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TMI Blog2002 (10) TMI 241X X X X Extracts X X X X X X X X Extracts X X X X ..... h HP and HPI on2nd April, 1991, as amended on27th May, 1991, pursuant to which the parties, agreed to combine the respective computer manufacturing, marketing. servicing and sales activities inIndiaof the assessee and HP1. In the JVA 26 per cent equity was held by HP through its wholly-owned subsidiary, Hewlett-Packard Delaware Capital Inc. ("HPDC") Under the joint venture agreement, the assessee was permitted to use the name "Hewlett Packard" and was thus renamed as HCL Hewlett-Packard Ltd ("HCL HP Ltd") 6. The joint venture agreement amongst these parties was ultimately terminated by an agreement dt.1st April, 1997,Para2 of the said agreement, provides for payment of seventeen million dollars ($ 17,000,000) as follows: "HP shall pay to HCL HP as full compensation to HCL HP, its shareholders, creditors, and any other interested persons for the past and future loss of exclusivity with respect to HP computer products and elimination of non-competition obligations referred to in art. 14.3 of the joint venture agreement the sum of seventeen million dollars ($ 17,000,000) as follows: (a) On or before3rd April, 1997, eight million dollars ($ 8,000,000) (hereinafter referred to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute a capital asset in terms of s. 2(14). Further he held that the extinguishment of this bundle of rights by termination of the JVA has resulted in transfer of an asset as per provisions of s. 2(47)(ii) of the IT Act. The AO also rejected the assessee-company's contention that this capital receipt is not taxable and held as under: "The amendment to Finance Act, 1997 also very clearly states that if the extinguishment of a capital right to manufacture is for a consideration it will fall under s. 55. The assessee's case is, therefore, covered by the provisions of s. 45 r/w s. 55 of the IT Act, 1961. The intent of the legislature on this issue is very clear. Sec. 55(2)(ii) has been amended w.e.f.1st April, 1998, in order to ensure payments such as these are brought to tax. Sec. 55(2)(ii) states that in such cases, the cost of acquisition, where the capital asset is a right to manufacture or produce any article or thing will be Nil." The entire amount of Rs. 60,80,95,000 was brought to tax under s. 45 r/w s. 55 of the IT Act, 1961 as income from long-term capital gains. 11. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT(A) and reiterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment it is clear that the AO's action suffers from no infirmity. Accordingly, I have no hesitation in holding that the capital receipt of Rs 60,80,95,000 has been correctly brought to tax by the AO under s. 45 r/w s. 55 as income from capital gains. The submissions and contentions of the learned authorised representative on this issue do not hold water and carry no weight. The AO's finding rests on a sound footing and suffers from no infirmity. No relief is admissible on this ground." 12. The assessee is still aggrieved and has come up in appeal before the Tribunal. Shri S.K Tulsyan, adv. appeared with Shri S. Bandyopadhyay, adv. and Shri J.B. Sanghari, CA on behalf of the assessee The learned counsel of the assessee strongly objected to the conclusion drawn by the AO that on termination of the JVA, the main loss of the assessee was in respect of the right to manufacture HP products i.e., computers, its component and other accessories. According to him on proper reading of the JVA of2nd April, 1991, it is seen that the parties desired to combine the respective computer manufacturing, marketing, servicing and sales activities inIndiaof the assessee and HPI into one operation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different sections of the IT Act denote the whole specie of a particular article or thing and not some selected items thereof produced under a particular brand name, trade-mark etc. On this basis, it was submitted that the assessee never lost the right to manufacture computers as such which is the general specie but a particular brand i.e. HP computers and its products. 16. In support of the above interpretation, Shri S.K. Tulsyan, the learned counsel relied on the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Laxmi Art Studio (2001) 168 CTR (Raj) 380 : (2001) 249 ITR 710 (Raj) where it was held that there is no further condition that the article or thing manufactured or produced by the assessee must be an article or thing which could be sold or bought in open market as a general commodity. The article or thing, which the particular assessee was producing was photographic films and related to the specific requirements of its customers. Acknowledging that in general, the expression "article or thing" should mean article or thing in its generality which can openly be sold or bought in the market. The Hon'ble Rajasthan High Court held in that case that even so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a right to manufacture, produce or process any article or thing, as is mentioned in cl. (a) of sub-s. (2) of s. 55 of the IT Act, 1961. Hence it is pleaded that merely on account of loss of right to use a particular brand name in respect of manufacture of certain types of article or thing, there is no extinguishment of the general right to manufacture such article or thing and hence provisions of s. 55(2)(a)(ii) would not apply to the present case. 20. It was submitted that the assessee was already in the line of manufacture of computers, its component parts and accessories on the basis of its in-house technology. The termination agreement does not stop the assessee-company from manufacturing computers and its component parts, accessories and workstation systems. The assessee-company continues to be in the same business even now. In other words, the right to manufacture computer is not lost on account of the termination of the JVA. Therefore, the contention of the AO that the abovementioned compensation is for the loss of the right to manufacture is not correct. In the present case, the right to manufacture article or thing is the right to manufacture computer and accessories, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above r/w para C of the termination agreement dt.1st April, 1997, make it abundantly clear that the assessee-company which was made to be the exclusive manufacturer of HP computer products inIndiawas given technical know-how etc. in order to enable the manufacture of HP products as per HP technology. If the assessee-company was to manufacture HP computer products as per the HP technology, it is obvious that it had to be supplied the technical know-how, patents, drawings, designs and blueprints, etc. Without the right to use such technical know-how, drawings and blueprints, etc., it would not be possible for the assessee-company to produce computer products as per the exclusive HP technology. Therefore, it is obvious that such rights to use the patents, technical know-how etc. are ancillary to the licence given for manufacturing HP products as per the exclusive HP technology. In other words, the above rights given for use of patents, technical know-how, drawings, blueprints etc. are all embedded in the expression "exclusive use of HP technology" Therefore, it cannot be said that the use of HP patents, "technical know-how etc., is a right distinct from the right to manufacture as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Similarly, the reliance on the case of Pathange Poultry Farm vs. CIT was also held to be irrelevant as the question for consideration in that case was the interpretation of the word 'plant'. 26. With regard to the reliance in the case of Apeejay (P) Ltd. vs. CIT, it was submitted that the Hon'ble Calcutta High Court in that case held that the assessee was merely mixing up and blending the tea which did not involve manufacture of any article or thing. The input and the output of the assessee's business remained tea and, therefore, the thing produced by the assessee was tea and the end product sold by the assessee was also tea. The learned CIT, therefore, questioned how this helps the case of the assessee since the controversy in the present case was the question of manufacture of article or thing namely computer products. 27. The assessee in this case was engaged in the business of manufacture of computer products as per its in-house technology prior to entering in JVA withHP,USAAfter entering into the JVA, the assessee ceased to manufacture such in-house computer products and instead started the manufacture of computer products as per HP technology. What is under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill. The amendment will take effect from 1st April, 1998, will accordingly, apply in relation to asst. yr. 1998-99 and subsequent years." 30. It is further submitted that it has been held in the case of J.C. Chandiok vs. Dy. CIT (1999) 64 TTJ (Del)(SB) 1 : (1999) 238 ITR 89 (AT)(Del)(SB) that the amendment of s. 55(2)(a) w.e.f. 1st April, 1995, providing that the cost of acquisition of tenancy rights is to be taken as nil, indicates that the legislature took the character of tenancy rights as that of capital asset. The ratio of this judgement would be applicable to the facts of the instant case also. The introduction of the words "a right to manufacture, produce or process any article or thing" in s. 55(2) w.e.f.1st April, 1998clearly indicates that the legislature took the character of the above rights to manufacture as that of capital asset. The words "a trademark or brand name associated with a business" have been further introduced by the Finance Act,2001 w.e.f.1st April, 2002. These amendments are only clarificatory in nature, since a trademark or a brand name associated with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, vide Agreement dt.2nd April, 1991. As seen in the preamble to the Agreement, HP is and for several years has been engaged inter alia in the design, engineering, manufacture, assembly and sale of certain types of computers together with their components and paripherals. 33. Similary, the assessee then HCL has been engaged in the manufacture, distribution and sale of computers and services inIndiaand has been and continues to be the recipient of workstation computer technology from HP pursuant to its agreement with Apollo Computers Domain GmbH, a subsidiary of Apollo Computer Inc. It was also acting as exclusive representative of HP's computer products inIndiapursuant to earlier agreement dt.24th Oct., 1990. Since the parties desire to combine the respective computer manufacturing, marketing, servicing and sales activities in India of HCL and HPI into one operation to be conducted by a company inIndiaowned jointly by HP and the shareholders of HCL, the JVA was entered into. 34. On the basis of the agreement, a control group company was to be formed by the name of "HCL Hewlett-Packard Ltd." and "Hewlett-Packard" was to be used as part of the company's name with the express con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to HP's worldwide infrastructural and marketing support resources. 38. HP, therefore wished to offer for sale its entire share holding in HCL HP to the members of the control group and obtain the freedom to implement inIndiathrough HPI its worldwide sales, distribution and business models and discontinue manufacturing of HP computers and software in HCL HP under the licensing agreements. HP, therefore, agreed to pay as full compensation to the assessee-company, its shareholders, creditors and any other interested persons for the past and future loss of exclusivity with respect to HP computer products and elimination of non-competition, a sum of seventeen million dollars ($ 17,000,000). The issue, therefore, is to consider whether this payment is a compensation to the assessee for the loss of a right to manufacture, produce or process computers or it is a mere loss of right to use the trademark or brand name associated with HP computers. 39. On verification of the assets of the company at the time of JVA in 1991 as at the time of termination of the agreement in 1997, it is seen that there is no actual transfer of assets in the form of plant and machinery and other apparatus for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains tax could be levied under s. 45 of the Act in respect of this capital asset for which no cost of acquisition is incurred by the assessee. This view taken by us is in line with the decision of the Calcutta Bench of the Tribunal in the case of ICI India Ltd. vs. Dy. CIT. We, therefore, hold that the compensation received by the assessee in the instant case cannot be assessed to capital gains tax for the year under consideration as the amended definition of cost of acquisition is effective only from the asst. yr. 2002-03. The appeal on this ground is accordingly allowed. 41. The next ground is in regard to claim of depreciation on computers which was part of stock-in-trade of the assessee-company and which had been given on hire or use in-house capitalized during the year. The AO found that these computers were used and since the assessee has been claiming depreciation on all other items, the non-claiming of depreciation was due to losses in the earlier years. Since the assessee could not give proper reason for not claiming depreciation on these items he was of the view that the correct market value for capitalization should be arrived at by calculating allowable deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. yr. 2002-02 (sic) 2002-03 as Expln. 5 to s. 32 was inserted by the Finance Act,2001 w.e.f.1st April, 2002. Since depreciation has to be allowed on the actual cost, it is submitted that the claim of the assessee should be allowed without reducing the cost by deducting notional depreciation of the earlier years. 44. On the other hand, Shri B.D. Gupta, learned CIT (Departmental Representative) supported the order of the CIT(A). According to him the assets in question were undisputedly put to use from year to year by giving them out on hire or use in-house. The assets in question, therefore, were not only treated as fixed assets but were also all along put to use. Therefore, the claim of the assessee that the assets in question were stock-in-trade is not tenable on the facts and circumstances of the case. Since the assets were also put to use right from the year in which they were acquired, the assessee ought to have claimed depreciation thereon in order to arrive at the true business profits. The nature of the entries passed in the books of account of the assessee by treating these assets as stock-in-trade are not conclusive. Having regard to these and also keeping in view the Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated above. 46. The next ground is in regard to liability in respect of fluctuations in foreign currency loan received from HP. The assessee in this regard debited a sum of Rs 2,60,80,000 on account of the foreign exchange rate difference in the principal loan amount. The AO disallowed the claim observing as follows: "Further,' this debit of Rs 2,60,80,000 is on account of the exchange rate difference in the principal loan amount. It is apparent that increase in loan amount due to foreign exchange fluctuation is not an expenditure incurred for securing the loan, it is not an expenditure which can be stated to be incidental to business of the assessee. On the contrary, it is an expenditure related to indebtedness of the assessee and. is, therefore, not a business expenditure, as held by Calcutta High Court in Bestobell (India) Ltd. vs. CIT (1979) 117 ITR 789 (Cal). The Calcutta High Court stated that "In the instant case it was not the contention of the assessee that it had. incurred the extra expenditure in order to secure the loan. The loan had already been obtained. It was at the point of repayment that the assessee has to provide an extra amount in Rupee by reason of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has been maintaining its account under the mercantile system and, therefore, actual payment has got no relevance in the case of the assessee. Relying on the decision of the Hon'ble Supreme Court in the case of CIT vs. Arvind Mills Ltd. (1992) 101 CTR (SC) 91 : (1992) 193 ITR 255 (SC), it is submitted that the question of actual payment of liability was not at all important and the liability should be considered to have accrued during the year. 50. Relying further on the decision referred to above and that of the Hon'ble Delhi High Court in the case of CIT vs. Bharat Heavy Electricals Ltd. (1999) 156 CTR (Del) 12 : (1999) 239 ITR 756 (Del) and that of the Delhi Bench of the Tribunal in the case of Telemecanique Controls (India) Ltd. vs. Dy. CIT (1998) 60 TTJ (Del) 434 : (1997) 60 ITD 483 (Del), it is submitted that increase in the loan liability utilized for importing raw materials on account of adverse fluctuation in (sic) Mills Ltd. and that of the Hon'ble Delhi High Court in the case of BHEL and of the Tribunal in the case of Telemecanique Controls (India) Ltd. are distinguishable and the ratio laid down by them have no application to the facts of the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee to substantiate the claim. The order on this point is also accordingly set aside for fresh decision as indicated above. 54. The next ground is in regard to claim of deduction under s. 80-IA. In this regard the claim of the assessee for deduction under s. 80-IA was disallowed in respect of the industrial unit at Pondicheri on the ground that the gross total income was negative. It is the limited submission of the learned counsel of the assessee that the AO failed to take into account the provisions of cl. (7) of s. 80-IA as it existed at the relevant time as follows: "Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-s. (1) apply shall, for the purposes of determining the quantum of deduction under sub-s. (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to subsequent assessment year up to and including the assessment year for which the determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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