9911796707
TMI Blog2009 (7) TMI 899X X X X Extracts X X X X X X X X Extracts X X X X ..... tion paid to the assessee to adjust the relations between the parties, which had become strained on account of committing breaches by the parties as against each other in execution of the agreement. If the original agreements did not create any capital asset or advantage of enduring nature in favour of the assessee due to several restrictions and limitations in the agreement while using the technical know-how then as necessary corollary consequent upon termination of such agreement, the amount received by the assessee from their foreign collaborator too did not create any asset of capital nature nor created advantage of enduring nature in favour of the assessee so as to entitle the assessee to claim exemption from payment of tax on the said sum as capital receipt. Contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period, and in this respect, it differs from an agency agreement – it is revenue receipt in the hands of the assessee and was liable to be assessed as revenue receipt. Mercanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the assessee and against the Revenue in the light of two decisions of the Supreme Court reported in Jute Corporation of India Ltd. v. CIT [1991] 187 ITR 688 (SC) and National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). 4. In Jute Corporation of India Ltd. [1991] 187 ITR 688 (SC), their Lord- ships, while examining the powers of appellate authority under the Income-tax Act, ruled as under (page 693) : "The declaration of law is clear that the power of the Appellate Assistant Commissioner is coterminous with that of the Income-tax Officer, and if that is so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an appellate authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey relate to question No. 1, it is noticed that the Tribunal did not allow the assessee to raise one additional ground regarding charging of interest under section 234B of the Act in their appeal on the ground that the same was not raised before the lower authorities. As a consequence, the assessee was prevented from raising a plea regarding charging of interest in their appeal before the Tribunal. In our opinion, the Tribunal in the light of the law laid down by the Supreme Court in aforementioned two cases, should have allowed the assessee to raise the plea of charging interest under section 234B ibid in their appeal. It was more so when it did not involve adducing of any additional evidence. In fact, it was a pure question of law. An issue of this nature could, therefore, be decided by an appellate authority on admitted facts without calling the parties to adduce any additional evidence on facts in support of such plea. In our opinion, therefore, it was a plea, which could be allowed to be raised by the assessee in their appeal before the Tribunal notwithstanding the fact that it was not raised by them before the lower authorities. 8. In the light of the foregoing discussion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) Duration of agreement shall be for a period of 8 years from the date of agreement filed with the RBI. 14. Consequent upon the grant of approval, the assessee entered into foreign collaboration agreement/memorandum of understanding in July, 1985, technical know-how agreement dated June 22, 1987, and technical services agreement India/France, dated June 22, 1987. 15. Some of the salient features of technical know how agreement dated June 22, 1987, need mention. Clause 1.4 defines "technical know-how" whereas clause 1.5 defines "technical services". Clause 2 provides for grant of licence to the assessee a non-exclusive right to use the technical know-how in the establishment of plant by the assessee at Pithampur and to manufacture all types of tyres/tubes. This clause also grants non-exclusive right to the assessee to use, distribute and sell in all countries the licensed products so manufactured by the assessee in their plant except in those countries where M/s. Michalin has a manufacturing facility at the time of execution of the agreement (France, Italy, Spain and Nigeria). 16. Clause 3 provides for payment. The assessee (licensee) was to pay to Michelin a lump sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement for any breach by the assessee, it shall not be relieved from payment of any obligation. 19. Clause 10 provides for assignment. Clause 10.1 states that agreement is personal to the assessee, who has agreed not to assign, transfer, sub- license, charge or part with any rights or obligations under the agreement without prior written consent of M/s Michelin. Clauses 11, 12 13 and 14 provide for procedure for conciliation and arbitration, force majeure and mode of serving notices. 20. Pursuant to the aforementioned agreements, the assessee set up a factory at Pithampur, Distt. Dhar (MP) having a capacity of 5/8 lakhs units of products (tubes/tyres) per annum. The assessee also paid in lump sum technical know-how fees in three equal instalments of Rs. 6,66,666 on February 24, 1987, September 29, 1987, and October 19, 1989. The first two payments were debited to pre-operative expenses in books in the assessment year 1989-90 whereas the third one was debited to the work-in- progress account in the books in the assessment year 1990-91. The assessee then adjusted the royalty payment aggregating Rs. 8,38,152 in books "Rs. 1,72,964 in the assessment year 1988-89, Rs. 2,49,550 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the first payment of U.S. $ 1,11,08,000, i.e., Rs. 2,88,51,613. The assessee shown this amount as capital gains being an amount received on extinguishment of rights and claims from Michelin. The assessee, therefore, claimed deduction of the entire sum under section 54E on account of investment in the IDBI Capital Bonds within six months. This is what the assessee actually said in the return so far as their claim on this issue was concerned : "The company during the year has received US $ 11,18,000 towards extinguishment of its right and claims from company General Des Establishments, Michelin, its technical collaborators as per the agreement dated November 22, 1991. The convertible value of the said amount of US $ 11,18,000 amounting to Rs. 2,88,51,613 as received by the company the said collaborators has been credited by it in its profit and loss account for this year. The company claims that there being no identifiable cost of acquisition towards the amount received for extinguishment of its rights and claims against the foreign collaborator and the same being an item of capital gain is not taxable as per the decision of the Supreme Court in the case of CIT v. B. C. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selected under scrutiny it shall be presumed that the claim of the company treating the amount of Rs. 2,29,50,782 as capital receipt has been accepted and the loss for this year shall be increased for set off in the subsequent years by Rs. 2,29,50,782." 28. It is with this background and facts, the Assessing Officer called upon the assessee to justify its claim that the aforesaid two receipts represented consideration for transfer of capital assets. It was contended by the assessee before the Assessing Officer that there was a capital asset consisting of right to receive the technical know-how to manufacture and sale of tyres and tubes. This right, according to the assessee, was transferred. Since there was extinguishment of this right and hence, consideration received was on account of transfer of capital assets. 29. The contention of the assessee was not accepted by the Assessing Officer. By order dated February 28, 1995 (annexure A), the Assessing Officer held that keeping in view the terms of the agreement and further the correspondence exchanged between the two, the amount (2 receipts) received upon termination of agreement was not on account of surrender of any right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appeals) and the Tribunal. In other words, his submission was the same as was before the lower authorities, namely, the Assessing Officer was not justified in making the impugned addition of Rs. 5,18,02,396 as a taxable income in the hands of the assessee in the assessment year in question. According to him, it was not taxable because it was essentially in the nature of capital asset or advantage of an enduring nature. Learned counsel took us to various clauses of agreements referred to supra and by placing reliance on law laid down by the Supreme Court in cases cited at the Bar contended that on a proper interpretation of relevant clauses of agreements and applying the law laid down by the Supreme Court in the cases cited at the Bar, the transaction in question, i.e., the payment received by the assessee cannot be held as revenue receipt but has to be held as capital asset thereby not exigible to tax. 33. In reply, learned counsel for the Revenue supported the impugned additions and contended that question No. 2 has to be answered against the assessee and in favour of the Revenue. 34. Having heard the learned counsel for the parties at length and on perusal of record o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circum- stances. Thus, the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may well be his income. The problem that confronts us has to be approached keeping in mind the different kinds of consideration taken into account in the different cases." 39. Further, the learned Chief Justice applying the principles of law laid down by Lord Hanworht M. R. in the case of Short Bros. Ltd. v. IRC [1927] 12 Tax Case 955, 973 to the facts of that case went on to hold (page 916) : "These three agreements would have come to an end on the expiration of the period of five years from the respective dates of release of the films and only a part of the period to run, a fact which may also be relevantly borne in mind. The cancellation of these agreements must have left the assessee free, if it so chose, to secure other films which could be distributed in the place of these films and which might have brought in better box-offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court in later deci- sion of Raj Bahadur Jairam Valji [1959] 35 ITR 148 (SC). In this case, the assessee was engaged in supplying limestone/dolomite. In the course of this business activity, the assessee entered into an agreement with a company called "B.I. Company". In terms of the agreement, the B. I. company was to purchase all requirement of limestone/dolomite from the assessee at a specified rate. After sometime, B. I. company went into liquidation and its assets and liabilities were taken over by another company called "I. I. S. company". The successor company continued to purchase the limestone/ dolomite from the assessee for sometime but later finding that rates are uneconomical stopped purchasing the material from the assessee. The assessee, therefore, filed a suit against I. I. S. company and obtained injunction restraining them from purchasing material from any person other than the assessee. This led to the assessee and I. I. S. company enter- ing into an agreement. In terms of this agreement, the assessee was to supply limestone from one quarry to I. I. S. company for 25 years as per their requirement. The agreement also provided that I .I. S. company would pay Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law to be drawn from those facts. Vide also the observations of Lord Greene M.R. in Rustproof Metal Window Co. Ltd. v. IRC [1948] 16 ITR (E.C.) 57 (CA). That being so, we must first examine the facts of the present case, and then consider whether on those facts and in the light of the applicable principles, the sum of Rs. 2,50,000 received by the respondent is a capital or a revenue receipt." 44. In his distinctive style of writing, the learned judge by giving practical illustration explained the legal principle for determining the true nature of transaction in the following words (page 162) : "If under the terms of a contract a businessman A is to supply goods, let us say, 100 bales of yarn, on a particular day and he does that, the price received by him, therefore will be a revenue receipt. and in the above case if the purchaser cancels the contract and pays damages to the seller, that would also be a revenue receipt. If under the same contract A is to deliver the bales in four quarterly instalmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Kulti for a period of 12 years and for loading iron at Monoharpore for a like period. There was, therefore, at no time any agreement which operated as a bar to the carrying on of business by the respondent. On a consideration of all the facts established, we are of opinion that the receipt of Rs. 2,50,000 by the respondent is a revenue receipt and is chargeable to tax." 46. Examining the facts of the present case in the light of the above decisions, the question to be considered is what is the true nature of agreements in question whether it was entered into by the assessee in the usual course of their business and if it was then whether the amount paid for the termination of the agreement can be held to be a trading receipt. Yet another question that arises for consideration is whether the assessee acquired any asset of an enduring nature pursuant to the agreements in question and if so whether it enabled them to claim the amount received to be in the nature of capital receipt. 47. A perusal of memorandum of understanding so also the technical know-how agreement would go to show that, firstly, foreign collaborator Michelin had granted to the assessee non-exclusive righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain the benefit of technical assistance for running the business, (5) when licence could be granted to others by Swiss company, (6) when the assessee was prohibited from divulging confidential information to third parties without the express consent of the Swiss company, (7) when recurring payment of royalty was dependant upon sale only up to the date of the agreement, it was difficult to hold with these terms that the assessee acquired any capital assets of enduring nature. In other words, in the light of these conditions emerging from the agreement, their Lordships held that the assessee-company did not acquire any asset or advantage of enduring nature for the benefit of its business. 49. This question in somewhat similar facts again arose before the Bombay High Court in the case reported in CIT v. Tata Engineering and Locomotive Co. P. Ltd. [1980] 123 ITR 538 (Bom). In this case also, Tata had entered into an agreement with their foreign collaborator, M/s. Daimler Benz, for manufacture and sale of trucks at their factory. In term of agreements, M/s. Daimler Benz were to supply their technical know-how, advice, training and use of their trade name to Tatas for certain period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Mere length of the period of the agreement is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset. The agreement itself could have been terminated by any party before the expiry of the term on any of the grounds stated in the agreement. There is no doubt nothing in the agreement which disables Telco from using the technique which it had mastered after getting the know-how from either M/s. Daimler Benz or M/s. Henricot. It is not possible for us to accept the argument that merely because a company, which has entered into a contract with regard to know-how, is entitled to use that know-how even after the agreement has expired, the benefit must be said to be of an enduring character. Agreement of foreign collaboration, where foreign know-how is availed of in lieu of payment, is in our view, in substance, a transaction of acquiring the necessary technical information with regard to technique of production. Instead of employing persons having knowledge of those techniques and utilising their knowledge, what is done is that technical know-how is acquired under a collaboration agreement. The fact that the same informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign collaborator) so that agreement comes to an end amicably. In the words of Venkatarama Ayyar J. in the case of Rai Bahadur Jairam Valji [1959] 35 ITR 148 (SC), if the purchase under contract puts an end to the contract after sometime, say after two years and pays compensation for the breach of contract as regards the remaining period, does the receipt thereof becomes a capital. The learned judge says "it sounds illogical so to hold". This principle squarely applies to the facts of this case, because the terms of the agreement in question extensively quoted supra go to show that it was essentially in the nature of compensation paid to the assessee to adjust the relations between the parties, which had become strained on account of committing breaches by the parties as against each other in execution of the agreement. If the original agreements did not create any capital asset or advantage of enduring nature in favour of the assessee due to several restrictions and limitations in the agreement while using the technical know-how then as necessary corollary consequent upon termination of such agreement, the amount received by the assessee from their foreign collaborator too did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wering question No. 2 in favour of the assessee. 55. Learned counsel for the assessee also cited cases reported in CIT v. Shawallace and Co., AIR 1932 PC 138, CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902 (SC), Devidas Vithaldas and Co. v. CIT [1972] 84 ITR 277 (SC) and Jonas Woodhead and Sons (India) Ltd. v. CIT [1997] 224 ITR 342 (SC). Having gone through the same, we find them to be distinguishable on facts of the case. In our view, the decision of this reference is governed by cases referred to and relied on supra. We, thus, do not wish to deal with them in detail. 56. In view of foregoing discussion, we answer question No. 2 in favour of the Revenue and against the assessee. In other words, we hold by answer- ing question No. 2 that the Tribunal was justified in holding that a sum of Rs. 5,18,62,396 constituted a revenue receipt in the hands of the assessee and was liable to be assessed as revenue receipt. 57. This takes us to question No. 3. We for convenience again reproduce question No. 3 hereinbelow : "3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the amount of Rs. 2,19,50,782 accrued to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC). His Lordship H. R. Khanna J., speaking for the Bench, succinctly explained the true system of accountancy in the following words (page 840) : "The appellant-company admittedly was maintaining its accounts, according to the mercantile system. It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits ; whereas under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received ; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on the mercantile basis, the profits or gains are credited though they are not actually realized, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made (See Indermani Jatia v. CIT [1959] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2,19,50,782 and hence, its taxability in the hands of the assessee could not be postponed till the date of its actual receipt, i.e., up to November 30, 1992. In other words, it had to be taxed in the hands of the assessee as if received on November 22, 1991, i.e., the date on which agreement was executed. Since, this date fell in the assessment year 1992-93 and hence, it was rightly taxed by the Assessing Officer in the assessment year 1992-93. We, thus, concur with this view of all the three authorities and hold accordingly. 66. In this view of the matter, we answer question No. 3 against the asses- see and in favour of the Revenue. In other words, we answer the question No. 3 by holding that the Tribunal was justified in taking a view that the amount of Rs. 2,19,50,782 accrued to the assessee in the assessment year 1992-93 and was rightly brought to tax in the said assessment year. In view of the foregoing discussion, we answer the reference as follows : 67. 1. Question No. 1 : It is answered in favour of the assessee and against the Revenue. 2. Question No. 2 : It is answered against the assessee and in favour of Revenue. 3. Question No. 3 : It is a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
