemecanique” and “TE”, which had consequently put and end to various legal proceedings.
15. As regards applicability of Proviso to sub-clause (a) of sec. 28(va) of the Act, the learned CIT(A) noted that the Assessing Officer has discussed this aspect in his order wherein it has been observed that the Proviso was not applicable in the present case as there was no transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which was chargeable under the head “Capital gains”. It has further been discussed by the AO that there was no such asset reflected in the balance-sheet which was owned by the assessee which could be transferred. Therefore, the compensation received was not a capital gain.
16. During the course of proceedings before the CIT(A) the learned AR of the assessee argued that right to use trade mark was a capital asset and the name licence agreement dated 1.11.1986 allowed the assessee company to use the trade mark and extinguishment of the right to use such trade name was transfer of capital asset within the meaning of sec. 2(47) of the Act. The learned CIT(A) however did not agree with the arguments of the learned AR of the assessee. Mere right to use or refer to the name of “Telemecanique”, or “TE” its logo, the trade mark etc. did not make the assessee the owner of the said asset. Hence, there was no question of transfer of any such right which was chargeable under the head “Capital gains”. Hence the assessee’s case did not fall under the Proviso to sub-clause (a) of clause (va) of sec. 28. Accordingly the assessee’s claim for exemption u/s 54EC of the Act was not sustainable as there was no capital gain. The learned CIT(A), however, held that the AO was justified in invoking the provisions of sec. 28(va)(a) of the Act. She accordingly upheld the addition made by the AO.
17. Before us the learned AR of the assessee submitted that Press Note No.18 of 1998 issued by the FIPB created a right to object to the entry of Schneider in competing business in India. The right was vested in assessee and constituted valuable right in the hands of the assessee falling within the meaning of capital asset defined in sec. 2(14) of the Act. Relying on the decision of Hon’ble Bombay High Court in the case of CIT v. Tata Services Ltd. 122 ITR 595, the learned AR of the assessee submitted that the word “property” of any kind in sec. 2(14) of the Act was a word of the widest amplitude and the definition has re-emphasized this by the use of the words “of any kind”. The Hon’ble Bombay High Court has held that any right which could be called “property” would be included in the definition of “capital asset”. Reliance was also placed on the decision of Hon’ble Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT 149 ITR 29, wherein the word “property” used in sec. 2(14) was held to be widest import and signified every possible interest which a person could acquire, hold and enjoy. The Hon’ble Delhi High Court held that tenancy right/right to continue in the possession of a property as a tenant, is a valuable right, which falls within the meaning of the term “capital asset” u/s 2(14) of the Act. The aforesaid decision has been approved by the Hon’ble Supreme Court in D.P. Sandhu Bros., Chembur P. Ltd, 273 ITR 1 (SC). The learned AR of the assessee placed reliance on several other decisions to support his contention that the right to object was a capital asset within the meaning of sec. 2(14) of the Act.
18. It was further submitted that u/s 45 surplus derived from transfer of a capital asset was taxable under the head “capital gains” which is to be computed in accordance with the provisions of sec. 48 of the Act. The predominant purpose of the Settlement Agreement was to obtain “No objection” from the assessee and therefore, the compensation received by the assessee for exercise of such right in favour of Schneider, by conveying “No objection” to FIPB constituted transfer/extinguishment of a valuable right/capital asset vested in the assessee. By conveying no objection to FIPB against entry of Schneider entities in competing business in India, the assessee extinguished its right to object, which was vested in the assessee under Press Note No.18. To that extent the action of the assessee in conveying no objection to FIPB amounted to transfer of capital asset, namely, right to object to entry of Schneider in competing business in India through its wholly owned subsidiary or otherwise. It was further submitted by the learned AR of the assessee that capital gains are to be computed u/s 48 of the Act. For computing capital gains the cost of acquisition of asset is to be reduced from the full value of consideration. If the cost of acquisition of the capital asset is indeterminate, the provisions of sec. 48 could not be applied and, accordingly, the amount received could not be brought to tax as capital gains under sec. 45 of the Act. He placed reliance on several decisions including the decision of Hon’ble Supreme Court in the cases of CIT v. B.C. Srinivas Setty 128 ITR 294 (SC); & PNB Finance Ltd. v. CIT 307 ITR 75 (SC).
19. It was further submitted that the Department of Industrial Policy and Promotion (DIPP) vide Circular 1 of 2011, has abolished Press Note No.1 of 2005 (successor of erstwhile Press Note No.18 of 1998). As a consequent of the aforesaid amendment, foreign entities are no longer required to obtain approval of the Indian collaborator before entering competing business in India. The aforesaid valuable right vested in Indian businesses to object to the entry of foreign players with whom such businesses have existing business relationship, has been taken away by law. The aforesaid would go to show that the valuable right which vested in the assessee to object to entry of Schneider in competing businesses in India was vested upon the assessee by virtue of the then prevailing legal regulations and was, thus, a self generated asset, which was not acquired by the assessee through payment but which vested in the assessee by virtue of the legal regulations. Thus it was not possible to determine the cost of acquisition of the aforesaid valuable asset, viz., the right to object to entry of Schneider in competing business in India. Since the cost of acquisition of such asset was indeterminate, the compensation received against such asset was a capital receipt not liable to tax under the head “Capital gains” under sec. 45 read with sec. 48 of the Act.
20. It was further submitted that for the purpose of determining the cost of acquisition of certain self-generated assets u/s 48, provisions of sec. 55(2)(a)(ii) of the Act can be applied only for those assets, which have been prescribed therein. The cost of acquisition of any asset which had not been prescribed u/s 55(2)(a)(ii) cannot be assumed to be ‘Nil’. The capital asset in the nature of right to object, vested in terms of the prevailing Press Note 18, is not prescribed nor can by any stretch of imagination be included u/s 55(2)(a)(ii) of the Act. Therefore, in the absence of any determinate cost of such acquisition of self-generated capital asset, in the nature of right to object, vested in the assessee by virtue of legal regulations, provisions of sec. 55(2)(a)(ii) could not be applied to compute capital gains chargeable to tax u/s 45 read with sec. 48 of the Act.
21. The learned AR of the assessee placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT v. David Lopes Menezes, 195 Taxman 131, wherein consideration paid for casting their affirmative vote in favour of the resolution for transfer of business of marketing the products under the trade name “Old Spice” in favour of Procter and Gamble (India) Ltd. (PGI) was in the nature of capital asset not liable to tax under the provisions of Income-tax Act. The assessee also placed reliance on the decision in the case of DCIT v. Sak Industries Pvt. Ltd. [2005] 1 SOT 798, wherein the compensation received was held to be capital receipt not liable to tax under the provisions of the Act.
22. The learned AR of the assessee further submitted that amount of compensation received by the assessee from Schneider was for impairment to the existing business structure and the same was, therefore, in the nature of capital receipt. It was further submitted that as a consequence of entering into the Settlement Agreement, the profit earning apparatus was impaired inasmuch as – (i) The assessee had no access to continuous flow of technology/technical information owned by TE/Schneider; (ii) The assessee had to stop using trade marks owned by TE/Schneider on the products manufactured by the assessee; (iii) The assessee had not to use “Telemecanique” as part of its corporate name; & (iv) The entry of Schneider in the competing business in India was permitted. The termination of collaboration with the foreign joint venture partner and exit of the joint venture partner altered the aforesaid basic structure of carrying business by the assessee in India inasmuch as post settlement and exist of the foreign collaborator, the assessee could not have continued access to the technology and band/trade name of such collaborator and, accordingly, was to manufacture new products by developing own technology. Therefore, post settlement/exist of the foreign collaborator business to be carried on by the assessee was different than that carried along with the foreign joint venture partner inasmuch as new products were to be manufactured by using indigenous technology. As a result of exit of foreign joint venture collaborator, there was complete loss/sterilization of existing profit earning apparatus/business of the assessee carried on along with the foreign joint venture partner. Further, by allowing the foreign joint venture partner to enter into the competing business in India, there was damage to the business/profit earning apparatus of the assessee company by virtue of direct competition in such business with such joint venture partner. The aforesaid settlement agreement, therefore, resulted in immobilization, sterilization, destruction and loss of the existing profit earning apparatus/business of the assessee and the amount received to compensate the aforesaid loss of source of income/business was in the nature of capital receipt, which was not subject to tax under the provisions of the Act. The learned AR of the assessee placed reliance on the following decisions:-
(i) CIT v. Vazir Sultan & Sons, 36 ITR 175 (SC).
(ii) CIT v. Prabhu Dayal, 82 ITR 804 (SC).
(iii) CIT v. Bombay Burmah Trading Corpn., 161 ITR 386 (SC).
(iv) Van Dem Berghs Ltd. v. Clark, 3 ITR (Suppl.) 17 (HL).
(v) Kettlewell Bullen & Co. Ltd. v. CIT, 53 ITR 261 (SC).
(vi) Oberoi Hotel Pvt. Ltd. v. CIT 236 ITR 903.
(vii) Ms Payal Kapur v. ACIT (2006) 98 ITD 19 (Del).
(viii) Spaco Carburetors (I) P. Ltd. v. Addl. CIT [2009] 315 ITR (AT) 86 (Mum.).
(ix) Intergold (India) Pvt. Ltd. v. JCIT [2010] 37 SOT 45.
(x) Tecumseh India Pvt. Ltd. v. ACIT 2010 TIOL 408 ITAT (DEL) (SB).
Relying on the above decisions the learned AR of the assessee submitted that the assessee’s case is squarely covered by the above decisions inasmuch as in the case of the assessee the exist of foreign collaborator/joint venture partner has substantially impaired/sterilized the basic structure of carrying business of manufacturing products by the assessee in India and has placed the assessee in a more disadvantageous position, through direct competition with the foreign joint venture partner. The business to be carried on by the assessee, post settlement/exist of foreign joint venture partner is entirely new/ different, inasmuch as the assessee is manufacturing products through development of indigenous technology and using new brand name, which are different and distinct from the products manufactured earlier through use of technology provided by the foreign collaborator. In such circumstances the amount received by the assessee under the settlement agreement to compensate the sterilization of the existing profit earning apparatus and loss of source of income has to be regarded as capital receipt not liable to tax under the provisions of the Income-tax Act.
23. Further sec. 28(va) was inserted in the Statute by the Finance Act, 2002 w.e.f. 1st April, 2003, whereby compensation received by the assessee in lieu of undertaking negative/restrictive covenant by agreeing not to carry on, directly or indirectly, any business or any activity in relation to such business, in competition with the payer has been brought to tax as business income. In the case of the assessee the impugned amount of compensation was not received by the assessee in lieu of undertaking any negative/restrictive covenants not to engage in any competing business/activity with the existing foreign joint venture partner. On the contrary the assessee was still continuing in the said competing business of manufacturing electrical equipments, albeit in a varied form. The aforesaid compensation was received to obtain ‘No Objection’ from the assessee to allow entry of Schneider in competing business in India through its wholly owned subsidiary or otherwise. Therefore, the amount received by the assessee could not be said to be in the nature of non-compete fee covered under the provisions of sec. 28(va) of the Act. The learned AR of the assessee placed reliance on the decision of ITAT in the case of Govindbhai C. Patel v. DCIT, 36 SOT 270, wherein it was held that compensation received against undertaking not to sue the payer in Court of Law, was not in the nature of non-compete fee taxable under sec. 28(va) of the Act. In that case, the assessee company had received an amount of Rs. 2.93 crores from Saumya Construction Pvt. Ltd., which was shown as liability in the balance-sheet filed for the earlier previous years. Subsequently in pursuance of the understanding with Saumya Construction Pvt. Ltd. the aforesaid amount was agreed to be written back as not refundable in lieu of compensation/damages towards relinquishment of assessee’s right to sue the aforesaid party in the Court of Law. It was held that the compensation received in lieu of foregoing right to sue the payer in the Court of Law was in the nature of capital receipt not liable to tax and could not be brought to tax under sec. 28(va) of the Act. In view of above, the learned AR of the assessee submitted that compensation was not assessable either u/s 45 or u/s 28(va) of the Act.
24. On the other hand, the learned CIT-DR submitted that Press Note No.18 issued by Government of India did not confer any legal right upon the assessee. The assessee was not the owner of any patent or design or logo which were under dispute with the foreign company. Therefore, it could not be said that the property of any kind was held by the assessee company. The learned CIT-DR further submitted that there was no impairment of profit earning apparatus of the assessee. The payment was received as compensation in the normal course of business and therefore, the same was the revenue receipt. There was no sterilization of income earning apparatus of the assessee company. The assessee had only 38% share in joint venture company and public had 24% share. Referring to Black’s Law Dictionary the learned CIT-DR submitted that legal right is defined as natural right existing as a result of contract and rights created or recognized by law. If the facts of the case are examined in the light of definition of “Legal Right”, Press Note No.18 neither creates any natural right nor the right existing as a result of contract, nor it is a right created by law. The assessee company was in the same line of business as Schneider India Ltd. and competing with them in the similar products. Submission of the assessee that the payment was received for giving “No Objection” certificate was not correct. Page 3 of Joint Venture Settlement Agreement dated 10.04.2003 shows that the serious disputes arose between TE on the one hand and TC and CS on the other in September, 1988. Schedule 1 of Joint Venture Settlement Agreement dated 10.04.2003 shows that Schneider India Ltd. had filed many cases in various Courts against the assessee company and there were counter cases by Assessee Company against Schneider India Ltd. which are evident from Schedule 2 of JV Settlement Agreement.
25. Referring to annual report for F.Y. 1988-89 the learned CIT-DR submitted that the assessee company was speeding up of essential indigenization of the company’s product which had become necessary to mitigate the heavy cost of components imported from them. The foreign collaborator had been making attempts to do away with some of the existing agreements and understandings between the two Houses. It also mentioned that during the period of almost 4 years their engineers and other work force had become fully conversant with the technical know-how and other procedures and intricacies for the production, quality-control and testing etc. to be able to take up in their hands the task of complete manufacture of the product as efficiently as was being done by the foreign technicians deputed by the collaborators. The report further mentioned that it was never the intention of the assessee to depend on foreign technicians for all the time and the process of learning was expedited by the fact that the Indian engineers were found to be a complete match to the foreigners to imbibe the necessary skills and to successfully take up the required tasks independently in their hands in an extremely short period. Similarly in annual report for F.Y. 1991-92, it was stated –
“There are dissensions between the company and its foreign collaborator, Telemecanique Electrique, France, each party claiming that there have been breaches of the agreements with and for the company, committed by the other party and about the validity and subsistence of such agreements. There are consequent claims and counter claims against each other. Further, during an earlier year, the foreign collaborator made an application to the international Chamber of Commerce, Paris for arbitration in pursuance of the Arbitration Agreement contained in clause No.18 of the Agreement for Technical Services dated 28 Nov., 1984 and condition No.11 of the General Terms and Conditions of Acknowledgement of Orders of the foreign collaborator against which the company has initiated proceedings in the Delhi High Court.”
The learned CIT-DR therefore, submitted that payment has not been received for Press Note No. 18 but because of litigations between the parties. Our attention was further drawn to the reference of litigation in the report for F.Y. 1995-96 also. The learned CIT-DR further has submitted that there were many disputes between the assessee company and its foreign collaborator much before the Press Note No. 18 was issued. There were claims and counter claims by both the parties. The assessee company had mentioned in the annual report for F.Y. 1988-89 that it was never the intention to depend on foreign technicians for all the time and the process of learning was expedited by the fact that the Indian engineers were found to be a complete match to the foreigners to imbibe the necessary skills and to successfully take up the required tasks independently in their hands in an extremely short period. Therefore, the submissions of the learned AR that because of termination of the Licence Agreement and signing of the Joint Venture Agreement, the profit earning apparatus got impaired, is not correct. Schneider was granted permission to promote a 100% subsidiary in India by FIPB vide letter dated 31st August, 1994. Schneider Electric India incorporated a company in India in 1995 under the name Schneider Electric India Pvt. Ltd. (SEIPL) which has since then acquired the Low Voltage Control Gear Division of Crompton Greaves Ltd. The Press Note No. 18 was issued on 14.12.1998 i.e. more than 4 years after the Schneider was granted permission by FIPB to promote a 100% subsidiary in India. He further submitted that Para 7.1 of the JV Settlement Agreement dated 10.04.2003 provides that –
“In consideration and full compensation for TC’s commitments and other undertakings under this Agreement, a sum of Euro 2.229.700 (Euro two million two hundred twenty nine thousand seven hundred only) (the “TC Settlement Sum”) shall be payable by SEI to TC subject to and strictly in accordance with the terms and provisions of this Agreement towards the following:
i. Settlement of all past present or future claims and potential claims made by TC to the Ministry of Commerce & Industry in the Government of India and satisfactory settlement of those matters, as set out in Section 4 above, and other wise.
ii. Change of corporate name by TC to “Controls & Switchgear Contractors Ltd.”
iii. On account of agency commission outstanding from SEI (amounting to Euro 25.600 (equivalent to FFR 167.837.55), without any interest.”
On the basis of above the learned CIT-DR submitted that the payment was received for settlement of past, present and future claims and change of corporate name and agency commission outstanding. He further submitted that the letter dated 24th April, 2003 addressed to Ministry of Commerce & Industry stated – “In view of the Settlement, we now hereby confirm that the activity of Schneider Electric India P. Ltd. does not in any way jeopardize or is prejudicial to the interest of our company or our promoters/shareholders or is in any other manner detrimental to us.”
The learned CIT-DR further submitted that from Para 4, 6, 7 and 9 of letter dated 24th April, 2003 it is clearly established that payment was received for the settlement of various disputes which were going on since 1988. He further submitted that the decision of Hon’ble Bombay High Court in the case of CIT v. David Lops Menzes (supra) is not applicable to the facts of the assessee’s case as they were decided on different facts and therefore, it is distinguishable on facts. The decision in the case of Oberoi Hotel Pvt. Ltd. v. CIT, 236 ITR 903 relied upon by the learned AR of the assessee is also not applicable to the facts of the assessee’s case.
26. The learned CIT-DR further submitted that the assessee was continuing in the same business. There was no bar on the assessee company to continue in the same business. It is competing with the foreign collaborator in the similar product. It has not lost its own clients because of JV Settlement. The learned CIT-DR relied on the decision of Hon’ble Supreme Court in the case of CIT v. G.R. Karthikeyan 201 ITR 866 wherein it has been held that income as appearing in sec. 2(24) is of widest amplitude and must be given natural and grammatical meaning. A receipt even if it does not fall under any specific clause in the Act, will still be taxable if it is of revenue nature. He also placed reliance on the decision of Hon’ble Delhi High Court in the case of JCIT v. Khanna and Anndhanam 305 ITR 336.
27. As regards the contention of the assessee that the impugned transaction was covered by the provisions of sec. 2(47) of the Income-tax Act and the resultant amount was taxable under the head “Capital gains” and since the assessee had deposited the capital gain in tax saving bonds as prescribed under sec. 54E of the Act, no tax was leviable, is not correct as the assessee is not the owner of the trade mark, logo, design for which licence agreement was granted. Therefore, there was neither a capital asset as defined in sec. 2(14) nor the same was treated by the assessee company. The AO has rightly rejected the claim of the assessee and the same was rightly upheld by the CIT(A). The learned CIT-DR finally concluded that payment received by the assessee from its foreign collaborator in pursuance of Joint Venture agreement was revenue receipt and rightly taxed by the AO and confirmed by the learned CIT(A).
28. In rejoinder the learned AR of the assessee submitted that it was not the case of assessee that the assessee was the owner of any capital asset in the form of patent or design or logo under dispute which was subject matter of transfer. The case of assessee was that the impugned compensation has been received against conveying “No Objection” giving up right to object to entry of Schneider in competing business in India, which was a valuable right vested in the assessee by virtue of foreign exchange regulation/Press Note 18 issued by FIPB. Therefore, the objections raised by the learned CIT-DR need to be ignored.
29. As regards legal right the learned AR of the assessee submitted that even at the time when Schneider incorporated a wholly owned company in India in the year 1995, the format prescribed seeking approval of FIPB contained a column under which the information relating to foreign collaboration for the same or similar product was to be given. Schneider incorporated the company to be engaged in competing business in India without disclosing the material fact of existing Joint Venture in India and without obtaining no objection from the assessee. It was only after restraint order dated 24th February, 2003 passed by the FIPB that Schneider was provoked to enter into a settlement agreement with the assessee and obtained no objection from the assessee, which alone could put an end to the impasse created by virtue of the restraint order passed by FIPB. It was on the basis of amicable settlement and no objection issued by the assessee that FIPB revoked the above said restraint imposed on Schneider vide order dated 7.05.2003, allowing Schneider to carry on business in India, in competition with the assessee company. Therefore, right to issue no objection or object to entry of Schneider in competing business in India was very much in existence prior to issue of Press Note 18 of 1998.
30. As regards contention of the learned CIT-DR that the impugned compensation was received for settlement of various existing disputes between the assessee and foreign collaborator, the learned AR of the assessee submitted that the dominant intention between the parties to enter into the aforesaid Settlement Agreement and pay the compensation was in lieu of the assessee conveying its no objection to FIPB, in order to lift the restraint imposed on Schneider by FIPB to carry on competing business in India. The learned AR of the assessee further submitted that the condition precedent for payment of compensation was issue of no objection and not settlement of any other existing disputes which were pending for the last several years in various forums. It was reiterated that the immediate trigger/provocation for Schneider agreeing to enter the JV Settlement Agreement was to make FIPB to lift the restraint/injunction, which was not possible without the assessee company conveying its no objection. Therefore, the payment of compensation has direct, proximate and integral nexus with the issue of no objection certificate/letter by the assessee company to FIPB. It was further submitted that once company conveyed its no objection to Schneider carrying on business in India, prejudicial and detrimental to the interest of the assessee company, the joint venture arrangement could not have, in any case, continued and had to ipso facto be terminated. With the collapse/coming to an end of the joint venture agreement, the allied agreements, co-terminus with the joint venture agreement, automatically came to an end. It was therefore, submitted that the compensation received was in nature of capital receipt not liable to tax. The same was not subject to tax on capital gains under sec. 45 read with sec. 48, in view of the cost of acquisition of said capital asset, which was vested in the assessee by law being indeterminable. The learned AR of the assessee further submitted that the remarks in the annual report for F.Y. 1988-89 were approximately 15 years prior to the subject Settlement Agreement. The aforesaid remarks do not lead to the conclusion that the assessee had imbibed all the technology, necessary for carrying on business. The foreign collaborator had provided exclusive licence to the assessee to manufacture and sell the licensed products, apart from continuous and unrestricted access to technology, as per clause 2(c) of the Technical Services Agreement. Further as per clause 2(d) of the said agreement, the assessee also had the right to ask for any technology developed by the foreign collaborator in relation to any new product proposed to be manufactured by the assessee company. On exist of the foreign collaborator the assessee lost the right to (i) carry on the business of manufacture and sale of licensed products; (ii) use technical information developed by the foreign collaborator; (iii) the right of continuous access to any technology for any new product owned by Schneider, which impaired the profit earning apparatus of the assessee. Even assuming that the assessee company had imbibed all the existing technical know-how availed from the foreign company, the exit of the foreign collaborator resulted in impairment of profit earning apparatus of the assessee on account of (i) loss of exclusive right to manufacture products, using know-how of Schneider in India; (ii) Cessation of right to use trade marks owned by TE/Schneider on the products manufactured by the assessee; & (iii) Cessation of right to use “Telemecanique” as part of its corporate name coupled with entry of Schneider in the competing business in India was permitted. It was therefore, submitted that exit of foreign collaborator pursuant to the impugned Settlement Agreement resulted in sterilization/impairment of profit earning apparatus/existing business of the assessee company and, therefore, the compensation received therefor was a capital receipt, which is not subject to income-tax under the provisions of the Act.
31. The learned AR of the assessee further submitted that compensation can be regarded as revenue receipt if the same is received on account of termination of any regular business contract or to compensate any loss suffered in the ordinary course of business. However, if the same has been received to compensate any loss to the profit earning apparatus, then the same will be regarded as capital receipt notwithstanding that the assessee continues to carry on the business in altered/modified form. The cases relied upon by the learned CIT-DR are distinguishable on facts as in the present case there is complete sterilization of income earning apparatus in the form of business of manufacturing and sale of Telemecanique/Schneider range of products on account of (a) termination of licence; (b) termination of agreement for supply of technical information; and (iii) termination of agreement for technical services, Name Licence Agreement, agency earning apparatus etc.
32. The learned AR of the assessee further submitted that the learned CIT-DR had not advanced any argument on applicability of sec. 28(va)(a) of the Act. On facts on the contrary it is conceded that the assessee had not undertaken any negative covenant under the agreement. A fresh plea/argument has been taken that the assessee continuous to carry on same business post settlement, impugned compensation would be regarded as received in the ordinary course of business which shall be taxable as normal business income. He further submitted that it was not the case of lower authorities that impugned compensation was received in the ordinary course of business of the assessee. The bone of contention between the assessee and the lower authority was whether the same was received in lieu of undertaking the negative covenant of not using the foreign collaborator’s name or conveying no objection to Schneider to carry on competing business in India. The learned AR of the assessee objected to the plea taken by the CIT-DR for the first time before the Tribunal because it changes the entire complexion of the case made out by the lower authorities and challenged in appeal by the assessee before ITAT. He submitted that such a plea is not permissible to be raised at this stage especially in the absence of any departmental appeal. He placed reliance on the decision of Hon’ble Calcutta High Court in the case of Indian Steel & Wire Products Ltd. v. CIT 208 ITR 740, wherein the Court held that additional plea which altogether changes the complexion of the case as originally brought before the CIT(A)/Tribunal is not permissible to be raised at the stage of hearing. The learned AR also placed reliance on the following decisions:-
(a) CIT v. T.M. Bhumraddi 33 ITR 82 (Bom.);
(b) CIT v. G.M. Chennabasappa 35 ITR 261 (A.P.);
(c) Chandulal Lallubhai (HUF) v. CIT 139 ITR 642;
(d) Escrots Ltd. v. ACIT 104 ITD 427 (Del); &
(e) Slocum Investment v. CIT 106 ITD 1 (Del).
The learned AR of the assessee finally submitted that additional plea sought to be raised by the Department cannot be entertained by the Tribunal and the same would be rejected at the threshold.
33. We have heard both the parties and gone through the material available on record. In this case the assessee company came into existence as joint venture on 3rd September, 1984 between Telemecanique Electrique SA (TE), a French company and Control & Switchgear Co. Ltd. (CS), an Indian company. The assessee entered into Agreement on 28th November, 1984 for Supply of Technical Information Agreement for Technical Services dated 28th November, 1984 and Name Licence Agreement dated 8th February, 1985. In 1989 Telemecanique Electrique (TE) was acquired by another French company, viz. Schneider Electric Industries SAS (Schneider), pursuant to which TE got merged into Schneider. When Telemecanique Electrique SA (TE) merged into Schneider Electric Industries SAS (Schneider), the serious disputes arose between TE/Schneider on one hand and the assessee and CS on the other hand, which were subject matter of legal proceedings initiated by the parties against each other in various Courts. Subsequently, Schneider incorporated a wholly-owned subsidiary company in India to carry on competing business of manufacturing electrical equipments, pursuant to approval dated 31st August, 1994 granted by FIPB. FIPB issued Press Note No. 18 of 1998 on 14.12.1998 according to which foreign companies having an existing Joint Venture in India were allowed to set up wholly owned subsidiary company in India in the same field under automatic route. When FIPB granted approval on 31st August, 1994 to set up wholly owned subsidiary company in India, Press Note No. 18 of 1998 was not in existence. The assessee after issue of Press Note No. 18 of 1998 came into action and filed a complaint with FIPB stating therein that Schneider had incorporated a wholly owned subsidiary company in India in contravention of Press Note No.18 of 1998. From these facts it is clear that as on the date when FIPB granted approval to Schneider for incorporating a wholly owned subsidiary company to carry on competing business of manufacturing electrical equipments with that of joint venture, Press Note No. 18 of 1998 was not in existence. Therefore, question of obtaining no objection from the JV partner could not have arisen. The learned AR of the assessee however, led emphasis on the form to be filed by the foreign company for setting up a subsidiary wherein the information about existence of any joint venture was to be given. A copy of application filed by Schneider Electric Industries SAS before FIPB for setting of wholly owned subsidiary has not been placed on record and therefore, it is not possible to comment whether Schneider had given information or they suppressed the information in respect of joint venture while applying for permission to set up a wholly owned subsidiary company in India.
34. Be it as it may. In order to ascertain the scope of Press Note 18, we have to examine the contents of the Press Note which is reproduced as below:-
“PRESS NOTE NO. 18 (1998 SERIES)
Government of India
Ministry of Industry
Department of Industrial Policy & Promotion
Udyog Bhawan,
SUBJECT: Guidelines pertaining to approval of foreign/technical Collaborations under the automatic route with previous ventures/tie-up in India.
1. The Government have reviewed the present Guidelines relating to approval of foreign/technical collaborations under the automatic route and after careful consideration it has been decided that foreign financial/technical collaborators with previous ventures/tie-up in India would be subjected to the following guidelines:
I. Automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade-mark agreement in the same or allied field in India. RBI, therefore, have to stipulate necessary declaration before applications for the automatic route are taken on record.
II. Investors of Technology to the suppliers of the above category therefore will have to necessarily seek the FIPB/PAB approval route for joint ventures or the technology transfer agreements (including trade-mark) giving detailed circumstances in which they find it necessary to set-up a new joint venture/enter into new technology transfer (including trade-mark).
III. The onus is clearly on such investors/technology suppliers to provide the requisite justification as also proof to the satisfaction of FIPB/PAB that the new proposal would not in any way jeopardize the interests of the existing joint venture or technology/trade-mark partner or other stakeholders. It will be at the sole discretion of FIPB/PAB to either approve the application with or without conditions or reject in toto duly recording the reasons for doing so.
2. The above procedure will form part of the approval procedures contained in the “Manual on Industrial Policy & Procedures in India” published by SIA, Ministry of Industries, Government of India, which shall stand clarified accordingly in respect of foreign/technical collaborators with previous joint ventures/tie-up in India.
Sd/-
(I. SRINIVAS)
DIRECTOR
New Delhi, dated the 14th December, 1998″
On plain reading of Press Note No.18 one may find that it relates to foreign collaborators who had any previous joint venture or technology transfer/trade-mark agreement in the same or allied field in India. Such Investors of Technology were required to seek the FIPB/PAB approval route for joint ventures or the technology transfer agreements (including trade-mark). They were required to give detailed circumstances under which it was necessary to set-up a new joint venture/enter into new technology transfer (including trade-mark). Onus was on such investors/technology suppliers to provide the requisite justification as also proof to the satisfaction of FIPB/PAB that the new proposal would not in any way jeopardize the interests of the existing joint venture or technology/trade-mark partner or other stakeholders. The Press note 18 conferred sole discretion on FIPB/PAB to either approve the application with or without conditions or reject in toto duly recording the reasons for doing so. Thus from the language employed in Press Note No.18 it is clear that it nowhere provided that the foreign investor has to obtain no objection certificate from the existing joint venture partner. It was the duty of the investor to satisfy the FIPB that the interest of existing joint venture or technology partner would not be jeopardized. FIPB under its discretionary powers would have either approved or rejected the proposal to set up new Joint Venture. Under such circumstances Press Note 18 did not vest any legal right in the assessee which could be enforced in the court of law. We are, therefore, in agreement with the contention of the ld. CIR(DR) that Press Note No.18 did not create any natural right or the right existing as a result of contract, nor it is a right created by law.
35. As mentioned earlier the serious disputes arose between TE/Schneider on one hand and the assessee and CS on the other hand, which were subject matter of legal proceedings initiated by the parties against each other in various Courts. Such disputes arose in 1989 whereas the Press Note No. 18 was issued on 14th December, 1998. On issue of Press Note No. 18 the assessee took advantage and tried arm twisting tactics so that its earlier claims could have been settled. When FIPB issued notice the foreign party came forward for settlement. Joint Venture Settlement Agreement was made on 10th April, 2003. Annexure in Schedule 1 is the list of various legal proceedings filed by TE/SE/SEI against TC/CS (the assessee) and Schedule 2 is list of various legal proceedings filed by TC (the assessee) against TE/SE/SEI. Schedule 1 & 2 are reproduced as Under:-
“SCHEDULE 1
(i) Arbitration proceeding bearing Reference No. 6694CI/ CK/AER/ACS before the International Court of Arbitration, Paris raising various claims against TC;
(ii) Suit No. 1919 of 1999 before the Delhi High Court for permanent injunction against infringement of its Patents and Designs.
(iii) Suit No. 2112 of 1999 before the Delhi High Court for permanent injunction against TC spreading marketing misinformation.
(iv) Suit No. 2629 of 2001 before the Delhi High Court for permanent injunction against TC using “Telemecanique” as a part of its Corporate name.
(v) Suit No. 444 of 2002 before the Delhi High Court seeking permanent injunction against TC holding any Board Meeting in violation of the quorum requirements laid down in the Articles of Association of TC.
SCHEDULE 2
(i) SLP 8352of 2002 before Hon’ble Supreme Court of India against an Order dated 6.3.2002 passed by Hon’ble Delhi High Court in OMP No. 6 of 1989 filed by TC challenging the effect and scope of various arbitration agreements between TE and TC on the basis of which TE filed Reference for Arbitration before the International Chamber of Commerce.
(ii) C.O. No. 22 of 1999 before the Hon’ble Delhi High Court challenging the validity of the alteration of name and address of TE to Schneider Electric Industries by Controller of Patents in respect of various Patents and Designs registered in the name of TE.
(iii) A.I.D. No. 10 of 2000 before Hon’ble Calcutta High Court against registration of a Deed of Assignment by the Controller of Patents and Designs, Calcutta assigning various patents and design registered in the name of TE to the name of Schneider Electric Industries as the alleged assignee thereof.”
The above facts are corroborated from Joint Venture Agreement. The Joint Venture Settlement Agreement though mentions issue of letter by Ministry of Industry, Department of Industrial Policy and Promotion in relation to activities of Schneider Electric India Pvt. Ltd. dated 24th February, 2003 but the Joint Venture Agreement intended to put an end to disputes and legal proceedings by amicable global settlement on the terms and conditions set out in the agreement. By virtue of Joint Venture Settlement Agreement the assessee recognized and acknowledged SE/SEI as owner of patents, designs and trade marks. SE/SEI agreed to exit from joint venture. SE and SEI were accepted as legal successor of TE/TC. It was jointly agreed to put an end to legal proceedings listed in Schedules 1 & 2 as well as their outstanding commission, if any agreed and to any claim/s or potential claim/s in relation thereto. The assessee company agreed not to use the name “Telemecanique” or “TE” or similar words, its logo, trade mark, copy right and design relating to artistic work with respect to its logo, commercial references or use any word, name, logo, copy right or design similar or likely to be confused with them. The entire joint venture agreement is in respect of legal disputes between the assessee and joint venture partner which are listed in Schedule 1 & 2. Therefore, it is incorrect on the part of the assessee to say that the payment has been received by the assessee for giving no objection under Press Note No.18 of 1998. The payment of Euro 2.229.700 (Two million two hundred twenty nine thousand seven hundred only) was payable by SEI to TC (the assessee) subject to strictly in accordance with the terms and provisions of the Agreement as below:-
“(i) Settlement of all past, present or future claim/s and potential claim/s made by TC to the Ministry of Commerce and Industries in the Government of India and satisfactory submission of those matters as set out in section 4 above and otherwise.
(ii) Change of corporate name by TC to “Control & Switchgear Contractors Ltd.”
(iii) On account of agency commission outstanding from SEI (amount into Euro 25.600) (equivalent to FFR Rs. 167.837.55), without any interest.”
“4. Alleged breach of exclusivity:
TC hereby irrevocably and unconditionally confirms that upon issue of the Letter of Credit by Societe Generale Bank as envisaged in Section 7 herein, there shall not be or remain any past present or future claim/s or potential claim/s whatsoever against SE, SEI, SEIPL and/or their affiliates (present or future) to the alleged breach of exclusivity by SEI/SEIPL on the grounds that (i) SEI obtained approval of the Government of India on August 31, 1994 to set up a wholly owned subsidiary in India; (ii) SEI has incorporated a company in India in 1995 under the name “Schneider Electric India Private Limited” to undertake, inter alia, the business of industrial control, automation and electrical distribution (iii) Schneider Electric India Private Limited” has acquired the assets and business of Crompton Greaves Ltd pertaining to its “Low Voltage Controlgear Division” or (iv) any other ground whatsoever in relation with the scope of business, activities or interests in India (present or future) of SE/SEI/SEIPL and/or their affiliates.
TC shall simultaneously upon issue of the Letter of Credit by Societe Generale Bank as envisaged in Section 7 herein, deliver a No-objection letter to the Department of Industrial Policy and Promotion of the Ministry of Commerce & Industry in the Government of India and, whenever reasonably required by SEI, assist SEI in satisfactory settlement of those matters with the said Department of Industrial Policy and Promotion. The said No-objection letter shall be as per the draft annexed hereto as Schedule11 as may be improved or amended by SEI as soon as TC upon signing of this Agreement communicates and delivers to SEI all information and documents concerning its representation and correspondence with the Department of Industrial Policy and Promotion of the Ministry of Commerce & Industry.
Likewise, TC agrees and undertakes to provide SE/SEI/SEIPL with such letters/no-objections whenever reasonably required in respect with any future dealings with the Department of Industrial Policy and Promotion of the Ministry of Commerce & Industry.”
From above it is clear that Joint venture settlement agreement was entered mainly to put end to all litigations between the parties. Press Note 18 played only a role of a catalyst to expedite the settlement.
36. As regards contention of the assessee that compensation received was for impairment of source of income and therefore, the same is capital receipt. As discussed above, the dispute arose between the assessee and foreign collaborator in the year 1988. Tax audit report for the F.Y. 1988-89 contains the remarks of Board of Directors wherein it has been stated that during the period of almost 4 years their engineers and other work force had become fully conversant with the technical know-how and other procedures and intricacies for the production, quality control and testing etc. to be able to take up in their hands the task of complete manufacture of their products as efficiently as was being done by the foreign technicians deputed by their collaborators. The report also states that it was never the intention to depend on foreign technicians for all the time and the process of learning was expedited by the fact that the Indian engineers were found to be a complete match to the foreigners to imbibe the necessary skills and to successfully take up the required tasks independently in their hands in an extremely short period. Therefore, the submissions of the learned AR that because of termination of the Licence Agreement and signing of the Joint Venture Agreement, the profit earning apparatus got impaired, has no force. Likewise, in annual report for 1991-92 it has mentioned that there were dissensions between the assessee and its foreign collaborator Telemecanique Electrique, France. Both the parties were claiming that there had been breaches of agreements. There were consequent claims and counter claims against each other. The report also mentions about the application made by foreign collaborator to International Chamber of Commerce for arbitration. The assessee company had also initiated proceedings in the Delhi High Court. Identical remark has been made in annual report for 1995-96. From the annual reports it is evident that assessee established itself not only production procedures and its intricacies but also in technical know how. The intension of the assessee from very beginning was to become technologically independent and was attained within the period of four years. The assessees who are dependent on foreign technical know how and on foreign technician would not have dared to snap the relationship like in the present case. The Joint Venture Agreement was entered into between the parties on 10th April, 2003. By the time the agreement was made the experience of engineers and other work force was of almost about 20 years and would have been of the level which could compete with the manufacture of products with any foreign technicians. Then the assessee filed application with FIPB complaining against setting up of wholly owned subsidiary competing with the joint venture company. At that point of time the assessee’s interests were jeopardized. But when joint venture agreement was made within short period, the assessee gave in writing to FIPB vide letter dated 24th April, 2003 stating therein that that their interests were not affected. Para 4 of letter dated 24th April, 2003 reads as under:-
“4. In view of the settlement, we now hereby confirm that the activity of Schneider Electric India Pvt. Ltd. does not in any way jeopardize or is prejudicial to the interests of our company or our promoters/shareholders or is in any other manner detrimental to us.”
The above clause of the letter dated 24th April, 2003 clearly indicates that there as no impairment of source of income. The assessee’s engineers and work force was competent enough to produce Indianized product competing with that of the wholly owned subsidiary company set up by the collaborator. Moreover, the assessee had acquired high level of technical know-how in the manufacture of the products. If the assessee was deprived of the technology, the business would have collapse. Therefore, it cannot be said that profit earning apparatus was affected in any way. Therefore, the compensation received cannot be treated to have been received for impairment of source of income.
37. Now coming to the contention of the assessee that the learned CIT-DR has contended that compensation should be regarded as normal business receipt received in the normal course of business, we find that the same had not been received in lieu of undertaking any negative covenants not to compete with Schneider in India but on the contrary the assessee continues to carry on the same line of business. The learned AR of the assessee further submitted that the AO brought the impugned receipts to tax as business income under sec. 28(va)(a) of the Act on the ground that the same was received in lieu of undertaking negative covenants of not using trade mark of foreign collaborator, post settlement. It is a fact that assessee had given an undertaking not to use trade marks, designs, logo of Telemacanique and had accepted the ownership on such intellectual property of foreign collaborator. The learned AR further stated that the learned CIT-DR had not made any argument on applicability of sec. 28(va) of the Act. On the contrary he has conceded that the assessee had not undertaken any negative covenants under the agreement. A fresh plea for argument has been taken that since the assessee continues to carry on same business post settlement, the impugned compensation would be regarded as receipt in the ordinary course of business which shall be taxed as normal business income. The learned AR of the assessee placed reliance on the decision of Hon’ble Calcutta High Court in the case of Indian Steel & Wire Products Ltd., 208 ITR 740 for the proposition that additional plea which altogether changes the complexion of the case as originally brought before the Commissioner of Income-tax (Appeals)/Tribunal was not permissible to be raised at the stage of hearing. This contention of the assessee in our considered opinion is not correct. The issue before the Tribunal is the assessability of the compensation, whether it should be assessed as business income or amount received in lieu of undertaking negative covenants. As pointed out above the assessee and the foreign collaborator were in litigation for the last 15 years and in order to settle their disputes as mentioned in Schedule-1 and Schedule-2 of they entered into Joint Venture Agreement and amicably settled the issue. The issue for consideration is whether the compensation should be assessed as business income or income under sec. 28(va)(a). All the material facts are on record. The plea raised by the CIT-DR is purely legal issue. It does not require any investigation of facts. Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT 229 ITR 383, has held that the Tribunal has the discretion to allow or not to allow a new ground to be raised. But where the Tribunal is only required to consider the question of law arising from the facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee. From the decision of Hon’ble Supreme Court in the case of NTPC Ltd. (supra) it is clear that legal issue can be raised at any time. Therefore, the issue can be entertained by the Tribunal. The learned AR of the assessee placed reliance on the decision of Hon’ble Calcutta High court in the case of Indian Steel & Wire Products Ltd. (supra) wherein it has been held that an additional plea which altogether changes the complexion of the case as originally brought before the Commissioner of Income-tax (Appeals) and the Tribunal in second appeal cannot be raised at the stage of hearing before the Tribunal. The decision of Hon’ble Calcutta High Court is not applicable to the facts of the case before us. At Page 744 the Hon’ble Calcutta High Court has observed as under:-
“The Tribunal held that if the additional grounds which were pressed before it was in the nature of an alternative ground touching the interpretation of the law resulting in the same relief, the grounds would have been unexceptionable. But where the ground is a ground of additional nature involving a claim of a larger relief than that urged before the lower authorities, the same is impermissible. Though the Tribunal’s order on the miscellaneous petition on the point is not very explicit, yet that is the idea beneath the statement that the ground would have been admissible as an alternative ground but not as an additional ground. The Tribunal found that ground not to be an alternative ground but to be an additional one.”
From the above observation of the Hon’ble Calcutta High Court it is clear that a ground which requires interpretation of law should be admissible. The decision of Hon’ble Calcutta High Court in our considered opinion supports the case of the Revenue because the learned CIT-DR has taken a legal issue and not an additional ground. The issue of assessability of compensation was before the AO as well as CIT(A).
38. Hon’ble Supreme Court in the case of Kapurchand Shrimal v. CIT, 131 ITR 451 has held as under:-
“It is well known that an appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, appropriate directions to the authority against whose decision the appeal is preferred to dispose of the whole or any part of the matter afresh, unless forbidden from doing so by statute.”
Therefore, the Tribunal has power to assess the income correctly. If income is assessable as business income, in our considered opinion as held by the Hon’ble Supreme Court, the compensation should be assessed as revenue receipt liable to be assessed as business income. Therefore, in our considered opinion, the Revenue could have taken the additional legal plea at any time for assessing the compensation received by the assessee.
39. Hon’ble Calcutta High Court in the case of C.C.A.P. Ltd. v. CIT [2004] 270 ITR 248 has held that when an appeal is preferred before the Tribunal by any of the parties, the whole appeal is before the Tribunal. The Tribunal is supposed to pass appropriate order as it may deem fit in the appeal preferred by any of the parties. It is immaterial whether such benefit one or the other of the parties or in the process it might be in favour of a party who has not preferred the appeal but is a respondent therein.
40. Seen in the light of above judicial pronouncements, we are of the considered opinion that the compensation received by the assessee is assessable as revenue receipt. The objection raised by the ld counsel for the assessee is, therefore, rejected.
41. The alternative plea of the assessee is that the compensation received by the assessee is assessable as capital gains. In our considered opinion the contention of the assessee is not correct as held above; the right to object is not a right. Even if is assumed that there is right, it is limited to assessee itself; it cannot be transferred or sold. Therefore, consideration received cannot be treated as capital gains. Therefore, benefit of sec. 54EC cannot be given to the assessee. This plea of the assessee is also rejected.
42. In the result, the appeal filed by the assessee is dismissed.
A reading of the reported lengthy order of the itat goes to show / convince one to readily make out that both sides have made a sincerely painful and anxious attempt to exhaust all possible arguments , also cite all located precedents, so as to support own individual stance.
According to an independent view, for a proper understanding from an objective standpoint, a couple of aspects require to be highlighted / commented on:
1. In one’s understanding, it was not the case of either side that the consideration received was for ‘transfer’ of any capital asset acquired for a price (at a cost) or which could conceivably be regarded as one capable of being acquired for a price (cost) (much less, as one for which any cost improvement could be envisaged / imagined). If so, for obvious reasons, the question of taxing any income under the head of capital gains is a non-starter.
2. As is implied in the title to the write-up, in one’s own view rightly so, going by the facts and circumstances as narrated (so also accordingly urged by assessee), the consideration received, to be true to own courage of conviction, was nothing but “compensation to end litigation”, Should that be so, the question of bringing to tax any income under the head of ‘capital gains’ does not arise. In other words, at best, it is a ‘capital receipt’, but not ‘income’, which could be taxed either under section 45 or section 28(va)(a).
One of the arguments advanced by the assessee, relying on the Bombay HC’s opinion founded on the concept of ‘negative covenant’, was, in fact, to that effect. The itat, however, as is seen from paragraph 23 of the Order, has not accepted it but on the short ground as stated.
Perhaps, in the further proceedings, the aforementioned important argument could be expected to be pursued in extenso and pressed with all the force it seems to well deserve.