TMI Blog2011 (4) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee company were impaired. Since there was an obligation with KGCL to purchase ossein from assessee company and KGCL desired to forgo all these obligations, it paid compensation to the assessee. This will certainly be in the nature of revenue receipt - Decided in favor of Revenue Claim of additional depreciation on account of fluctuation in the rate of foreign exchange - assessee-company had purchased plant and machinery, cost of which increased due to adverse fluctuation in exchange rate - Held that:- The liability of repayment increased on account of fluctuation in the exchange rate, hence depreciation claimed on such increased cost will be allowed - Decided in favor of assessee. Sale promotion expenses - Tribunal restricted the dis-allowance to 10% of total expenditure - Held that:- We remit the matter back to the file of AO for considering dis-allowance at 10% of the total expenses subject to the rider that such dis-allowance will not be more than the dis-allowance already made by the AO - Decided in favor of Revenue for statistical purposes. Deduction u/s 80HHC - Held that:- Excise duty and sales tax will be excluded from the total turnover for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on facts on of the case in directing to include income by way of sale of empty bags, income by way of sale of C.B. Dust Sinews and income by way of sale of scrap and waste chemicals in the profits of the business for the purpose of deduction under section 80HHC, disregarding the facts that these items of income are not derived by the industrial undertaking from the export business." 3. The facts of the case are that assessee-company is involved in the manufacture of "ossein" and "gelatine" from animal bones. The first issue in Revenue's appeal relates to deletion of sum of Rs. 3.38 lakh being the depreciation on account of fluctuation in the rate of foreign exchange. The facts relating to this issue are that assessee-company had purchased plant and machinery. Its cost increased due to adverse fluctuation in exchange rate. The additional burden on this count amounted to Rs. 3.38 lakh. The Assessing Officer had disallowed the claim following his order for assessment year 2001-02. The order of ld. CIT(A) thereon was subject-matter of appeal before Tribunal. The Tribunal had allowed the claim of assessee for additional depreciation on increased cost due to adverse exchange rate flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of Tribunal, we remit the matter back to the file of Assessing Officer for considering disallowance at 10 per cent of the total expenses subject to the rider that such disallowance will not be more than the disallowance already made by the Assessing Officer. With this observation, this ground of Revenue's appeal is allowed but for statistical purposes. 7. The third issue relates to including excise duty and sales tax accrued amounting to Rs. 72,15,365 in the total turnover for the purpose of deduction under section 80HHC. 8. We have heard the parties and in our considered view the issue is now fully covered by the decision of Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667/160 Taxman 404, wherein it is held that these two items have to be excluded from the turnover. Following above decision this issue is decided in accordingly. This ground of Revenue's appeal is accordingly disposed of. 9. Last issue relates to inclusion of income by way of sale of empty bags and scrap and waste in the profits of the business for the purpose of deduction under section 80HHC. 10. We have heard the parties and perused the materials on record. This issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity and hence allowable in the year in which the increased liability arose due to exchange rate fluctuation. Similarly the increased liability which was utilized for acquisition of capital asset is to be added as cost of capital asset. It has also been clarified that amendment in section 43A by Finance Act, 2002 with effect from 1-4-2003 is prospective in nature. Therefore, in view of the authoritative pronouncement of the Hon'ble Supreme Court, the increased liability on account of working operation is allowable in the year in which the liability arose. The increased liability on account of foreign exchange loan which was utilized for acquisition of capital asset is to be added to the cost of assets for purpose of claiming depreciation in the year in which such increased liability arose. The same is to be held as ascertained or accrued liability and not notional or unascertained liability. Accordingly, the grounds raised by the assessee are allowed and that by the revenue are dismissed." The ld. AR also submitted that assessee had borrowed working capital from a foreign bank to the extent of Rs. 7.35 crores as circulating capital for joint corporate objects. Once it is cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us while disposing of Revenue's appeal. This ground is accordingly allowed but for statistical purposes. 17. Ground No. 5 relates to disallowance under section 14A. The facts relating to this issue are that assessee company claimed income of Rs. 88,77,869 as exempt under section 10(33) of the Income-tax Act, 1961. 18. After considering the reply of the assessee and his order for assessment year 2000-01 the Assessing Officer worked out disallowable under section 14A at Rs. 12,76,089 as under : A. Total interest payment 7264572 B. Total funds available 1068779664 C. Cost of fund (taking both borrowed fund and own fund together) A/B 0/01 D. Investment in Shares 148517246 E. Cost of fund invested in shares (A/B) D 10099482 Sales 345863194 Other income 49354673 F. Total Receipts 395217867 G. Dividend being exempt 4575869 H. Administrative and other expenses 21609999 I. Amount of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The facts relating to this issue as noted by the Assessing Officer and the ld. CIT(A) are that the assessee company is involved in the manufacturing of "ossein" and "gelatine" from bones. M/s Konica Gelatine Corporation which was purchasing "ossein" from assessee company was a promoter of the assessee company. The "ossein" purchased by M/s Konica Gelatine was apparently used for manufacturing "gelatine" which was further used for manufacturing photographic films. The detailed facts from inception of the assessee company till the termination of agreement with Konica Gelatine which led to the award of compensation to the assessee company, are as under : Miranis were partners in M/s Khimji Vishram Sons, Mumbai. This concern entered into collaboration with M/s Konica Gelatine Corporation and M/s Nichimen Co., Japan, for manufacturing "ossein" in India. For this purpose they entered into a basic agreement and technical agreement both dated 29-8-1972. In pursuance of these agreements, assessee company namely India Gelatine Chemicals Ltd., (IGCL) was set up to manufacture "ossein" in India. The basic agreement dated 29-8-1972 was to provide finance, administrative, technical and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in relation to the project documents. The project documents were defined in the termination agreement as consisting of two agreements of 1972 and technical agreement of 1995. The assessee had claimed that due to the structural damage to the project resulting from the termination agreement the compensation received is capital in nature. The termination agreement would have left possible closing of "ossein" plant and thus damage to the profit earning apparatus of the assessee company. On the other hand, the claim of the Revenue is that the above receipt is revenue in nature as it is awarded against stoppage of purchases of "ossein" from the assessee company and that assessee company has not stopped manufacturing of "ossein" even after termination of agreement. In order to appreciate the arguments of the assessee and revenue we consider it appropriate to deal with the contents of the agreements in detail. In 1972 a basic agreement and technical collaboration agreement were entered into between three parties who were as under : (a) Konica Gelatine Corporation (KGC) (Technical Partner) (b) Nichimen Corporation Ltd., Japan (NCL) (Fin Mar. Partner) (c) Miranis of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltaneously with the subscription of shares. There were restrictions of transfer of shares by each party to the effect that for such transfer full agreement with other parties has to take place as the other remaining parties will have pre-emptive rights to purchase the same. Takarazuka was appointed technical consultant to the assessee company as per terms and conditions concluded with the two. It was further agreed that Takarazuka (now Konica Gelatine Corporation) would purchase "ossein" manufactured by assessee company on priority basis. Article 11 of basic agreement in this regard reads as under : Article 11 : It is agreed that ossein produced by the company shall be taken up by Takarazuka to whom it shall be offered in priority at international prices. However, the Company shall not be precluded from selling ossein to any other countries. The international price here means the price obtainable by the other manufacturers of ossein in India in the international markets, on equivalent FOB terms in agreed foreign currencies, as determined from time to time. This will be subject to the policy and/or regulations of Government of India for the time being in force. This basic agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company and Konica Gelatine Corporation Ltd., (KGCL) for establishing a separate unit for manufacturing gelatine. KGCL would provide all technical assistance for production of "gelatine" as it was already engaged in this product for many years. This new plant was to be establish at Vapi, Gujarat employing KGCL's technology. The KGCL would have provided know-how and technology to the assessee company for setting up and running of this new plant. It was provided that gelatine so produced by IGCL could be exported, sold or used anywhere in the world. Such right was granted on the payment of fees. The Article 3 of this agreement in this regard reads as under : 3.1 KGC hereby grants to IGCL subject to the payments of the fees agreed in this agreement, the exclusive right : (a) to employ KGC's Technology in the design, construction, improvement and operation of the contract plant. (b) To sell or use in India products so manufactured in the contract plant, and to export, sell or use the same in any other country of the world. However, IGCL shall commence manufacture and sale of photographic grade of gelatine only at a future date after obtaining the prior written conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of that party to discharge its obligations under this Agreement. (iii) As order is made a resolution is passed for winding up or liquidation of the other party except where in such an event is only for the purpose of amalgamation with another or reconstruction and the resultant company emerging is or agrees to be bound by the terms hereof. 13.2 No waiver of any antecedent deed and no grant of time and indulgence shall prejudice any subsequent right to terminate this Agreement. 24. Before the Assessing Officer it was contended as under : l the so called termination has resulted in the damage to the profit earning apparatus, l It has lead to the sterilization (as termed by the assessee limbs are broken and it has become permanently handicapped baby) of the source of the income l The receipt is capital in view of the loss of the infrastructure of the company (sic). l Various cases have been cited selectively to buttress its claim as the capital receipt. The Assessing Officer, however, rejected the claim of compensation as capital receipt. He held that the profit making apparatus of the assessee company has not been compromised or harmed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r termination of purchase from you of ossein with your delivery of ossein to us in October this year. We have endeavoured to provide this to you at the earliest possible opportunity and have provided you with termination notice of over 6 months, to allow you to identify alternative customers for purchase of ossein from you, and to thereby mitigate your losses, if any, arising from such termination." According to the ld. CIT(A) this letter clearly states the intention of KGCL to terminate the contract for the purchase of "ossein". Similar letter was written on 26-6-2001 which also indicated that termination of agreement dated November, 2001 was for terminating the agreement for purchase of ossein. The ld. CIT(A) has referred to the contents of this letter as under : "Dear Sirs, We refer to our letter of March 28, 2001 to you and the subsequent discussions on April 5, 2001, April 9, 2001 and May 21, 2001 regarding our decision to terminate the agreement for purchase of ossein from you. After due consideration of your request to extend concession and the circumstances, we hereby give you notice of our intention to terminate purchase of ossein from you as of January 31, 2002 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is capital in nature. 26. Against this the ld. AR for the assessee submitted that : (1) The termination of agreement should be read as a whole. It provided compensation for termination of basic agreement and technical agreement of 1972; (ii) for termination of agreement dated 12th May, 1995 which related to providing technical know-how; and (iii) for setting up gelatine plant. (2) All the agreements namely Memorandum, basic agreement, technical collaboration agreement and agreement of 1995 were referred to as project documents which were finally terminated. (3) In consideration of termination of project documents and in consideration of discontinuing the purchase of product by KGCL from IGCL, assessee was paid compensation. Therefore, it is incorrect on the part of the Revenue to say that compensation was only for termination of purchase from IGCL. (4) By terminating the agreement and project documents there is a damage to the infrastructure. Gelatine plant was set up at the cost of Rs. 45 crores in 1995-96 and it hardly attained commercial production by the end of 2001. The production reached only upto 30-50 per cent of its capacity. (5) Gelatine produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement of November, 2001 refers to purchase agreement then assessee company was to show what was the purchase agreement with Takarazuka or KGCL. If not then terms contained in basic agreement and technical collaboration agreement 1972 has to be considered as constituting purchase agreement which was terminated. Further ld. DR submitted that ossein plant and gelatine plants are different. Gelatine plant was being set up by virtue of agreement of 1995 and notice for termination was given only in respect of ossein. He submitted that assessee has not given any data how it has suffered structural damage. The basic working papers as to how the compensation has been calculated has not been given. The KGCL had only 10 per cent holding whereas Nichimen had 30 per cent holding in assessee company and it was required to market the products made by the assessee. This Nichimen is responsible for sale of ossein manufactured by the assessee. By virtue of separate agreement called technical collaboration agreement Takarazuka (IGCL) had provided technical assistance and this technical assistance confined for 5 years only. It cannot be therefore said that by termination agreement there was any effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company was free to market its products in any other country which has been clearly specified in 1972 agreement. The ld. DR submits that if for the sake of argument it is held that some compensation was paid for termination of 1995 agreement then there was also stipulation of non compete fee. KGCL had clearly agreed not to compete with the assessee for sale of ossein after termination of its relationship with the assessee company. In other words KGCL would have charged non-compete fee from assessee company which is apparently adjusted against total compensation paid to the assessee company. Thus apparently there are three elements in the compensation one which is major, is about termination of purchase of ossein from the assessee company for which KGCL would make payment to assessee company for loss of profit arising on sale of ossein to KGCL; secondly payment by KGCL to assessee company for withdrawing from Vapi plant; and thirdly payment by assessee to KGCL as non-compete fee. Since compensation paid was a net result and KGCL has terminated all the relation with the assessee company then "non-compete fee" element would neutralize any payment for withdrawing by KGCL from Vapi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1995 agreements are project document. It was for 10 years which are yet to expire and, therefore, on both the counts i.e., on account of structural damage to the assessee company and termination of project document in respect of Vapi plant compensation received by it would be capital in nature. He submitted that the production of the assessee company has substantially fallen because of withdrawal of KGCL, as provided earlier. 31. We have considered the rival submissions and perused the material on record. The undisputed facts are that basic agreement and technical collaboration of 1972 provide the creation of assessee company for manufacturing ossein which would be purchased on priority basis by M/s Takarazuka (Konica Gelatine Corporation now), no time limit as such for continuation of this agreement was provided. For technical collaboration assessee company was to provide a total sum of 5 million Japanese yens. Article 11 provided that ossein produced by the assessee company shall be taken up by Takarazuka on priority basis at international price and assessee company was not precluded from selling ossein to any other countries. The technical collaboration agreement provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 001 executed between the assessee company IGCL, KGCL and Nichimen Co. and Khimji Vishram Sons (Miranis) provided by virtue of clause (F) the definition of project documents which were terminated by clause (G). The two clauses (F) (G) in this regard are as follows : "(F) The Memorandum, the basic agreement, the Technical Collaboration agreement and the agreements dated May 12,1995 and October 15, 1998 executed between IGCL and Konica Shall, hereinafter, for the sake of brevity wherever the context so permits, be collectively referred to as the "Project Documents". (G) By its letters dated March 28, 2001 and June 26, 2001, Konica formally terminated the Project Documents and its contract to purchase the Product from IGCL." Clause (I) provides that Konica has reduced the production capacity of photographic gelatine and desires to discontinue the purchase of products from IGCL. Clause (I) of this termination agreement states as under : "(I) For certain reasons, Konica has reduced the production capacity of photographic gelatine and therefore desires to discontinue the purchase of the products from IGCL with effect from February 1, 2002." Clause (K) provides the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner, directly or indirectly, purchase and/or procure the Products from any third party within the territory of India. Konica acknowledges that the terms and conditions of this Agreement and the "non-objection" granted by IGCL is a composite, reasonable and sufficient consideration for undertaking the non-compete covenant under this Article, which has been arrived at after taking into account the commercial value of the covenant. Accordingly, no separate consideration is payable for this non-compete covenant, and Konica admits and acknowledges the same and foreover releases and discharges IGCL from making any payment and/or paying any further consideration." Thus from the termination agreement we notice that compensation was paid by Konica to IGCL in respect of three separate liabilities and obligations : (1) Obligation of Konica was to purchase ossein from assessee company which was stopped by KGCL on account of reduction in the production capacity of photographic gelatine and accordingly it desired to discontinue the purchase of the product from IGCL with effect from February 1, 2002. (2) Discharging Konica from its obligation contained in an agreement of 1995 wherein g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oods including electrical lamps. In 1938 it entered into an agreement with Phillip Electric Co. for the exclusive right to purchase and sale electrical lamps manufactured by Phillip Electrical Co., in certain areas of Indian territory. This arrangement continued for 16 years and thereafter Phillip Electrical Co. decided to take over the distribution of lamp in certain areas in which the firm of the assessee had a right. After serving a termination notice and after some deliberation with the partners it was agreed that a sum of Rs. 20,000 would be paid to Shri P.H. Divecha and other partners of the firm as three years remuneration. This amount was held as capital receipt in the hands of Shri P.H. Divecha for several reasons as under : (i) The agreement between the firm of P.H. Divecha and Phillip Electrical Company created a monopoly right of purchase and monopoly right of sale in the products of Phillip Electrical Co., in certain areas. It secured all the forms and advantage of an enduring nature and was not an ordinary trading agreement. (ii) It could not be proved that amount payable to the partners represented the likely profits of the firm that would have arisen if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e would be fixed by mutual consultation with Polish Company. The clause 15 of the agreement provided that period of the agreement would be 5 years but Polish Company retained the right to terminate the agreement by giving 45 days notice if any condition of the agreement are infringed but it also provided that termination of agreement would not affect in any respect, the fulfilment of contract between the parties in execution of the agreement. In other words the assessee would continue to sell tractors in its possession if agreement with the purchaser were executed prior to termination. The assessee purchased tractors from Polish Company but in between serious trouble developed on account of technical problems in the tractors. By mutual settlement distribution agreement was terminated and assessee received a sum of Rs. 93,450 in all. It was claimed as capital receipt. It was held by Hon'ble Bombay High Court that the sum received by the assessee company was in the course of its business and there was no damage to its profit making apparatus. Hon'ble Bombay High Court distinguished the decision of Hon'ble Supreme Court in P.H. Divecha's case (supra) and held that sum of Rs. 93,450 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to carry on his trade i.e., freed from the contract terminated, the receipt is revenue in nature. Where by the cancellation of an agency the trading structure of the assessee is impaired or such cancellation result in loss of what may be regarded as the source of income of the assessee, the payment made for cancellation agreement is normally a capital receipt. In that case assessee company carried on the business of manufacturing industrial gases. It entered into an agreement with Union Carbide India Ltd., Bhopal. The agreement was initially for 5 years with the option of further renewal. Union Carbide India Ltd., (UCIL) was to purchase a minimum quantity of gases per year worth Rs. 20 lakhs inclusive of sales-tax and duty and in the event of UCIL failing to take such quantity of gases in a year then UCIL would pay to the assessee a sum of money making to the assessee difference to Rs. 20 lakhs. The agreement was terminated by mutual consent with effect from February 5, 1985 after Bhopal Gas Tragedy, and the factory of UCIL was closed. However, another agreement entered into by the assessee with UCIL provided for supply of gases and supply being less the UCIL paid the differentia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower are handed over along with the area of sales, net work, under an agreement, and thus crippled or paralyzed one of the sources, then compensation so received would be capital in nature. (4) Where assessee is continuing to remain in business, source of income is not paralyzed or does not come to an end and assessee is compensated for loss of profit on account of other party not purchasing goods as agreed earlier, then compensation so received would be revenue in nature. The distinction is whether assessee's source of income continues to survive or comes to an end. In P.H. Divecha's case (supra) the source of income of assessee came to an end inasmuch as the distributorship was taken over by Phillip Electrical Company and it started selling products at its own. When we apply above principles to the facts of the present case we find that : (i) KGCL was continuing to purchase ossein from the assessee. It had stopped purchasing ossein on account of its being not able to sell gelatine manufactured by it from ossein. It allowed the assessee to operate in India in respect of ossein by not entering into Indian territory for sale of the product of the like manufactured by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KGCL to assessee company related to intention of KGCL whereby KGCL did not desire to continue to purchase ossein from assessee company. In view of this, the compensation received by the assessee company from KGCL would be in lieu of stoppage of ossein purchases from assessee company and hence would be a revenue receipt. There are covenants in termination agreement according to which KGCL released itself from other obligations. One of these obligations was to provide technical support in respect of Vapi plant. However, no amount if any payable to IGCL has been worked out in respect of this part of compensation which was supposed to be paid by KGCL by assessee company. Similarly, the compensation, if any, to be paid by assessee company to KGCL on account of non-compete clause in the termination agreement has also not been worked out except stating in the relevant covenant that no separate working for such compensation has been made. In our considered view the compensation, if any, to be paid by KGCL for withdrawing itself from obligation in respect of Vapi Plant would apparently neutralize the compensation to be paid, if any, by assessee company to KGCL for non-compete covenant and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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