2019 (3) TMI 1110 - HC - Income Tax

Compensation received on termination of contract - income u/s 28(ii)(c) - termination of agreement with US based company - nature of receipt - revenue or capital receipt - relationship between the assessee and the US based company one in the nature of the agency? - CIT (A) hold that there was no principal agent relationship between the parties and the contract was on principal to principal basis and therefore section 28(ii)(c) would not apply also confirmed by Tribunal - HELD THAT - Any such reference or the expression in the agreement, by itself would not be conclusive or determinative of relationship between the parties. The true character of the relationship from the agreement would have to be gathered from reading the document as a whole. This Court in case of Daruvala Bros. (P). Ltd. Vs. CIT 1970 (1) TMI 18 - BOMBAY HIGH COURT had found that the agreement made between the parties, was of sole distribution and the agent was acting on his behalf and not on behalf of the principal. In that background, it was held that the agreement in question was not one of agency, though the document may have used such term to describe the relationship between the two sides. No error in view of the tribunal. - decided against revenue

Summary

Issues:
1. Whether the addition made on account of compensation received on termination of a contract is a capital receipt and not assessable to tax?
2. Whether the relationship between the assessee and the US based company was that of principal to principal or principal to agent?

Analysis:
1. The revenue filed an Income Tax Appeal challenging the judgment of the Income Tax Appellate Tribunal regarding the addition made on account of compensation received on termination of a contract. The assessee received a compensation of ?2.25 crores after the termination of the contract with a US-based company. The revenue contended that the receipt should be chargeable to tax under section 28(ii)(c) of the Income Tax Act, 1961. The CIT (A) allowed the Assessee's Appeal, stating that there was no principal agent relationship between the parties, and the tribunal upheld this view. The tribunal held that since the entire source of income was terminated and there was no principal to agent relationship, section 28(ii)(c) would not apply.

2. The key issue was determining the nature of the relationship between the assessee and the US based company. The tribunal and CIT (A) held that the relationship was one of principal to principal and not that of agency. The CIT Appellate noted a clause in the Service Agreement stating that the contractor shall act as an Independent Contractor, emphasizing the absence of an agency relationship. The Appellant argued that the agreement itself described the relationship as one of agency. However, the court held that the true character of the relationship must be determined from the agreement as a whole. Citing a previous case, it was established that the mere use of the term 'agency' in an agreement does not conclusively establish an agency relationship.

In conclusion, the High Court upheld the tribunal's decision, stating that no error was found in the view taken. It was clarified that the reference to 'agency' in the agreement alone is not determinative of the relationship between the parties. The court dismissed the Appeal, emphasizing that no question of law arose in this case.