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TMI Blog2010 (1) TMI 980X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to allow the sum as revenue expenditure. The ground is allowed in favour of the assessee. Nature of Compensation received - exclusive marketing rights for both controlled and decontrolled products - HELD THAT:- As seen from the facts of this case, first of all the assessee had no exclusive marketing rights over the controlled products and secondly, out of the decontrolled products also the assessee has not given any exclusive marketing rights to IOC whereas it has retained certain marketing rights over both the controlled and decontrolled products on its own vide article 3. In view of this it cannot be stated that the assessee has surrendered its entire marketing rights. On the principles established in the abovesaid decision, it can only be concluded that the amount was received by the assessee towards loss of income and not loss of source of income, which is in the revenue field. Suffice to say that on the present set of facts since the assessee has no exclusive marketing rights over the controlled products and composite agreement was entered for supply of fixed quantity to IOC which was also marketing its products earlier exclusively, the amount of compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT DELHI-E] wherein it was held that the provisions of section 234D are applicable from 1st June 2003 and not with retrospective effect, hence, the same should not be applicable in the assessee's case for the assessment year 2001-02 wherein the refund was issued before June 1, 2003. In line with the decision of the Special Bench the assessee's ground is allowed. The Assessing Officer is directed to work out the interest u/s 234D, if any, in line with the decision of the Special Bench (supra). Ground is considered allowed for statistical purposes. The appeal is partly allowed. In the result, all the appeals are partly allowed. - Hon'ble Judges R.S. Padvekar, J.M. and B. Ramakotahiah, Member (A) For the Appellant : R. Vijaya Raghavan, Adv. For the Respondents : Ajay Kumar Srivastava, Adv. Order B. Ramakotaiah (Accountant Member).- 1. These appeals are by the assessee against the orders of the Commissioner of Income-tax (Appeals) for the assessment years 1999-2000, 2000-01 and 2001-02. The assessee M/s. Kochi Refineries Ltd. (referred as CRL) has since been merged with M/s. Bharat Petroleum Corporation Ltd. The assessee has asked f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax (Appeals) erred in not allowing set-off of unabsorbed depreciation and business loss of Cochin Refinery Balmer and Lawrie Ltd. (CRBL) aggregating to Rs.46,76,06,005 while computing the business income. Assuming but not admitting that the appellant is not entitled for the set-off of unabsorbed depreciation and business loss of CRBL as mentioned above, the learned Commissioner of Income-tax (Appeals) should have allowed depreciation on the assets taken over from CRBL on their original costs, as claimed by the appellant during the assessment proceedings. 5. The learned Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to consider the revised computation of income as per the revised return filed by the appellant. 3. With reference to ground No. 1, the assessee has claimed a total expenditure of Rs. 5.06 crores towards repairs and maintenance out of which the Assessing Officer considered an amount of Rs. 1,57,19,390 as capital expenditure and disallowed the same. The Commissioner of Income-tax (Appeals) has given part relief out of which the assessee is contesting the claim of the following two expenditures as revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. The assessee being a petroleum refinery, it is very essential to carry out routine inspection as a safety measure. The cost incurred by the assessee-company for the repairs and replacements on the basis of inspection report have been spent not to create any new asset or to substitute the old one with a new asset. These are repairs and replacements of part of the machinery and not the entire machinery itself. There is no reason to hold that the said expenditure is capital in nature, following the principles established in the assessee s own case for earlier years on similar replacements and repairs of the tank. We direct the Assessing Officer to allow the sum of Rs. 53,90,835 as revenue expenditure. The ground is allowed in favour of the assessee. 6. Ground No. 2 pertains to the expenditure on feasibility studies. This issue is covered in favour of the assessee by the orders of the Income-tax Appellate Tribunal in the assessment years 1994-95 to 1998-99. Since the facts are identical, respectfully following the decisions in the earlier years we direct the Assessing Officer to allow the expenditure as revenue expenditure. This ground is decided in favour of the assessee. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . R42011/17/95-OR-II dated August 25, 1995. Subsequently vide resolution No. P-20012/29/97 PP dated November 21, 1997, the Government of India declared dismantling of administered pricing mechanism of petroleum products in a phased manner. Oil Coordination Committee vide its clarification letter Ref. OSD/ETG/1 dated March 4, 1998 has classified the petroleum products into two categories, namely, controlled and decontrolled. In the letter issued by the OCC dated March 4, 1998 it was further clarified that while for controlled products the marketing rights will remain with the PSU marketing companies, the stand alone refineries are free to solicit the new business coming up for deregulated products. The freeze on existing company-wise, product-wise volumes for the year ending March 31, 1998 for decontrolled product would end on March 31, 1999 and these would apply to stand alone refineries also. In the preamble to the agreement the following were stated regarding the assessee-company and IOC and their intention to enter into an agreement : CRL has a petroleum refinery with an installed capacity to process 7.5 million tonnes per annum (MMTPA) of crude oil at Ambalamugal, Ernakula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oil and the variation in production of controlled products as per OCC directives/SPM. Product Annual quantity (000 MT) Controlled products Liquified petroleum gas (LPG) 297 Motor spirit (MS) 732 Superior kerosene oil (SKO) 465 Aviation turbine fuel (ATF) 84 High speed diesel (HSD) 3432 Decontrolled products Naphtha 703 JP 5 6 Light diesel oil (LDO) 36 Fuel oil (FO) 708 Low sulphur heavy stock/Heavy petroleum stock (LSHS/HPS) 408 3.2 CRL shall offer the abovementioned quantities of controlled and decontrolled products and IOC shall uplift the offered quantities of the products as per terms and conditions mentioned herein. 3.3 CRL proposes to put-up some jubilee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls on IOC based on quantity determined as per the measurements noted under article 5 and pricing as per article 11. Article 13 : Payment 13.1 For the sale of products to IOC, CRL shall be paid within 3 days of product transfer from CRL s storage as per the present practice. Article 18 : Compensation 18.1 In consideration of exclusive marketing rights of CRL s products assigned to IOC as per article 3 of this agreement, IOC shall pay CRL a lumpsum amount of Rs. 43 crores per annum with escalation of 5 per cent. (compounded) per annum. In addition, IOC shall pay CRL an amount of Rs. 10 crores per annum towards CRL s marketing facilities with escalation of 5 per cent. (compounded) as per annum. 18.2 CRL shall raise bill on IOC towards the aforesaid annual compensation in four equal instalments on quarterly basis, at the middle of each quarter. IOC shall make payment to CRL within 3 days of the bill. In regard to compensation for the 3 quarters of the current financial year 1998-99, the amount will be paid to CRL not later than a month after effectuation of the contract and after deducting the financial cost of working capital already availed of by CRL from IOC for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ; but if any of these rights themselves are transferred or restrained, it is in the capital field. Analogy can be drawn from the case of letting out of property. When properties are let out, receipt is revenue in nature. But when lessor agrees to let out the property and receives lumpsum premium, it is for parting with the right of the lessor, viz., right to let out and hence it is capital receipts (CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC)). Even though the premium and annual rent is mentioned in the same agreement and are part of the same transaction, their character is different. Similarly tenancy is an adjunct to and arises from the lease agreement. Tenant may merely walk out surrendering lease. However, if tenant is paid a sum of surrendering his tenancy, it is treated as giving up the right of tenancy and it is capital. It is surrender of rights of tenant. A. Gasper v. CIT [1991] 192 ITR 382 (SC) Similarly when technical know-how is given with right to recipient for exclusive manufacture using technical know-how, portion of payment granting the exclusive right is capital in nature. Though transfer of technical know-how and grant of exclusive rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 307 ITR 75 (SC). 14. Learned counsel summarising the arguments submitted that what the assessee has received is towards surrender of marketing rights and the true aspect of the transaction has to be considered in the light of various principles. It is not in dispute that the assessee has bundle of rights and relied on the decision of the Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC) for the proposition that the amount received is capital in nature. Moreover, since the assessee has foregone its right to marketing the product the principles established in the Income-tax Appellate Tribunal s decision in the case of BASF India Ltd. v. Addl. CIT 119 ITD 337 (Mum) will equally apply to the facts of the case. However, it was fairly submitted that there is no direct case law on this issue and the general propositions on the issue are applicable to the transfer of the marketing rights. 15. The learned Departmental representative in reply submitted that the assessee is having manufacturing and selling of the products which are part of the same business and the assessee had no right to sell in open market and it is always marketing through IOC earlier and continued to assign it to IOC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RL had agreed to market its bitumen products also through Indian Oil Corporation ( IOC ) by an agreement entered into on August 6, 1999. Under this agreement, the assessee claimed compensation for marketing rights of bitumen products of Rs. 2,88,22,881 for the assessment year 2000-01 and Rs. 3,65,65,716 for the assessment year 200102. However, this agreement was not submitted either to the Commissioner of Income-tax (Appeals) or the Income-tax Appellate Tribunal, Mumbai. This is given only for reconciliation of the claim 17. It was submitted that this issue is recurring issue in the later two years also and similar arguments are applicable for the respective grounds. 18. We have considered the issue and examined various details filed including the agreement and the case law relied upon by the respective counsels. As seen from the agreement with IOC it is very clear that article 3 of the agreement is composite marketing arrangement for controlled products as well decontrolled products. The assessee s capacity for refining is more as far as controlled products are concerned. The preamble of the agreement itself refers to the letter issued by the OCC dated March 4, 1998 which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products. As stated above the marketing rights of controlled products are always with six PSU marketing companies, IOC being one in that. Hence it cannot be stated and cannot be accepted on the basis of the arguments of the assessee that it has an exclusive marketing rights which was assigned to the IOC hence, the amount is a capital receipt. When an assessee does not have any marketing rights for the controlled products it cannot be stated that the assessee has parted with marketing rights exclusively to the IOC and the compensation was received in lieu of that. Admittedly, a part of the decontrolled products were being sold to IOC and on which, one can say that the assessee had certain marketing rights. But the fact that all the refining products of CRL were also being marketed by IOC. The written submission do indicate that the Government has permitted the CRL to choose any of the Government Oil Marketing companies and accordingly the CLR had chosen IOC and the amount was received in lieu of that. The Government of India letter was dated August 28, 1995 and the assessee has entered into agreement on December 16, 1998 effective from April 1, 1998. This does not indicate that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t but made claim only in computation of income based on certain principles of law. This aspect of legal principles was rightly considered by the Commissioner of Income-tax (Appeals) elaborately in the order. Some of the extracts were worth mentioning here (page 287): (b) Now the decision relied on by the appellant in support of its contentions are considered below. The appellant has relied on the decision of the hon ble Supreme Court in the case of Gillanders Arbuthnot and Co. Ltd. v. CIT [1964] 53 ITR 283 in support of its contention that the consideration received in pursuance of the aforesaid agreement is a capital receipt. The appellant has also quoted an observation of the hon ble Supreme Court in the said case which reads as under (page 287) : It cannot be seriously disputed that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of which the agency was terminated, or for loss of goodwill would, prima facie, be of the nature of a capital receipt. It is true that the Supreme Court has made the aforesaid observation in the case relied on by the appellant. In fact the observation appears in the following cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing regard to the vast array of business done by the said assessee as agents, the acquisition of agencies was in the normal course of business and determination of individual agencies a normal incident not affecting or impairing its trading structure. Accordingly, the Supreme Court held that the amount received by the appellant for the cancellation of the explosive agency did not represent the price paid for the loss of the capital asset. It was held to be of the nature of income. Analysing the facts of the case the Supreme Court held that there was no loss of an enduring asset by the cancellation of the agency. The Supreme Court held in the aforesaid case that the compensation received by the said assessee was not truly a compensation for not carrying on a business but it was a sum which was worked out in terms of the profits which the appellant could have earned in the period of notice and paid in the ordinary course of business to adjust the relation between the said assessee and the principal company. (c) As in the above case, no enduring asset has come into existence in the form of exclusive marketing rights in the case of the appellant. The appellant has also not produce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot created any new capital asset called marketing rights and has not lost any such capital asset on account of the agreement. Further by agreeing not to offer any decontrolled products to any other marketing company during the pendency of the agreement, the appellant was not entering into an independent obligation which came into operation when the sale agreement was entered into. The obligation was a dependent obligation and was a part of the whole agreement which required the IOC to buy the products which the appellant offered to it and it came into operation in connection with the sale of its products to IOC. In case the IOC did not perform its part of the agreement, the appellant had a right to terminate the agreement with three months notice. Therefore, the restrictive covenant was a part and parcel of the sale agreement and can only be treated as a conditions for the sale of its products to IOC. Hence the payment, if any, attributable to the restrictive covenant is part of the sale consideration and is a revenue receipt. (e) Another decision relied on by the appellant is that of Oberoi Hotels P. Ltd. v. CIT [1999] 236 ITR 903 (SC). In that case the assessee-company was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration for giving up its right to purchase and/or to operate the property or for getting it on lease before it was transferred or let out to other persons. It was not for settlement of rights under a trading contract but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principal agreement had resulted in loss of source of the assessee s income. Therefore, the receipt in the hands of the assessee was held to be a capital receipt. (f) But the facts in the case of the appellant are different. The amount received by the appellant was not for the loss of any source of income but it was a receipt under a trading contract. The Supreme Court has in the aforesaid case quoted the following Supreme Court observation in CIT v. Rai Bahadur Jayram Valji [1959] 35 ITR 148 (page 164) : whether a payment of compensation for termination of an agency is a capital or revenue receipt, it would have to be considered whether the agency was in the nature of capital asset in the hands of the assessee, or whether it was only part of his stock-in-trade. In the light of this observation, it can be seen that the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the appellant s trading structure. Therefore, the facts in the appellant s case are distinguishable. In fact the Supreme Court has held in the case of (Oberoi Hotels P. Ltd. v. CIT [1999] 236 ITR 903 at page 906) that the question whether a receipt is capital or revenue is to be determined by drawing a conclusion of law ultimately from the facts of the particular case and it is not possible to lay down any single test as infallible or any single criterion as decisive. The Supreme Court has also quoted its own observations in the case of CIT v. Rai Bahadur Jayram Valji [1959] 35 ITR 148 which have been quoted already. The aforesaid observation of the Supreme Court clearly applies to the appellant s case because the amount received by the appellant was in connection with the marketing rights of the appellant s stockin-trade. Since the marketing rights are closely associated with the stock-in-trade sold by the appellant the income from the transfer therefore is a revenue receipt. (i) In the appellant s case there is no transfer of any capital asset because the appellant has transferred only the marketing rights in respect of its stock-in-trade. The marketing rights forms p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant is earning income from the sale of petroleum products to the IOC as per the price determined as per article 11 of the agreement. It is also stated in article 11 that for all the pricing decisions the appellant s representative will be associated and its views will be taken into account. In the case of controlled products the prices fixed by the Ministry of Petroleum and Natural Gas or the OCC from time to time till the administered pricing mechanism continues shall be payable by the IOC to the appellant. After the removal of the administered pricing mechanism the prices payable for controlled products will be on the same basis as in the case of the decontrolled products. The payment of excise duty, railway freight and sales tax and TOT shall be reimbursed to the appellant. All these facts show that the appellant has not foregone any of its right to earn future profits as a result of the transfer the marketing rights to the IOC. In fact the IOC was marketing the appellant s products prior to the agreement. The appellant has not foregone any right to earn future profit because the price for the appellant s products is determined based on the pricing mechanism in article 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Supreme Court in the case of CIT v. B. C. Srinivasa Setty [1981] 128 ITR 294, does not arise. The appellant has also relied on Circular No. 763 dated February 18, 1998 ([1998] 230 ITR (St.) 54) wherein it has been clarified that it is only subsequent to the amendment to section 55(2) effected to insert specific provisions for computing the cost of acquisition in respect of self generated capital assets that any receipt on transfer thereof is eligible to capital gains. In view of the fact that there is no transfer of any capital asset this argument of the appellant is irrelevant and is hence rejected. For the same reason the claim of the appellant that in the case of the transfer of self generated intangible asset like brand name or a trade mark no capital gains can be computed in view of Circular No. 14 of 2001 dated November 23, 2001 ([2001] 252 ITR (St.) 65) and exigibility of such assets to the capital gains tax after the amendment to section 55(2)(a) are all irrelevant and are hence rejected. (n) The last claim of the appellant on this issue is based on the decision of the Madras High Court in the case of CIT v. T. I. and M Sales Ltd. [2003] 259 ITR 116. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction contract to a new company for which the assessee received an amount of Rs. 1 lakh. The said arrangement did not affect in any manner the trading structure of the assessee s business nor did it deprive him of any source of income. But the appellant s case IOC had been granted an exclusive right to market the decontrolled products. The agreement also provides that the appellant shall not offer the said products to any other marketing company during the pendency of this agreement. In the second case, the assessee who carried on the business of supplying commodities to the military authorities under contracts had entered into agreements with third parties for supplying the same commodities to the military authorities and had received certain amounts from the third parties. Your hon ble members would agree that in the appellant s case, an exclusive right had been granted to IOC and the appellant could not offer similar right to any other marketing company during the pendency of the said agreement. In the instant case, the consideration was for surrender of marketing rights which is a capital asset. Hence, the receipt should be nothing but in the nature of a capital re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribution network but also 8 employees along with data relating to the business comprising customer list, sales data, etc. In those facts of the case the hon ble Tribunal held that the amount received by the assessee on assigning of its marketing rights was capital receipt. However, as seen from the facts of this case, first of all the assessee had no exclusive marketing rights over the controlled products and secondly, out of the decontrolled products also the assessee has not given any exclusive marketing rights to IOC whereas it has retained certain marketing rights over both the controlled and decontrolled products on its own vide article 3. In view of this it cannot be stated that the assessee has surrendered its entire marketing rights. On the principles established in the abovesaid decision, it can only be concluded that the amount was received by the assessee towards loss of income and not loss of source of income, which is in the revenue field. Various case law relied upon by learned counsel need not be repeated here. Suffice to say that on the present set of facts since the assessee has no exclusive marketing rights over the controlled products and composite agreement wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee s own case, we direct the Assessing Officer to allow the expenditure as revenue expenditure. 26. Ground No. 2 pertains to surrendering of marketing rights. In line with the decision taken in ground No. 3 above, assessee s ground is rejected. The Assessing Officer and the Commissioner of Income-tax (Appeals) are correct in holding that surrender of marketing rights is a revenue receipt. Accordingly the ground is rejected. The appeal partly allowed. I. T. A. No. 1129/Coch/2004 27. The assessee has raised five grounds in this appeal. Ground No. 1 is similar to ground No. 3 in I. T. A. No. 1127/Mum/2004. In line with the decision taken in ground No. 3 the above assessee s ground is rejected. The Assessing Officer and the Commissioner of Income-tax (Appeals) are correct in holding that surrender of marketing rights is a revenue receipt. Accordingly the ground is rejected. 28. Ground No. 2 pertains to the issue of expenditure on feasibility study of Rs. 120.02 lakhs. As in earlier years the expenditure on feasibility study for expansion of the assessee s existing capacity of refining of crude oil is considered as capital expenditure by the Assessing Officer and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not added back the amounts in that year accordingly, withdrawal in this year cannot be allowed. 31. It was the submission of the assessee-counsel that under Explanation (i) any amount withdrawn from the provisions or reserve is to be excluded from the book profit but with the further requirement as per proviso to this Explanation, that if provisions was made after first April, 1997 it should have been added back in computing the book profit in the year in which the provision was made. Therefore it has to be seen whether in the year in which provision was made, viz. assessment year 1998-99-this amount of Rs. 6,34,74,000 being provision for bad debt was added back in computing the book profit for that year. From the records, it would appear for the assessment year 1998-99 no computation of book profit has been made under section 115JA (which was applicable to that year). By this it cannot be assumed or presumed that the provision made for bad debt has been deducted while computing book profit for the assessment year 1998-99. On the other hand, by means of Explanation (g) introduced to section 115JA, by the Finance Act, 2009, with effect from April 1, 1998, the provision made for d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s added back to the book profit of that year. Even by means of Explanation (g) introduced to section 115JA by the Finance (No. 2) Act, 2009, with retrospective effect from April 1, 1998 the provision for bad and doubtful debts would be deemed to have been added back in computing the book profit in that year and so the amount, now credited to the profit and loss account, is to be reduced by virtue of the provision of section 115JB. In view of this there is justification in the assessee's contention in claiming the provision as deduction in the computation of book profit in this year. On the fact that the assessee had been disallowed in that year under the normal computation and by virtue of the amendment now brought with retrospective effect from April 1, 1998, the provision for bad debt is deemed to have been added back in that year withdrawal and crediting into the profit and loss account now results in double taxation. Consequently, the assessee is correct in excluding the amount while computing the income under section 115JB. Accordingly the ground is allowed. 34. Ground No. 5 pertains to levy of interest under section 234D of Rs.2,84,775. Reliance is placed on the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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