Case Law Details
ITO Vs M/s Mechanalysis (India) Ltd. (ITAT Mumbai)- Whether when the agency agreement between the assessee and the non-resident continues even after expiry but no royalty is paid during this period, compensation paid to the assessee after many years later for formal termination of the agreement is akin to loss of profit-making apparatus, and thus, is capital receipt?
The assessee had entered into an agreement for joint venture with IRD Mechan analysis Inc. USA on 11.3.1979. It was subsequently renewed on 12.10.1990. Under the agreement the applicant company was entitled to make use of the trade name/ patents of IRD, USA and its associate concerns and licensed to manufacture and sale certain products in India. The company established its markets in India under the name of “IRD Mech analysis”. By a separate Sales Representative Agreement date 1.1.1989 amended by an agreement date 1.4.1991 with IRD, U.K., the assessee was entitled to represent the U.K. company in India in respect of goods/ products manufactured by U.K. company for which the assessee was receiving commission for sales. The joint venture agreement granting license to market expired in 2000-01 and hence no royalty was paid for the financial year 2001-02 and 2002-03. The Sale Representative Agreement continued till it was terminated during the assessment year 2003-04. It is the contention of the assessee that the compensation received for termination of the joint venture is a capital receipt not subject to tax. According to the assessee the income earning apparatus of the company has been lost or impaired on the termination of the joint venture agreement, impairing the complete manufacturing apparatus and trading structure of the assessee company from gaining any income. But the facts prove otherwise. The assessee company had discontinued or not renewed the collaboration agreement with M/s. Entek IRD International U.K. Ltd. But they got the help of M/s. Con-cast India Ltd for providing the technical know how for continuation of the business. The assessee vide letter date 30.01.2006 had submitted that due to non availability of technical assistance hitherto rendered by M/s. Entek IRD due to cessation of collaboration with that company had to approach M/s. Con-cast India Ltd for providing consultancy. This itself would show that the termination of collaboration with M/s. Entek IRD, U.K. was replaced by technical consultancy support given by M/s. Con-cast India Ltd. The royalty payable to M/s. Entek IRD, U.K, for their technical assistance was replaced by technical fees provided by M/s. con cast India Ltd. Elsewhere, in the appeal by the department for the very same issue we have upheld the payment of technical services payable to M/s. Con-cast India Ltd. Under the circumstances we are not satisfied that discontinuation of the Joint venture resulted in any serious impairment of the profit making apparatus of the assessee, who had continued the business with the technical consultancy obtained from M/s. Con-cast India ltd.
Further there is nothing on record, by way correspondence or agreement that the lump sum payment is for termination of joint venture which had taken place earlier and the basis on which the amount was arrived at. Again the compensation paid by M/s. Entek IRD, UK can not be said to be towards impairment of the profit making apparatus of the assessee. The profit making apparatus of the assessee appear to have continued with the technical assistance received from M/s. Comcast India Ltd. Further, the agreements for collaboration with M/s. Entek IRD do not provide for payment of compensation on termination. We are therefore of the view that the payment make by M/s. Entek IRD is towards the termination of the agency agreement which was terminated during the year under appeal. Hence the amount received by the Assessee is business income u/s 28(ii). We therefore, uphold of the order of CIT(A) confirming that payment of Rs. 1,16,51,240 received by the assessee as revenue receipt.
The ITO, Ward-3(1)(4), Vs. M/s. Mechanalysis (India) Ltd.
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