1970 (1) TMI 18 - HC - Income Tax

Section 10(5A) - Agreement for termination of the contract - compensation received for termination of sole distributorship - agreement made between the assessee-firm and the importers was not an agreement of agency - receipt on account of the compensation is not taxable

Summary

Issues Involved:
1. Whether the assessee-firm was holding an agency.
2. Whether the compensation of Rs. 50,000 was received in connection with the termination of an agency or the modification of the terms and conditions of an agency.

Issue-Wise Detailed Analysis:

1. Whether the assessee-firm was holding an agency:
The court examined whether the agreement dated April 29, 1955, between Ciba Pharma Ltd. and the assessee-firm constituted an agency agreement. The relevant section of the Indian Income-tax Act, 1922, under scrutiny was Section 10(5A), clause (d), which taxes compensation received in connection with the termination or modification of an agency.

The court analyzed the agreement's clauses, noting that the assessee-firm was appointed as a distributor for Ciba Ltd.'s pharmaceutical products in specified territories. The court considered the language and provisions of the agreement, including clauses 9, 24, 26, and 27, which were emphasized by the assessee-firm, and clauses 3, 19, and 30, highlighted by the revenue.

The court noted that the agreement described the assessee-firm as a distributor and included terms that allowed the firm to act independently, such as setting prices, appointing sub-distributors, and bearing the risk of unsold goods. The court referenced sections 182 to 238 of the Indian Contract Act, which define the legal relationship between a principal and an agent, emphasizing that an agent acts on behalf of the principal and does not act independently.

The court concluded that the agreement allowed the assessee-firm to act on its own behalf, making it a distributor rather than an agent. The firm was responsible for paying the invoice prices of the goods and bore the risk of resale, which is inconsistent with an agency relationship.

2. Whether the compensation of Rs. 50,000 was received in connection with the termination of an agency or the modification of the terms and conditions of an agency:
The court examined whether the sum of Rs. 50,000 received by the assessee-firm was in connection with the termination or modification of an agency, as per Section 10(5A) of the Act. The revenue argued that the agreement was an agency agreement, and the compensation was taxable under this section.

The court, however, found that the agreement was not an agency agreement but a distribution agreement. The firm acted independently, purchasing goods from the importers and reselling them at its own risk. Therefore, the compensation received could not be taxed under Section 10(5A) as it did not pertain to the termination or modification of an agency.

Conclusion:
The court held that the agreement between the assessee-firm and Ciba Pharma Ltd. was not an agency agreement. Consequently, the compensation of Rs. 50,000 received by the assessee-firm was not taxable under Section 10(5A) of the Indian Income-tax Act, 1922. The question referred to the court was answered in the negative, and the respondent was ordered to pay costs.