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TMI Blog2013 (5) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary of Tyco Electronics Corporation, USA (Tyco USA) which was having business presence in large number of countries and conducted numerous business. RPG Raychem Ltd. was a joint venture between the RPG Group from India and Tyco of USA each having 50% equity in the said company. M/s. RRL was manufacturing, , marketing and promoting of industrial products such as oil heat tracing systems for on and off shore pipes, process and power station heat tracing systems, low and high voltage power cable connection and termination systems and telecommunication cable connection systems. Further, RRL was also marketing certain industrial products which was mainly used in aerospace, automotive, electronics, construction, rail and mass transit industries. The business of manufacturing and marketing of industrial products was conducted by RPG Raychem Ltd. and the assessee who was its 50% equity holder and the assessee never carried on any manufacturing or marketing of industrial products as its business. The role of the assessee was confined to holding equity capital in RPG Raychem Ltd. the income received from RRL by the assessee was only in the form of dividend. The assessee never particip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot want RPG Raychem Ltd. to enter with it. Therefore a settlement was reached among the various players in this regard. As per the settlement the assessee agreed that it would take all actions within its control including exercise of its voting rights to ensure that RPG Raychem Ltd. did not engage or participate directly or indirectly in any business in India involving manufacturing, marketing, and promotion of certain products. In consideration of the said covenant the assessee was entitled to receive US $400,000 in three annual instalments of US $1,33,333/- each. 4.1. It was further argued before the ld. CIT(A) that the assessee is a non-banking financial company and was primarily engaged in shares/securities and granting of loans. Except for investments and financing no other business was carried on by it. It was never engaged in the business of manufacturing and marketing of any products of its own. In the above by agreeing to exercise its voting right in a particular manner the assessee did not undertake any organized business activity of making profit. Therefore the said receipt cannot be taxed as business income of the assessee. The ld. CIT(A) held that the assessee was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very much a revenue receipt. 4.6. It was further argued by the ld. AR before the ld. CIT(A) that in view of the decision of Mumbai Bench of the Tribunal in the case of Spaco Carburators (I)P. Ltd. 315 ITR (AT) 86 in the assesee's case also RPG Raychem Ltd. wherein the assessee was a 50% share holder had the right to manufacture and market certain products. By virtue of the settlement agreement the assessee was to exercise its voting rights in a particular manner so as to ensure that RPG Raychem Ltd. did not engage in manufacture and marketing of certain products which would have enhanced the value of assessee's investments. It was contended that the receipt from Tyco was therefore a loss in the potential increase in the value of investment and was accordingly a capital receipt. The ld. CIT(A) observed that the decision cited by the ld. AR was related to the compensation received on breach of a technical collaboration agreement between the assessee and a Japanese company. The facts of the case of the assessee were different and therefore it is a far-fetched exercise to import this decision to the case of the assesee. With regard to the argument that this receipt was in lieu of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee but that of RPG Raychem Ltd. The other argument that this should be treated as extinguishment of voting right in the capital asset is also wrong because the assessee still holds its voting right in the various affairs of the RPG Raychem Ltd. Here the assessee has actually exercised that right in a particular manner on a particular issue. There is no relinquishment of the rights of the assessee in RPG Raychem Ltd. They are in fact in accordance with the 50% shareholding which the assessee has in that company. 4.9. Secondly the ld. AR of the assessee submitted that by an amendment made by the Finance Act, 2002 in clause (a) of sub-section (2) of section 5 it was provided that in the case of a capital asset being "right to carry on business" the cost of acquisition for the same would have to be taken as "nil" if no purchase consideration was paid upon its acquisition. The same would mean that where an assessee relinquishes its right to carry on any business and receives consideration for relinquishment of its rights to carry on any business the receipt would be assessable as income under the head "capital gains". In the assessee's case by virtue of exercise of voting rights by it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business interest in India. Therefore to ensure that RPG Raychem Ltd. did not compete with the business of marketing and promoting specific industrial products within the licenced territory, Tyco Middle East agreed to pay a specific sum to the share holder of RPG Raychem Ltd.. The contractual amount received by the assessee from Tyco Middle East was for providing assurance or covenant to ensure that RRL in which the assessee held substantial shares would not undertake particular line of business. In other words the amount was paid by Tyco Middle East as a consideration to ensure that the assessee would exercise its voting rights in a manner in the meetings of RRL's share holders so as to ensure that RPG would not be able to carry on the business of manufacturing and marketing of products as specified in Schedule-A to the agreement dated 30.03.2005. The ld. AR of the assessee further submitted that the assessee itself was never engaged in the business of manufacturing or marketing of any industrial product and hence by entering into an agreement it had not accepted any restrictive covenant in regard to any business activities. Therefore, the amount in question received by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be passed in the General Meeting of an Indian company. The amount was received by the assessee for agreeing to exercise its voting right in a particular manner. In the return of income filed the assessee claimed the amount as not liable to tax as "income". The AO assessed the amount received as revenue receipt liable to tax. On appeal the Tribunal and Hon'ble Bombay High Court held that the amount received by the assesee was not "income" within the meaning of section 2(24) of the IT Act. Therefore, it was prayed that the impugned sum of Rs.60,59,303/- should be excluded from the total income of the assessee. 6. On the other hand, the ld. DR vehemently argued that the amount received by the assessee had all the connotations and characteristic of income within the meaning of section 2(24) of the IT Act. He relied on the detailed order passed by the ld. CIT(A) and submitted that the ld. CIT(A) had elaborately examined the agreement between the assessee and Tyco-USA and Tyco-Dubai and Recon USA dated 30.3.2005 in accordance with which the assessee received the amount in question. It was submitted by the ld. DR that although the AO had assessed the amount received as business income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tyco Electronics Corporation USA (Tyco USA) which was having business presence in large number of countries and conducted numerous business. RPG Raychem Ltd. is a joint venture between the RPG group from India and Tyco of USA each having 50% shares of RPG Raychem Ltd. M/s. RPG Raychem Ltd. is manufacturing, marketing and promoting industrial products. Tyco USA was also in the business of manufacturing, marketing of industrial products in different fields throughout the world. Tyco USA had designated Tyco Electronics Middle East FZE which was its subsidiary to conduct the business of marketing and promotion of its specific products in Asia Pacific region on exclusive licence basis. RRL was also carrying on manufacturing and marketing of similar products in India. Therefore Tyco USA and Tyco Middle East were apprehensive that RPG Raychem Ltd. can be a potential competitor in the business of Tyco Middle East. Therefore Tyco USA and Tyco Middle East negotiated a settlement with assessee who was a principal share holder which resulted in an agreement dated 30.03.2005. In pursuance to the agreement the assessee was to exercise its voting rights in order to ensure that RPG Raychem Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel invited our attention to the assessment order wherein this contention raised by the assessee has been specifically noted at the very beginning of the assessment order. The contention was also repeated before the CIT (Appeals) and has been noted by him in paragraph No. 7 of the order. Before the Tribunal, the assessee had raised the same contention which had been noted and accepted by the Tribunal in paragraphs 39 and 40 of its decision which read as follows : "39. The appellants are not engaged in the business of charging fees for voting on resolutions on the strength of their shareholdings. The act of affirmatively supporting a resolution is not an event, which has happened regularly or is expected to so happen. The impugned receipt was the only receipt of such nature ever received by the appellants, and neither before nor afterwards, the appellants have received any sums on such an account. 40. Considering these criteria of judging whether a receipt is of an income nature, it will be clear that on the peculiar facts of the case, the amounts received by the appellants cannot at all be considered as having the character of income receipts. . . ." 12. Learned Counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of 10 years and the other recognition of its marketing right and use of the brand name Old Spice. PGI, a subsidiary of a multinational company, offered to pay the money of Rs. 3.5 crores to the members of Menezes family not by way of charity, but as a condition to ensure that they vote in favour of the resolution at the general body meeting of Colfax and support the resolution. The money was paid for casting an affirmative vote by the members of Menezes family for one resolution namely the resolution recognizing extinction of the marketing rights of Colfax. The Tribunal has recorded a finding of fact that the voting on the resolutions in a particular manner was not a business of the members of the Menezes family. The money which was received by them was not a business receipt, but received as bounty or windfall for voting affirmatively and supporting the resolution. Similar money was not to be paid to them at any time in part and never intended to be paid in future. Thus, it was a receipt which was by way of a windfall and not an income within the meaning of section 2(14) of the Income-tax Act. Consequently, the Tribunal was right in holding that the money received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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