Income Tax Appellate Tribunal - Mumbai
Elite Orgo Chem P. Ltd, Navi Mumbai vs Assessee on 25 February, 2015
आयकर अपील
य अ धकरण "F" यायपीठ मब
ंु ई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER &
SHRI VIVEK VARMA, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No.2291 /Mum/2010
( नधा रण वष / Assessment Year : 2006-2007
Elite Orgo Chem Pvt. Ltd., बनाम/ Asstt. Commissioner of
Elite House, Income Tax - 10(3),
Vs.
Mahesh, C Wing, Aayakar Bhavan,
Sector - 15, M.K. Road,
CBD Belapur, Mumbai.
Navi Mumbai - 400 614.
थायी ले खा सं . /PAN : AAACE 7656 H
(अपीलाथ /Appellant) .. ( यथ / Respondent)
Appellant by Shri P.J. Pardiwala &
Ms. Vasanti Patel
Respondent by : Shri Rajesh Ranjan Prasad
ु वाई क तार ख / Date of Hearing
सन : 13-1-2015
घोषणा क तार ख /Date of Pronouncement : 25-2-2015
[
आदे श / O R D E R
PER R.C. SHARMA, A.M. :
This is an appeal filed by the assessee is directed against the order of Ld. CIT - 22, Mumbai dated 21-01-2009 for the A.Y. 2006-07 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961.
2. The only grievance of assessee relate to treatment of nature of receipt on transfer of Goodwill, whether capital receipts or revenue receipts.
3. Rival contentions have been heard and record perused. In the course of scrutiny assessment, the A.O. observed that assessee M/s Elite Orgochem P. Ltd. (EOPL) was appointed as exclusive distributor of G.N. Resound (GNRS), a 2 ITA 2291/M/10 Denmark based company for distribution of its products in India for the last 8 years. And Mr. Binu Raina (VR) and Mr. Vikram Paul (VP), Directors, founders have through EOPL operated the business of distributing and repairing hearing aid products of GNRS at various locations in India. An agreement between EOPL and GNRS took place in the previous year relevant to AY 2006- 07, whereby the assessee Company (EOPL) transferred its entire business to GNRS for consideration of Rs. 11,19,10,935. The assessee Company in its return of income claimed the amount as capital receipt and accordingly offered capital gain on this amount. The assessee further has invested this amount in the bonds issued by REC and has claimed the deduction u/s 54EC of the Income Tax Act.
3. During the scrutiny proceedings the issue of 'goodwill' was under
discussion. The assessee was asked to submit as to why the amount so received on account of transfer of 'Goddwill' should not be considered as 'income from Business'. The assessee has made submission on this issue vide letter dated 22.9.2008. It was submitted that assessee had entered into agreement with GNRS initially on 16-7-1997 which was further extended by agreement dated 1-8-2003 for distribution of products of GNRS on pribncipal to principal basis. As per agreement assessee was entitled to fix resale price of the said product. As per terms of agreement assessee was to advertise, make publicity of the product. Assessee was also under obligation of carry out repairs and after sale service. The assessee has made reference to the following clauses of an agreement, i.e. Clause No. G, II) Clause No. 1.1, Clause No. 2.1, Clause No. 2.2, Clause No. 2.3, Clause No. 2.4 & Clause No.2. 6 to indicate that there was transfer of Goodwill and amount so received was in the nature of capital receipt liable to tax as capital gains rather than as business income. Further the authorized representative of the assessee during scrutiny proceedings submitted that the amount has been decided as per the mutual agreement between the seller & .the purchaser".
3 ITA 2291/M/10
4. In the assessment order, the A.O. observed that assessee was in receipt of Rs. 11,19,10,935/- which it had shown as 'goodwill' in the computation of income and shown capital gain on this amount. A.O. further noted that in computation of income the assessee has taken purchase value of the goodwill at zero and the entire receipts have been shown as capital gain and also invested an amount of Rs. 9.96 crores in bonds issued by REC and claimed deduction u/s 54EC. A.O. asked the assessee as to why the said 'goodwill' should not be treated as business income. The assessee had filed its explanation dated 22-09-2008 which was reproduced by A.O. in the assessment order in para 6, page 3. A.O. noted that goodwill is generally used to denote the business arising from connection and reputation and its value is what can be got for the chance of being able to keep that connection and improve upon it but it is well established that there is no presumption that every business undertaking has goodwill. A.O. also viewed the agreement between EOPL and GNRS which took place in the previous year relevant to A.Y. 2006-07. A.O. also verified para 2 of the agreement which stated that EOPL transfers and assigns the goodwill to GNRS absolutely and forever from the date hereof and this agreement shall benefit GNRS or any successors and assigns of GNRS and shall be binding upon the successors and assigns of EOPL and agreed both the parties the payment of consideration of USD 2,570,000 (US Dollars Two Million Five hundred seventy thousand only).
A.O. also noted that clause referred by the assessee nowhere spells out the exact nature of 'Goodwill' and the clauses are general in nature and no connection with the actual value of goodwill determined. A.O. rejected claim of assessee regarding capital receipt relying on the decision in the case of Rustom Cavasjee Cooper vs. UOI (1970) 40 Comp. Cas 325 and Guzdar Kajora Coal Mines Ltd. vs.CIT (1972) 85 TR 599. The A.O. further noted that assessee has not been able to ascertain with the evidence the contention about the Goodwill and accordingly treated this receipt as compensation 4 ITA 2291/M/10 which is taxable u/s 28(va) of the I.T. Act. The A.O. noted that it merely deprived the assessee of a trading revenue for the period of 2 years, leaving it free to devote its energies after the end of period of 2 years to carry on the rest of the business. A.O. therefore held that compensation received did not represent the price received for loss of capital asset, but at the most can be said as an advance received by the assessee with regard to the income that he could have earned. It was further stated by A.O. that just because assessee has used the term goodwill, it doesn't mean that amount in question would become goodwill. Accordingly the receipt on account of goodwill was assessed under the head 'Profits and Gain from Business' under the provisions of section 28(va) of the Income Tax Act, 1961 in place of assessee's claim of capital receipt liable to tax under the head of capital gains.
5. Before the ld. CIT(A) it was submitted by the assessee that because of the increase in turnover since so many years and incurring huge expenditure for increase in the turnover, the assessee had generated goodwill. However the ld. CIT(A) did not agree with assessee's contention and he observed that increase in turnover itself doesn't generate any goodwill since the brand name GNRS for selling the hearing aid belonged to the parent company itself and it was never property of the assessee company. In view of this, the ld. CIT(A) held that the income received has rightly been taxed by the A.O. As per the ld. CIT(A) the asset in the name of 'goodwill' has never appeared in the balance sheet of the assessee and hence the compensation received cannot be stated to be in lieu of the goodwill transferred by the assessee. The asset which is not owned by the assessee can never be transferred. The assessee cannot term any receipt as goodwill and claim it as capital receipt.
6. It was submitted before the ld. CIT(A) that the assessee had ceased its source of earning i.e. usiness operation itself is cancelled which has resulted into sterlisation of distribution revenue yielding asset. The ld. CIT(A) rejected 5 ITA 2291/M/10 assessee's contention and held that the compensation received was only in lieu of its prospective income for two years during which the said business was banned by the parent company, hence it has to be taxed under the head business income only. Further, the ld. CIT(A) noted that what was transferred by the assessee company is the business and not the physical assets and hence there cannot be any question of capital gains.
7. Rival contentions have been considered and record perused. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by the ld. A.R. and ld. D.R. during the course of hearing before us in the context of factual matrix of the instant case. We have also carefully gone through the terms and conditions of the agreement executed by the assessee with GNRS on 16-7-1997 as well as 1-08-2003 with regard to exclusive distributorship given to the assessee for sale and marketing of GNRS products. We have also carefully gone through the agreement executed on 12-8-2005 entered by the assessee with GNRS pursuant to which GNRS took over the assessee's said business of distribution network etc., different clauses of which provide for assignment/transfer of goodwill by assessee to GNRS for which the assessee was to receive Rs. 11,19,10,935/- as a consideration for such transfer of Goodwill. Through this agreement, the assessee was also in receipt of Rs. 43,85,687./- for non-compete covenant. The amount received on account of assignment/transfer of goodwill was offered by assessee as capital receipt liable to tax under the head 'capital gains'. The amount received for non- compete covenant was offered by assessee as business income and same was accepted by A.O. The controversy in this appeal revolves around the amount received on transfer of goodwill, whether amounts to capital receipt liable to tax under the head "capital gains" or "income from business or profession".
6 ITA 2291/M/10
8. From the record we found that the assessee, EOPL had been appointed as exclusive distributor of GN ReSound, a Denmark based company (GNRS) for distribution of products namely Hearing instruments, assistive listening devices in India by GNRS. Mr. Vinoo Raina, Mr. Vikram Pal, have through the assessee, operated the said business of distribution of the said product including carrying out repairs and after sales service of the said product of GNRS at various locations in India. The only business activity carried out by assessee was related to the distribution of said product of GNRS. For this purpose, the aseessee had entered into exclusive distributor agreement with GNRS initially on 16.7.1997 and which was further extended by the agreement dated 1.8.2003. The said distribution agreement which was entered into with GNRS was on Principal to Principal basis and the terms and conditions of the said agreement stipulated that the assessee was entitled to fix resale price of the said product and that assessee was responsible for the publicity, advertisement exhibitions, for maintaining the trade secrets and for carrying out repairs and after sale services of the said product. From the record we found that over a period of 8 years, the assessee had developed a distribution network for the said product of GNRS due to the experience and skill developed by the assessee, and it had acquired the edge in the field of marketing and distribution of the said product of GNRS. These intangible assets were self-generating asset in the nature of goodwill. The said distributor agreement was terminated by agreement dated 12/08/2005 entered into between the GNRS and the assessee, pursuant to which GNRS took over the assessee's said business of distribution network etc. As per the said agreement dated 12.08.2005, the assessee was paid by GNRS consideration of Rs. 11,19,10,935/- for the assignment /transfer of the goodwill and amount of Rs. 43,85,687/- for non-compete covenant. Thus the dispute before us revolves around taxability of amount which was received on account of goodwill which was assigned/transferred to GNRS under the said agreement dated 12.8.2005. In respect of consideration received on account of 7 ITA 2291/M/10 non-compete covenant, the same has been offered by assessee as business income and A.O. has accepted the same. After going through various clauses of agreement and keeping in view the facts and circumstances of the case, we found that over the years the assessee had developed network for marketing and distribution of said product of GNRS all over India. The business which was carried out by the assessee was confined to distribution of said product of GNRS. There is no dispute to the fact that assessee's marketing skill, selling and distribution activities constituted very important function of the business of assessee. Over the period of 8 years, the assessee had captured huge market and increased substantial turnover. As per the terms of agreement entered on 16-7-1997 & 1-8-2003, the assessee was also required to provide after-sales services including repairing of the instruments, and for that purpose the assessee had engaged qualified and skilled technicians. As per materials placed on record, we found that over a period of last 8 years, assessee had appointed various sub-distributors all over India for the said products of GNRS. In view of the above facts, goodwill had been created over the period of eight years. Thereafter the amount received on transfer of this goodwill was capital in nature liable to capital gains tax.
8. It is an undisputed fact that the assessee had been a distributor of GNRS's said product for last 8 years and the assessee had specialized knowledge, business skill, experience for marketing of the said product and reputation with the result goodwill had been created over the years. Therefore consideration received on transfer/assignment of the said goodwill was on account of transfer of Capital asset and was chargeable to tax under the head "Capital Gains" and not as business profit, under the provision of Section 28(va). It was held by the Hon'ble Supreme Court in the case of CIT v. B. C. Srinivasan Shetty, 128 ITR 294, that goodwill is a capital asset and the amount received on transfer of goodwill as per provisions of Section 55(2)(a) of the Income Tax Act, 1961, would be chargeable to Income Tax under the head 8 ITA 2291/M/10 "Capital Gains". In Section 55(2)(a), it has been recognized that the goodwill is a capital asset for the purpose of computation of Capital Gains.
9. Following are some of the terms and conditions of the said agreement dated 12.8.2005 for transfer of goodwill and non-compete agreement which demonstrates that the assessee had agreed for transfer of goodwill which was created on account of business of marketing network and distribution relating to the said product of GNRS over a long period of 8 years.
"ClauseG "In the last 8 (eight) years, the Founders have through EaPL, and at the expense of EOPL generated and maintained significant goodwill (defined below) which is crucial to EOPL's business. It is agreed by and between GNRS and the Founders that upto termination of the relationship between GNRS and EaPL, such Goodwill shall be transferred to GNRS who shall thereafter license the same to the company in accordance with the terms hereof. "
Definitions:
"Business of the company" means the business of the company which consists of manufacturing, distributing and repairing GNRS hearing aids.' Business information" includes without limitation, technical or financial or business information proprietary or internal information related both products or services of EOPL, Business (defined below) including information related to trade secrets, business strategies, marketing plans, procurement requirements, purchasing, manufacturing, customers, dealers, distributors, competitors, employees, business and contractual relationships, business forecasts, sales and merchandising, process/ flow charts, business models and all such other allied and ancillary information which by its nature or the circumstances is connected to carrying on the EOPL business.
"EOPL Business" means the erstwhile business of ECPL consisting of manufacturing, distributing and repairing GNRS bearing aids in India."
""Goodwill" includes without limitation the reputation, patronage, Intellectual Property Rights (defined below) and Business Information created, acquired, developed and maintained by the Founders and EOPL and associated, whether directly or indirectly, with the EOPL business."
""Intellectual Property Rights" includes other than trademarks, patents, copyrights, registered designs, all other ideas, designs, concepts, techniques, practices discoveries, inventions, procedures, specifications, data, memoranda, documentation and other materials, that are first concerned, acquired, created or reduced to practice by EOPL, and/ or the Founders in connection with 9 ITA 2291/M/10 carrying on EOPL, Business and/ or embodied, underlying or reduced to practice in the EOPL Business and further includes all moral rights and any derivative work, improvement, extension, revision, modification, translation, abridgement, condensation, expansion, collection, compilation, error correction, of the aforesaid."
Clause-2.2of Transfer of goodwill and license thereof to the Company "EOPL and the Founder hereby declare and confirm that on and from the date hereof, they have no right, title, interest or benefit whatsoever into, over or upon the Goodwill hereby transferred and assigned by EOPL to GNRS. EOPL and the Founders further covenant, declare and confirm that they have, prior to execution of this Agreement, terminated all other arrangements/agreements for concurrent use/licensed use of the Goodwill or any part of it, by any other party who may have enjoyed the use of the Goodwill pursuant to any such arrangements/ agreements made / executed by EOPL."
Clause 3.1- "EOPL and the Founders represent and warrant as follows;
(a) That EOPL until the date hereof was the sole proprietor of the Goodwill and was entitled to all rights of every character in the Goodwill and that ECPL and the Founders have full right and authority to execute this agreement and transfer the rights hereby conveyed and the consent of no other person or entity is required or necessary.
(b) That EOPL and/or the Founders are not subject to any obligation or disability that will or might hinder or prevent the full completion and performance by EOPL and/ or the Founders of the covenants and conditions stipulated herein.
(c) That the Goodwill until the date hereof has not infringed and does not in any way infringe upon the copyright, trademark, patent or any other rights of any other person,
(d) That the goodwill and all other rights therein have in no way been sold, made subject to a security interest, grant, arrangement or agreement that might conflict or interfere with the company's complete enjoyment of the Goodwill from the date of incorporation of the company.
(e) That the use of the Goodwill by GNRS or its assigns will not in any way infringe upon any rights of any person and that EOPL and/ or the Founders have not and will not take any action which might prevent or impair the exercise of any rights assigned hereby, "
10. Plain reading of the various clauses of the agreement clearly indicates that there was a transfer of goodwill for which consideration of Rs. 11,19,10,935/- was paid and separate consideration of Rs. 43,85,687/- was 10 ITA 2291/M/10 paid for non- compete clauses, which was offered by assessee as revenue receipts. From the various clauses of the above agreement, it is clear that entire business of assessee was transferred and there was an impairment of the capital structure or profit making apparatus, to the extent of business specified in the said agreement. It is well settled by Supreme Court in the case of Oberoi Hotel (P) Ltd. V. CIT 236 ITR 903that when there is a loss of source of income, to the assessee, and that right is determined for a consideration the same is a capital receipt. The Hon'ble Supreme Court held that 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 principle agreement had resulted in the loss of service of the assessee's income. The receipt was held to be a capital receipt.
11. Similar view was also taken by the Hon'ble Supreme Court in CIT v. Bombay Burmah Trading Corpn. Ltd. (1986) 161 ITR 386 by holding that the compensation received for immobilization, sterilization, destruction or loss, total or partial, of a capital asset would be a capital receipt. If a sum represented profit in a new form, then that would be income but where the agreement related to the structure of the assessee's profit making apparatus and affect the conduct of the business, the sums received for cancellation or variation of such agreement would be capital receipt.
12. From the record we found that the assessee had special marketing skill with a reputation in the field of distribution of said product, which assessee was prohibited from carrying on after this agreement. This argument amounts to sterlisation of the very profit making apparatus of the assessee. Thus the compensation received for immobilization, sterlisation, destruction or loss of profit making apparatus would be capital receipt. Merely because the assessee was selling product of GNRS and did not have its own Trade mark 11 ITA 2291/M/10 the same will not make any difference on special marketing skill of the assessee with reputation and it cannot be construed that the assesee had not created goodwill. By virtue of the said agreement, the sources of earning of income has been extinguished, accordingly the said receipt was in the nature of capital receipt in the hands of the assessee which was offered as capital gains.
13. The agreement dated 12.08.2005 for transfer of goodwill clearly demonstrates that GNRS has acknowledged the fact that assessee had created goodwill and accordingly agreed to pay the said consideration. The basis on which such goodwill was recognized is already demonstrated by GNRS and therefore the CIT (Appeals) was not justified in simply disbelieving the terms and conditions of the said agreement in absence of any indication that the agreement in question is make belief agreement. In this connection, decision of Calcutta High Court in the case of CIT Versus ArunDua, 180 ITR page 494 can be relied on wherein Hon'ble Calcutta High Court has held that after both the parties to the agreement have understood the agreement in certain way, and acted upon that agreement, then it is not open to the Assessing Officer to give another interpretation. Similar view has been taken by Delhi High Court in the case of D. S. Bist & Sons Versus CIT, 149 ITR 276 and in the case of CIT Versus DD Industries Limited, 323 ITR 596.
14. Now coming to the decision of ld. CIT (Appeals) for upholding the addition made under the provisions of Section 28(va) of the Income Tax Act, he has relied on the decision of Bombay High Court in the case of John D'Souza Versus CIT, 226 CTR 540. The said decision is distinguishable on facts and not applicable to the case of the present assessee. The Bombay Court on the facts of the said case held that the assessee in the said case was a trespasser who was not the owner of any asset and there was no transfer of capital asset during the previous year. All that has been agreed by the 12 ITA 2291/M/10 assessee was that he will abstain himself from carrying out any activity relating to fish farming in the ponds located in the said land and therefore receipt of Rs. 25,00,000/- which was received by the assessee under the agreement cannot be said to be profit arising from transfer of capital assets and accordingly was taxable under the provisions of Section 28(va) of the I. T. Act.
15. For taxing the amount received on transfer/assignment of Goodwill under the head capital gains, the relevant provisions of sub section (2) of Section 55 are as under:
"For the purpose of sections 48 and 49 (cost of acquisition)
(a) In relation to a capital asset being goodwill of a business or a trade mark or brand name associated with business or a right to manufacture produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours.
(b) Provision of Cl. (va) of Section 28 for taking receipts under the head "profits and gains of business or profession" reads as under:
(a) Not any sum, whether received or receivable, in cash or kind under an agreement for carrying out any activity in relation to any business; or
(b) Not sharing any know how patent copyright trade mark licence, franchisee or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods of provision for services."
Provided that sub-clause (a) shall not apply to:
Any sum whether received or receivable in cash or kind on account of transfer of the right to manufacture, produce or process any article or thing or right to carryon any business which is chargeable under the head Capital Gains."
16. From the combined reading of sections 55(2) and sec 28(va), it is crystal clear that if the assessee gives up right to carryon any activity in relation to business, the same would be revenue receipt. As against that if the assessee gives up the right to carryon any business the consideration received would 13 ITA 2291/M/10 be capital in nature. As submitted earlier that by virtue of the said agreement for transfer/ assignment of goodwill the assessee's source of earning of income has been extinguished, thus there was sterlisation of assessee's very profit making apparatus. Accordingly, the said receipt is a capital receipt in the hands of the assessee. The assessee had offered the said capital receipt under the head 'Capital Gains', and under no circumstances the said amount can be brought to tax under section 28(va) of the I.T. Act, 1961.
17. In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 25th February, 2015.
आदे श क घोषणा खल ु े #यायालय म% &दनांकः 25-2-15 को क गई ।
Sd/- sd/-
(VIVEK VARMA) (R.C. SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
मुंबई Mumbai; &दनांक Dated 25-2-2015
[
व.6न.स./ RK , Sr. PS
आदे श क! " त$ल%प अ&े%षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आय7 ु त(अपील) / The CIT(A) -8,, Mumbai
4. आयकर आयु7त / CIT --4, Mumbai
5. :वभागीय 6त6न<ध, आयकर अपील य अ<धकरण, मुंबई / DR, ITAT, Mumbai H Bench
6. गाड@ फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स या:पत 6त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई / ITAT, Mumbai