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TMI Blog2012 (3) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... s right to manufacture - assessee is entitled to claim the amount of ₹ 30 crores received from BIL as non-taxable capital receipt for the assessment year and the same is not liable for long term capital gains tax. - IT Appeal No. 1223 (Bang.) of 2009 - - - Dated:- 24-1-2012 - N. BARATHVAJA SANKAR, J. Dilip S. Damle for the Appellant. G.V. Gopala Rao for the Respondent. THIRD MEMBER ORDER 1. As there was a difference of opinion between the Members who heard the appeal, the Hon'ble President, ITAT has nominated me as Third Member u/s 255(4) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"], to resolve the difference. 2. The question referred to me is as follows: "Whether in the facts and circumstances of the case, the assessee is entitled to claim the amount of Rs. 30 crores received from M/s.Britania Industries Ltd., as non-taxable capital receipts for the assessment year in appeal or is it liable for taxation as long-term capital gains?" 3. The main issue for consideration is whether the receipt of Rs. 30 crores for transfer of trade marks, copyrights and designs received from M/s.Britania Industries Ltd. ('BIL' for short) is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion differs with that of the Hon'ble Vice-President only regarding the second limb of revenue's contention viz., whether transfer of trademark, patent and design resulted in transfer of right to manufacture, produce or process any article or thing of M/s.Kwality Biscuits Pvt. Ltd.,(assessee). 6. Shri Dilip S.Damle, learned Chartered Accountant appearing for the assessee, submitted that it would be quite evident that each of the IPRs have specific and definite meaning in law and these rights are in no way connected with right to manufacture any particular product. The IPRs, which the assessee was owning and holding, were being used in connection with marketing and selling its products i.e. biscuits. However, 'manufacture' or 'production' of biscuits per se was not dependent on owning and holding the IPRs. He submitted that the assessee transferred only the rights relating to trademark, copyrights and designs to BIL but right to undertake manufacture or manufacturing know-how in relation thereto were never transferred by the assessee. He also submitted that on going through the history of amendments to sec.55(2)(a) (extracted elsewhere of this order), it would transpire that eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing trademark or brand name is only curative in nature and is applicable with retrospective effect. 7. In his rejoinder, the learned AR submitted that: ( i ) The first argument of the learned CIT-DR is that the consideration of Rs. 30 crores paid for IPRs included other bundle of rights and also non-compete fee. This argument is factually incorrect. Apart from Rs. 30 crores paid to the assessee, BIL paid Rs. 8 crores as non-compete fee to the promoters/shareholders of the assessee and not to assessee. The non-compete covenants were accepted by the erstwhile promoters in their personal capacity. One must keep in mind that in law, company is a separate and independent entity from its shareholders and promoters. The company is not bound by acts committed by or agreements entered into by the promoters/shareholders in their personal capacity. The promoters, for separate consideration received individually, agreed not to engage in business connected with the business of the assessee. No sum whatsoever was received by the assessee for accepting non-compete covenant from BIL, as submitted by the revenue. In terms of Heads of Agreement to which the assessee was an independent party, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -President's conclusion that assessee did not transfer 'right to manufacture'. In Hon'ble JM's opinion, brand name transferred by the assessee was right to manufacture and therefore he held that long term capital gains was assessable because cost of acquisition of such right u/s 55(2)(a) was nil. In the proceedings u/s 255(4), the scope for adjudication for the Third Member is limited to point of difference between the Members. This being the case, the Learned DR was not justified in relying upon the CIT(A)'s finding that transfer of trade mark was chargeable to tax in the assessment year 2001-02 being transfer of 'goodwill'. As already explained, "right to manufacture biscuits' and "right to market biscuits under "kwality trade mark" are separate and independent rights and it cannot be said that right to manufacture includes 'trade mark' or 'brand name'. Both the rights operate in the independent field and can be operated or acted upon independent of each other as well. Prior to 29-3-2001, right to manufacture and right to market biscuits the IPRs were owned, held and exercised by the assessee. After 29-3-2001 IPRs became BIL's property. The right to manufacture, however, continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to manufacture, distribution and marketing of biscuits business in the erstwhile brand name "Kwality". Thus the argument that the assessee continued the business is not correct. 9. Learned Departmental Representative submitted that: ( i ) the decision of the Allahabad High Court in the case of Shervani Industrial Syndicate Ltd ( supra ) is not applicable to the facts of the present case as the same was rendered mainly to consider the jurisdiction assumed by the CIT u/s 263 of the Act. Although the amendment to clause (a) of sub-section (2) of sec.55 has only prospective effect from 1-4-2002, the effect of the amendment in relation to earlier period is to be necessarily considered while determining the question as to whether the brand name associated with the business was included in the expression 'goodwill', the Kerala High Court in the case of Vysali Chemotherapeutics (P) Ltd. v. CIT [2004] 269 ITR 362/134 Taxman 445 has decided. ( ii ) the decision of the Hon'ble Supreme Court in the case of Guffic Chem (P.) Ltd. ( supra ) was primarily rendered in the context of amendment in the section 28(va) and not in the context of sec.55(2). ( iii ) the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nct from 'goodwill', followed the decision of the Apex Court in the case of S.C. Cambatta Co. (P.) Ltd. v. CEPT [1961] 41 ITR 500 wherein the distinction between these two rights was recognized and accepted by the Apex Court. ( iv ) In the case of Bombay Oil Industries Ltd ( supra ), the Mumbai Bench of the Tribunal, while deciding the said issue not only referred to the decision of the Delhi High Court in the case of Milk Foods Ltd. ( supra ) but also the decision of the Calcutta Bench in the case of ICI India Ltd. v. Dy. CIT [2002] 81 ITD 348. The ITAT, Calcutta, had categorically held that the Legislature made amendment in sec.55(2) by the Finance Act 2001 w.e.f. 1-4-2002 by inserting, the words 'or a trade mark or brand name associated with a business', after the word, 'goodwill of the business', clearly establishes that as per the intention of the Legislature, trademark cannot be equated with goodwill. 10. I have heard the rival submissions at length, considered the entire facts and material available on record including the orders of the Hon'ble Vice-President and the Hon'ble Judicial Member and also the case laws cited by both the parties. In order to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g have been extinguished for a consideration. This amount is shown as a capital receipt and is not taxable presently under the head 'capital gains'. It is proposed that capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc. is for any consideration. It is proposed that such receipts be also subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill The proposed amendment will take effect from 1st April 1998 and will accordingly apply in relation to assessment year 1998-99 and subseguent years. (emphasis supplied by me) 'Trade mark' or 'brand name associated with the business' was brought within the purview of section 55(2)(a) by the Finance Act 2001. 11 ( ii ). Notes on clauses of Finance Bill 2001 is as under (248 ITR(St.)126): "Clause 32 seeks to amend section 55 of the Income-tax Act relating to meaning of the expressions 'adjusted', 'cost of improvement' and 'cost of acquisition'. Under the existing provision contained in clause (a) of sub-section (2), the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2001 and it was mentioned in the Memorandum explaining the amendments specifically that this amendment will take effect from 1st April 2002 and will apply in relation to assessment year 2002-03 and subsequent years. The intention of the Legislature can be gathered from the Memorandum explaining the amendment and the Memorandum has clearly stated that it is applicable from 1st April 2002 (assessment year 2002-03). 12 ( i ) The CBDT circular No.14 of 2001, vide paras.42 to 42.3 clarified as under: "42. Providing for cost of acquisition of certain intangible capital assets under section 55 42.1 Under the existing provisions of sub-section (2) of section 55 of the Income-tax Act, the cost of acquisition of an intangible capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, is the purchase price in case the asset is purchased by the assessee from a previous owner, and nil in any other case. It was pointed out that certain similar self-generated intangible assets like brand name or a trade mark may not be considered to form part of the goodwill of a business, and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me became assessable by virtue of the amendment made to section 55(2)(a) by the Finance Act, 2001 w.e.f. 1-4-2002. We are concerned with the block period commencing from the assessment year 1988-89 and ending with the date of search, namely, 16-10-1997. The capital gains have been assessed as undisclosed income for the assessment year 1996-97. Therefore, the assessment to capital gains can be sustained only if the capital asset transferred was the goodwill of the assessee-company; if what is transferred is the trade mark, there will be no capital gains to be assessed since the amendment making the cost of acquisition of trade mark to be taken at Rs.nil came into effect only from 1-4-2002." 12 ( v ). In the case of Bombay Oil Industries Ltd. ( supra ), the Division Bench held as under: "It was an admitted fact that trademark/brand name of 'Parachute' and 'Saffola' was a self-generated asset and the cost of the same was nil. The receipt on sale of trademark/brand name was not exigible to capital gains tax, prior to the introduction of the words 'Trademark or Brand name associated with business'. The same has been clarified by the judgment of the Delhi High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Since the appeal of the assessee relates to assessment year 2001-02 this amendment cannot be applied retrospectively. 14. Now let me turn the other issue whether the assessee, while transferring trademark, patent and design to BIL has transferred the right to manufacture, produce or process any article or thing also, as opined by the lower authorities and the Hon'ble Judicial Member? 15. For arriving at a conclusion on this aspect, I have to mention the following facts: On 29-3-2001, a tripartite agreement was entered into by and between Shri N.Gourishankar representing the shareholders of the assessee, the assessee (KBPL) and the BIL evidencing comprehensive arrangement arrived at between the parties. The said agreement was titled as 'Heads of Agreement" (copy thereof at pages 41 to 97 of the first paper book). In terms of the said Agreement, the following things were agreed: ( a ) Existing shareholders of the assessee agreed to sell all equity shares to BIL and or its nominees at and for consideration of Rs. 16.00 crores ( b ) The assessee agreed to transfer trademarks, designs and copyrights to BIL for an aggregate consideration of Rs. 30 crores (Clauses 3.1, 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lower authorities was wrong. 17. The Hon'ble Judicial Member did not accept this finding of the Hon'ble Vice-President. He, referring to the explanatory Note to the Finance Bill, highlights the following sentence: "and nil in any other case, it has been pointed out that certain similar intangible assets like brand name or a trade mark may not be considered to form part of the goodwill of a business.... " By quoting the above, he was of the opinion that the intention of the Legislature behind the amendment of the Act is that certain but not all brand names or trademarks may not be considered to form part of the 'goodwill' of the business. When there is a sale of brand name by a company having manufacturing activity, it sells its right to manufacture along with its brand name but when there is a sale of brand name by a company which does not have a manufacturing activity, it sells only its brand name which, according to the Hon'ble JM, can also be the intention of the Legislature when these types of cases were brought into the definition of the said section. 18. If that was the intention of the Legislature, in my opinion, they would have stated in clear terms. One canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of biscuits manufacturing but only IPRs to be transferred to BIL for separate and distinct consideration. BIL had agreed to purchase IPRs in order to increase its own market share of biscuits business. BIL had no intention to acquire or extinguish assessee's right to manufacture biscuits as per se or had no intention to acquire its manufacturing apparatus or know how. BIL did not acquire from assessee either its manufacturing apparatus or factory establishment or it acquired assessee's right to manufacture biscuits. The fact that the assessee continued to carry on manufacturing and trading business is evident from sales tax assessment orders and other facts and hence, it is incorrect to hold that the assessee transferred its right to manufacture thereby ceased to carry on manufacturing or production of biscuits. I find force in the contention of the learned C.A. that even after 29-3-2001 the assessee was manufacturing biscuits for other biscuit marketing companies such as BIL and Snacko Biscuits Pvt. Ltd., against payment of job charges. I also find that it was only in the matter of marketing, distribution and sale of biscuits under the brand name "kwality", assessee faced res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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