2018 (11) TMI 790 - AT - Income Tax

Nature of income - non-compete fee - revenue or capital receipt - Held that - The assessee has parted with only some of the trademarks and has agreed to not to compete with the Henkel for only f 2 years by using its name. It has also agreed to sell its products to Henkel only exclusively. Therefore substantial business revenue stands transferred to Henkel but it cannot be said that appellant has ceased to exist after the execution of the said agreement. It might be possible that the turnover of the company has fallen substantially but because of the reason that for 2 years the assessee cannot compete with the products manufactured by Henkel. Therefore the consideration received on account of transfer of trademark is not chargeable to tax under the head capital gain as, though trademark is a capital asset, but the cost of acquisition of the same is not ascertainable. Chargeability of transfer of sale of know-how on sale of product information - whether that amounts to the transfer of right to manufacture, produce or process any article or thing where the cost of acquisition would be nil - the contention of the assessee is that after the expiry of the 2 years the appellant can make use of its right to know how and the product information to manufacture or produce its own goods - Held that - According to the assessee there is no transfer of any right to manufacture, produce or process. On careful consideration of this argument it is apparently clear that by transferring the know-how and the product information in respect of goods the appellant has not ceased its right to manufacture, produce or process the goods. Even otherwise, it is only for the 2 years that the assessee has entered into a non-compete agreement. Therefore we find ourselves in agreement with the finding of the learned CIT appeal that the said capital receipt is not liable to tax within the meaning of the provisions of section 55 (2) of the act. In view of this, the sale of knowhow and the sale of the product of ₹ 25 lakhs and ₹ 75 lakhs respectively is not chargeable to tax under the head capital gains. Disallowance on account of service charges paid to M/s TriStar Home products private limited - Held that - The claim of the assessee is that the super stockiest was only charging service charges for the appellant on monthly basis towards the salaries as well as the 2 expenses of the person employed. Commissioner appeals allowed the claim of the assessee stating that the services of the employees of the super stockiest were availed of by it for business purposes the appellant did not have its own staff in the region of Bihar and a sum the claim was allowed in the disallowance of the expenditure was deleted. DR could not point out what is the infirmity in the order of the learned commissioner of income tax appeals. - Revenue appeal dismissed.

Issues Involved:
1. Deletion of additions on account of trademark, sale of know-how, and product information.
2. Deletion of disallowance of service charges paid to M/s. Tri Star Home Products (P) Ltd.
3. Consideration of non-compete fee as capital receipt not liable to tax.
4. Condonation of delay in filing cross objections.

Issue-wise Detailed Analysis:

1. Deletion of Additions on Account of Trademark, Sale of Know-how, and Product Information:
The revenue challenged the deletion of additions amounting to ?1.75 crores for trademarks, ?25 lakhs for know-how, and ?75 lakhs for product information by the CIT(A). The assessee, a public limited company engaged in manufacturing housecleaning products, had entered into an agreement with Henkel Spic India Limited for selling these assets. The assessee claimed these receipts as exempt capital receipts. The assessing officer, however, treated them as taxable under long-term capital gains, considering the cost of acquisition as nil. The CIT(A) held that trademarks, know-how, and product information are distinct from goodwill and hence not taxable under capital gains. The tribunal upheld the CIT(A)'s decision, stating that the cost of acquisition for these assets is indeterminate, and thus, the receipts are not chargeable to tax.

2. Deletion of Disallowance of Service Charges Paid to M/s. Tri Star Home Products (P) Ltd.:
The revenue also contested the deletion of disallowance of ?1.85 lakhs paid as service charges to M/s. Tri Star Home Products (P) Ltd. The assessing officer disallowed the charges on the grounds that the assessee had sold its business to Henkel and thus did not require such services post-sale. The CIT(A) allowed the claim, stating that the services were availed for business purposes in regions where the assessee did not have its own staff. The tribunal upheld the CIT(A)'s decision, finding no infirmity in the order.

3. Consideration of Non-compete Fee as Capital Receipt Not Liable to Tax:
The assessee raised a cross objection, claiming that the ?1.5 crores received as non-compete fee should be considered a capital receipt and not liable to tax. The tribunal noted that the assessee had initially offered this amount for taxation and did not object before the assessing officer or CIT(A). The tribunal held that the issue of non-compete fee was not part of the order of the CIT(A) and thus could not be raised in cross objections. The tribunal dismissed the cross objection, stating that the appropriate remedy for the assessee would be under section 264 of the Income Tax Act, not in an appeal before the tribunal.

4. Condonation of Delay in Filing Cross Objections:
The assessee filed cross objections with a delay of 552 days, citing recent legal advice as the reason. The tribunal condoned the delay, considering the reasons acceptable and noting that the delay was not due to any deliberate negligence. The tribunal admitted the cross objections for consideration.

Conclusion:
The tribunal dismissed the revenue's appeal and the assessee's cross objections, upholding the CIT(A)'s decisions on all contested issues. The order was pronounced in open court on 13/11/2018.

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