9911796707
TMI Blog2005 (12) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee entered into an agreement with M/s. Indo Tech Transformers Ltd., on 15-7-1994 for transfer of the firm as a going concern for a consideration of Rs. 4,70,65,056. The component and payment of this amount works out as follows:- ---------------------------------------------- (A) Value of net assets ... Rs. 2,76,49,617 (B) Value of technical know-how ... Rs. 1,25,00,000 (C) Compensation for pending orders i.e., for not to compete and indulge in transformers business by the firm ... Rs. 36,16,139 (D) Compensation for expected orders under negotiations (i.e., for not to compete and indulge in transformers business by the Firm). ... Rs. 33,00,000 --------------- Rs. 4,70,65,756 --------------- MODE OF PAYMENT (i) Share to Sri P.E. Subramaniam ... Rs. 87,86,800 (ii)Payment to Sri P.E. Subramaniam ... Rs. 1,15,00,000 (iii)Share to Sri P.S. Jagdish ... Rs. 87,86,800 (iv)Payment to Sri P.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the company has been in existence for several years and it has been making huge amount of profit since so many years. The learned departmental representative drew our attention to the profit earned by the assessee in earlier years which is as under:- ------------------------------------------- Assessment year Amount of profit (Rs.) ------------------------------------------- 1993-94 ... 87.56 lakhs 1994-95 ... 214.85 lakhs 1995-96 ... 73.59 lakhs ------------------------------------------- This being the position, the company was sold without any good-will and non-existing asset came into picture as technical know-how. It, therefore, shows that the goodwill of the company was coloured as technical know-how with an intention to evade tax. If there is a technical know-how, the assessee should have incurred the cost for it and the same should have been reflected in the balance sheet. As there was no item of technical know-how in the balance sheet of the company, it is far from imagination that the assessee has sold technical know-how. In other words, he submitted that though the assessee has incurred technical know-how fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued that the right to manufacture is different from skill to manufacture. In the present case, the assessee has not transferred any manufacturing technology, but the goodwill in the market has been transferred and not only the trading activity has the goodwill but also the industrial activity. 7. Conclusively the learned Departmental Representative submitted that the CIT (Appeals) ought to have noticed that the assessee had not imparted any technical know-how to the transferee so as to say that the transfer was that of a technical know-how and the amount shown as receipt towards technical know-how actually was part and parcel of the total composite consideration and the impugned receipt was towards goodwill though cloaked as technical know-how and as such, the same is taxable. 8. On the other hand, the learned Counsel for the assessee submitted that the assessee has commenced manufacturing and marketing of Distribution and Medium sized Power Transformers, relatively small sized Distribution Transformers with OLTC's, Arc Furnace transformers, Induction furnace transformers, special application transformers etc. to the Industrial Sector. It took a lot of Engineering to manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c, USA for a period of 7 years in an arrangement entered into in or about 1985. In terms of actual payment (even at a very moderate estimate of US $ 125 million sales per year) this would amount to a figure of US $ 35 million over a period of 7 years. Based on the above facts Rs. 125 lakhs paid by Indo Tech Transformers Limited to Indo Tech Electric Company is very much a nominal amount. All these designs, drawings, technical data, specifications etc. formed part of the technical know-how. 9. The learned Counsel for the assessee submitted that in the light of the foregoing, only technical know-how was transferred which is a capital asset and the transfer of profit-earning apparatus is in the nature of capital asset, not chargeable to tax. He further submitted that the intention of the assessee must be ascertained from the Transfer Deed itself and it is not permissible to go outside the word set down and taxation authorities cannot substitute or guess as to what the parties might have intended in the circumstances. The authorities cannot deny the propriety of looking at an agreement between the parties as a whole and the authorities cannot re-write the agreement according to their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of the consideration will remain unaffected, i.e., the same will not be taxable under the head 'Capital gains' only up to assessment year 1997-98 and will become taxable from the assessment year 1998-99 and subsequent assessment years. (iii) where the capital assets are intangible assets (like trademark, etc., listed in para 2 above) not being in the nature of goodwill of a business, the issue to be decided, depends upon one vital factor whether such assets ought to be transferred was initially acquired at a cost or whether it was self-generated. In the event, such asset was acquired at a consideration, capital gains will have to be calculated in accordance with law in this behalf. However, where such asset in question is a self-generating asset, no capital gains will be levied up to assessment year 1997-98, after which date capital gains will become leviable. It may be clarified that mere payment of some amount for registration of such intangible asset like trademark, etc., may not constitute the cost of acquisition for the purpose of computation of capital gains." 10. We have heard the rival submissions and perused the material on record. We have also carefully gon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess. Though it is attached to the business, it can be sold with the business or independently. It is not taxable till the amendment to Income-tax Act, 1961 in view of the judgment of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 as this was self-generated and date of acquisition cannot be determined. However, Income-tax Act was amended and goodwill was brought into tax with effect from 1-4-1988 by the Finance Act, 1987. 13. In the present case, the assessee has transferred the firm as a going concern for a consideration of Rs. 4.71 crores though its net asset was Rs. 2.76 crores. Now the question for consideration is, what is the balance consideration represents. The assessee is a profit-making concern and was earning profit for the last many years. We cannot accept the argument of the assessee that it has sold the business without any goodwill. In our opinion, the consideration of Rs. 1.25 crores which was termed as consideration for technical know-how is nothing but a colourable device adopted by the assessee with a view to evade tax. It is well-settled that the corporate veil of a company can be lifted for the purpose of ascertaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e capitalized the technical know-how, it should have appeared in the balance sheet. As per the argument of the assessee, it has developed through the expertise and knowledge of technocrats for which assessee might have incurred cost. But actually, it is not so. The technical know-how newly came into existence by signing the transfer agreement. There is no material on record to establish the cost of it other than mentioning in the transfer deed. There is no material also to show the method of quantification of the technical know-how and there is no technical appraisal report. It is an admitted fact that the assessee has not transferred any patented process, trade mark, trade name, know-how relating to plant and machinery, process of manufacturing, technical data relating to maintenance of quality of product etc. In our opinion, what was sold, was nothing but goodwill only and the assessee has chosen to label this goodwill as "Technical Know-How" in order to evade tax, as the 'goodwill' is exigible to tax with effect from 1-4-1988 and the technical know-how was not liable to tax during the relevant period. It is unimaginable that the assessee has sold the profit-making unit without a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax. He further submitted placing reliance on the decision of the Bombay Bench of the Tribunal in the case of Asstt. CIT v. Ashit M. Patel [2005] 96 TTJ (Mum.) 439 that all sums received or receivable in cash and kind under an agreement for not carrying out any activity in relation to any business is not liable to tax till the assessment year 2003-04. He also placed reliance on the decision of the Delhi Bench of the Tribunal in the case of P.L. Lamba (HUF) v. Asstt. CIT [2005] 90 TTJ 389 for the same proposition. He also submitted that non-competition fee received by the assessee due to restrictive covenant imposed on it for not carrying on competitive business cannot be subjected to tax. For this proposition, he relied on the decision of Chennai Bench of the Tribunal in the case of R.K. Swamy v. Asstt. CIT [2004] 88 ITD 185. He further submitted that the consideration received by the assessee for surrendering the right to manufacture of transformer cannot be taxed as this is a capital receipt. For this purpose he relied on the decision of the Chennai Bench of Tribunal in the case of P.L. Chemical Ltd v. Asstt. CIT [2003] 86 ITD 46. Further he relied on the decision of the Mumbai Be ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
