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TMI Blog2015 (3) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... eholding of the foreign company in the joint venture Indian company. There are clear indications as to why the foreign company entered into the non-competition agreement after this approval given by the Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Foreign Collaboration-II Section. The Tribunal erred in holding that the amount paid by the foreign company to the assessee/appellant is by the employer to the employee, which conclusion, on the face of it, is not correct, as there is no relationship of employer and employee between the foreign company and appellant/assessee and this conclusion arrived at by the Tribunal is a misreading of the agreement. On a plain interpretation of Section 15 read with Section 17 of the Act, we are unable to subscribe to the view of the respondent/Revenue as has been confirmed by the CIT (Appeals) and the Tribunal, that the payment received in this case is in the nature of salary. The principles, as laid down by the Supreme Court in Guffic's case (2011 (3) TMI 6 - Supreme Court) is squarely applicable to the facts of the present case. In view of the aforesaid reasoning and findings, this Court holds that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustries such as Paper Mills, Rolling Mills, Sugar Plants, Cement Plants, etc. It is the further stand of the appellant that he also acquired proficiency in high power charging equipments to be used by Baba Atomic Research Centre, National Thermal Power Corporation, etc. Similarly, he also gained expertise and proficiency in commissioning of High Power UPS Systems in Customs Dept., Texas Instruments, Dalmia Cements, etc. The proficiency acquired by the appellant in Industrial Drives is put to use in industries where large motors are used for production purposes. Since the power of these motors vary between few kilowatts to 100's of kilowatts, for the purpose of controlling those motors, the appellant/assessee, using his expertise, designed and implemented power electronic controls to drive the motors. These Power Electronic Converters (for short 'PEC') are called Industrial Drives. The Industrial Drive System, according to the appellant, is a specialized equipment involving power system, electronic control system and automation system using Programmable Logic Controller (for short 'PLC') and application oriented software. The Industrial Drive System enhances the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is quoted hereunder :- 1 Name and Address of Foreign Collaborator M/s.CONTROL TECHINIQUES PLC ST. GILES, NEWTOWN POWYS SY 16 3AJ UNITED KINGDOM 2 Item(s) of manufacture/activity covered by foreign collaborator 1) STATIC CONVERTORS 2) BOARDS PANELS 3 Proposed Location District State DEVELOPED PLOT-117b ELECTRONIC ESTATE MADRAS TAMIL NADU 4 Foreign Equity Participation : Increase from 51.00% (Rs.40.80 Lakhs) to 85.00% (Eighty five Percent) amounting to ₹ 425.00 Lakhs (Four Hundred Twenty Five Lakhs) in the revised paid up capital of ₹ 500.00 Lakhs, in your undertaking. 7. After obtaining approval as above, since the stakes of the UK company, viz., CT-PLC was increased from 51% to 85%, correspondingly, the shareholding of RSM came to be reduced from 49% to 15%. In order to ensure that there is no competition of any kind by the appellant consequent to reduction of the share capital in the joint venture Indian company, viz., CTIL, CT-PLC entered into a non-competition agreement with the appellant on 14.12.95. That agreement is now the bone of contention between the appellant/assessee and the respondent/Income Tax Department. 8. For better understanding o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... STATE AS FOLLOWS : 1. CT recognises that RAVEENDRAN possesses the necessary expertise and has with considerable efforts, set up the Industrial Drives System business of RSM and has enjoyed a good reputation and sufficient market recognition in the territory which has constituted substantial source of income for RAVEENDRAN and that RAVEENDRAN has spent and incurred substantial expenditure in establishing the Industrial Drives business. 2. RAVEENDRAN agrees to give up, part with and cease and desist from carrying on the Industrial Drives business anywhere in the territory, and further agrees that such business shall be carried on only by the 'CTI' wherein RAVEENDRAN will be a shareholder and a partner. 3. RAVEENDRAN shall not directly or indirectly own, manage, operate, join, have an interest in, control or participate in the ownership, management, operation or control of, or be otherwise connected in any manner with any body corporate, partnership, proprietorship, trust association or other business entity in India which directly or indirectly engages as a commercial activity anywhere in the territory in the Industrial Drives business either in its production, distributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the legal opinion from M/s.Subaraiya Iyer Padmanabhan and Ramamani, Advocates. This is not received as cash but the equivalent shares will be issued by the Companies." 11. In the statement of income, besides this amount received from CT-PLC, the appellant/assessee has also shown salary that he received from the joint venture Indian Company, viz., CTIL. According to the assessee/appellant, this amount is a capital receipt and, hence, exempt from tax and also entitled to immunity from capital gains as the cost of acquisition is 'Nil'. The Assessing Officer took the view that non-competition agreement, which is a fall out of the formation of the joint venture company between CT-PLC and RSM with 51% share to the UK company and 49% share to the Indian company resulting in formation of CTIL, held that the business of RSM was taken over by CTIL and the new company came into operation from 1.10.93. In para-12 of the order, the Assessing Officer analyses the effect of such joint venture on the assessee. On the first premise, he holds that consequent to the merger of CT-PLC with the Indian company, viz., RSM, the assessee and two other Directors of RSM became Directors of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order are extracted hereinbelow :- "14. Case Laws :- In this connection, the assessee has presented two case laws for my consideration, but I find that both the case laws are not applicable to the case of the assessee. In Saraswathi Publications 132 ITR 207 (Mad) the agreement was between two different concerns working in the same field to the effect that they will mutually refrain from overlapping in business in respect of specified clients and specified area. In G.D. Naidu 165 ITR 63 (Mad) , the payment was between partners of a firm in a process of new partners joining and old partners quitting so that the business is ultimately handed over to the new partners. On the one hand, these case laws have been delivered much before the relevant provisions of capital gains have been successively amended. Secondly, the facts of these cases have no similarity with the case of the assessee, except that the assessee has also made an agreement in the style of a non-competition agreement. Where there is no scope for competition, there is no place for a non-competition agreement. 15. No Competition :- RSM was in the company CTI with 49% share. The assessee was in the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employer and the employee and also since it is essentially connected with his past, present and future services. But is is made known that this does not discount the scope of assessing it as Capital Gains on Goodwill, which will remain as an equal alternative. It is made clear that the receipt is assessable whether it is treated as Capital or Revenue. 16. In the end, the Assessing Officer held that the amount received as non-competition fee is salary and in the alternative it should be treated as goodwill and capital gains tax was sought to be levied. However, in the computation of assessment, the said amount was treated as salary. 17. Aggrieved by the above order, the assessee preferred appeal to the CIT (Appeals). On consideration of the matter, the CIT (Appeals) held as follows :- "3. ........ it would not make any difference, in legal parlance, to treat both as employer, in the opinion of the assessing officer. I agree with the stand taken by the assessing officer in the matter. The appellant's representatives have sought to build up a case to the effect that the appellant was never the employee of CT PLC (UK) therefore the receipt from that company would not constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the formation of the joint venture company. The assessee himself admits in his letter dated 16.5.99 addressed to the first appellate authority. According to this letter, the entire business was not taken over by the joint venture company and even on 31.3.96, RSM Electronics Pvt. Ltd., was in existence and it appears the assessee has filed a copy of the audited accounts to show that RSM Electronics Pvt. Ltd., was in existence. It was the case of the assessee before the first Appellate authority that RSM Electronics Pvt. Ltd., was an independent company and it was not merged with Control Techniques PLC. If that is the factual situation and when the RSM Electronics Pvt. Ltd., continued its business even after the formation of the joint venture, where is the necessity to pay any money as non-competition fee? Admittedly, the foreign company Control Techniques PLC is having 51% of the shares in the newly formed joint venture Indian company. Therefore, to look after the business and overall interest in the joint venture company the foreign company has to nominate somebody. In this case, probably they might have nominated the assessee and as a consideration for taking care of the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LC to form a new company CTIL of which the appellant/assessee was made a Director and CT-PLC was holding 51% of the shares in CTIL. Thus there exists an employer-employee relationship and, therefore, any monies received thereof while in employment shall have to be construed as part of the salary. Therefore, it is submitted that no interference is called for with the order passed by the authorities below. 23. Heard Mr.Sridhar, learned counsel appearing for the appellant/assessee and Mr.Ravikumar, learned standing counsel appearing for the respondent/Revenue and perused the materials available on record as also the decisions relied on by the learned counsel for the parties and the relevant Sections under the Income Tax Act on which reliance was placed by the parties. 24. Before proceeding to analyse the matter in-depth, it is better to have a look at the legal position in regard to receipt of amount, whether it be treated as capital receipt or revenue receipt and what is the yardstick to be applied in cases of such receipt. 25. In Kettlewell Bullen & Co. - Vs Commissioner of Income Tax, Calcutta (AIR 1965 SC 65), the Supreme Court had occasion to consider payment of non-competitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. 27. In a recent decision in Guffic Chem Pvt. Ltd. - Vs - C.I.T., Belgaum & Anr. (2011 (332) ITR 602 (SC)), the Supreme Court has distinguished the difference between 'capital receipt' and 'revenue receipt' and the circumstances in which the receipt would fall under the particular category. For better appreciation of this case, it is useful to extract the relevant portion of the said judgment, as hereunder :- 5. The position in law is clear and well settled. There is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. ********* 7. ............. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed its other operations, viz., battery charges, UPS systems, etc. It is only in relation to Power Electronic Converters or Industrial Drives that RSM entered into a joint venture collaboration with CT-PLC to form the joint venture company. In view of the above reasoning, the finding of the original authority that the business of RSM was taken over by CTIL is not correct. No doubt, the fact that two Directors of RSM became Directors of CTIL and they were receiving salary from that assessment year from the joint venture company is not in dispute. The Original Authority, on considering the joint venture company and also the non-competition agreement has held in para-13 of the order that there was a specific clause barring the assessee/appellant from doing any business akin to the line of business of the joint venture company, including accepting any job in that line. This finding, according to the appellant/assessee, is erroneous in view of the terms of conditions, which provides for certain restrictions only. For better clarity, the same is extracted hereinbelow :- "The foregoing term conditions are conditional on fulfilling all obligations as executive directors of the Company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial threat to the foreign company, viz., CT-PLC, as well as to CTIL and, therefore, to curb any such threat of any kind, the non-competition agreement appears to have been signed by CT-PLC with the appellant/assessee and by no stretch of imagination, the payment in lieu of the non-competition agreement could be called as salary. 35. The further finding of the Assessing Officer is that there was no reason to pay the amount of ₹ 9,83,385/- as on 14.12.95, as there was no competition and that if there was any competition, it ended 27 months earlier when RSM merged with CT-PLC to form CTIL and the assessee was made a Director. The reasoning of the Assessing Officer could be found in para-17 of the assessment order and for better clarity, the said portion is extracted hereunder :- "There are two possibilities of appreciating the receipt as per the agreement either as Capital or as Revenue. As mentioned earlier, the payment of ₹ 9,83,385 is not an outcome of a non-competition agreement as there was no competition as on 14.12.95. It is not a compensation for the right to carry on business as the assessee was not doing any competing independent business as on that date. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payment, viz., salary, remuneration, commission, etc., would form part of salary as per Section 17 (1) of the Act. 38. The contention of the assessee/appellant is that he has clearly shown in his return of income what his salary is, together with a note appended, showing capital receipt on the basis of the non-competition agreement. It is clear from the documents on record that the salary portion was received from CTIL, whereas the non-competition fee has been received from CT-PLC and, therefore, both the transactions are distinct entities. It is clear from the record that the payment made by the foreign company, viz., CT-PLC, consequent to the non-competition agreement is for the purpose of restraining the assessee from engaging in any form of business that will jeopardize its principal shareholding of 51%, which was later on enhanced to 85%, as the same should not be compromised on account of the wealth of knowledge and capacity of the assessee in the particular field, viz., industrial drives. The Original Authority himself has accepted that the receipt of the amount is not capital gain, but only salary. Therefore, this Court is not elaborating on the provisions of Section 55 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s due. [Explanation 2. Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.] Deductions from salaries. 16. The income chargeable under the head Salaries shall be computed after making the following deductions, namely : (i) [***] (ii) a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less; (iii) a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law. (iv) 50[***] (v) 51[***] 41. Section 17 of the Income Tax Act deals with 'Salary', 'Perquisite' and 'Profits in lieu of salary'. The terms 'salary' and 'profits in lieu of salary', which are relevant for the case on hand, are extracted hereinbelow for better clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyer or former employer to the employee, whether paid or not, Section 17 makes it clear that for the purpose of Sections 15 and 16, 'salary' would include, salary, wages, any annuity or pension, gratuity and any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. A conjoint reading of both Sections 15 and 17 make it clear that salary that is due from an employer or former employer alone should be taken for the purpose of computation of total income. The plea of the learned counsel for the respondent/Revenue that it will fall under Section 17 (1) (iv), that any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages would bring within its ambit the non-competition fee, is totally misconceived as the pre-condition for bringing any payment under the head 'salary' as defined under Section 17 is that it should be a salary due from an employer or former employer. In this case, CT-PLC is neither the employer nor the former employer and of the assessee and, therefore, bringing the above payment under the head 'salary' is unsustainable. 43. The CIT (Appeals) concurred with the Assessing Office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , to safeguard the interests of the joint venture company, in which the stakes of the foreign company was increased from 51% to 85%, the foreign company thought it fit to make the non-competition agreement with the appellant/assessee. There is no material anywhere before the Assessing Officer or the CIT (Appeals) or the Tribunal to say that to look after the business and overall interests of the joint venture company, the foreign company had nominated somebody, muchless the assessee and they paid the consideration to take care of the entire joint venture company on such payment. This fact is not supported by any document or statement. 45. The wordings of the non-competition agreement is clear and proceeds that taking note of the vast experience of the assessee gained over 20 years, and further the assessee being capable of design, manufacture and testing of industrial drives, in which the joint venture company is already there in the market and that the appellant/assessee has set up a company called RSM Electronics, which enjoys good reputation and market recognition and in order to ensure that the appellant/assessee ceases and desists from carrying on the business in industrial d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court finds that the employment contract is between the joint venture Indian company, viz., CTIL and the assessee and the terms and conditions of the employment is restricted only in relation to three items, which we have already referred to in the earlier part of this order and there is nothing to show that it has any relation with the industrial drives in question and, therefore, the foreign collaborator was justified in entering into a non-competition agreement, i.e., only after 26.9.95 when the Government of India, Ministry of Industries, granted approval to increase the shareholding of the foreign company in the joint venture Indian company. There are clear indications as to why the foreign company entered into the non-competition agreement after this approval given by the Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Foreign Collaboration-II Section. 49. Insofar as the decision of this Court in Ian Peter Morris Vs Asst. Commissioner of Income Tax, Chennai (T.C.A. Nos.225 & 226 of 2006 dated 25.7.2010), relied on by the learned standing counsel appearing for the Department/respondent, that was a case of transfer of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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