Income Tax Appellate Tribunal - Delhi
Mediworld Publications Pvt. Ltd , New ... vs Department Of Income Tax on 15 July, 2009
I.T.A. No. 4086 /Del/2009
1/14
IN THE INCOME TAX APPELLATE TRIBUNAL,
NEW DELHI, BENCH ' E'
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI
A K GARODIA, ACCOUTANT MEMBER
ITA No. 4086/Del/2009
(Assessment Year 2006-07)
DCIT, Circle 6(1), Vs. M/s. Mediworld Publications P. Ltd.,
New Delhi D-73, 1st Floor, Kalkaji,
New Delhi-110 019
(Appellants) (Respondents)
PAN / GIR No. AAACM8877C
Appellant by: Shri M.K.Gautam, CIT DR
Respondent by: Shri Salil Aggarwal, Adv.
ORDER
PER A. K. GARODIA, AM:
1. This appeal by the revenue has been directed against the order of Ld. CIT(A)-IX, New Delhi dated 15.07.2009 for the Assessment Year 2006-07. The grounds raised by the revenue are as under:
"1)The order of the Ld .CIT(A) is erroneous & contrary to facts and law.
2) On the facts and in the circumstances of the and in law, the Ld. CIT(A) has erred in treating the sum of Rs.3,80,02,500/-
received by the assessee on account of business agreement as capital gain and not as business income of the assessee."
2. The brief facts as noted by the Ld. CIT(A) in para 4.0 to 4.2 are as under:
"4.0 The brief facts of the case are that the appellant company is incorporated in the year 1995 vide certificate of I.T.A. No. 4086 /Del/2009 2/14 incorporation issued by the Registrar of Companies, Delhi & Haryana for conducting the business of Healthcare Journals & Communications including activities such as publication of Medical Journals for the Medicine Industry and Professionals and production of customized print, audio and video Healthcare Communications. On 10th March 2006, the appellant company entered into a 'Specified Assets Transfer Agreement' with M/s. CMP Medica India Private Limited, Bangalore for the sale of all its rights, titles and interests in the specified assets of its Healthcare Journals & Communications business. These assets, as narrated in para 2 of the aforesaid agreement were (a) the periodicals (b) the products (c) the business intellectual property rights along with the goodwill and all rights, interests and benefits appurtenant to the business intellectual property rights (d) the customer database (e) the records (f) the editorial materials and (g) the contracts. Through two separate deeds of the same date, namely the 'Deed of Assignment of Copyrights' and the 'Deed of Assignment of Trademarks', the appellant company also assigned the copyrights and trademarks pertaining to its Healthcare Journals & Communications business. In short, the appellant by the said agreements transferred all the intangible assets being trade marks, brands, copyrights and the associated goodwill of its Healthcare Journals & Communications business, which the appellate had built up and had been running for the past ten years or so. 4.1 The appellant by the aforesaid "Specified Asset Transfer Agreement' also relinquished for six years the right to carry on any business involving or relating to or competing with the transferred specified assets. The appellant as such gave up its right to carry on the Healthcare Journals & Communications business for the specified period. While all the assets of Healthcare Journals & Communications business were transferred as above, the appellant vide para 3.4.9 of the agreement retained a limited and non exclusive right to use the Customer Database comprised of advertisers and pharmaceutical companies solely for the purposes of its clinical trials business and for no other purpose whatsoever. In consideration of the aforesaid transfer, the appellant received a total sum of Rs.3,80,02,500/- from the said CMP Medical India (P) Ltd.
I.T.A. No. 4086 /Del/2009 3/14 4.2 For the year under consideration, the appellant filed its return of income for the above noted assessment year on 19th November 2006 declaring a total income of Rs.11,69,453 computed as under:
Income from business 11,66,953
Long term capital gains on sale of
Intangible assets 3,80,02,500
Less: Amt. Invested in REC
Bonds 3,80,00,000
2,500
Total Income 11,69,453"
3. Ld. CIT(A) has decided the issue in favour of the assessee by following the Tribunal order rendered in the case of Rohan Software Pvt. Lt. Vs ITO as reported in 304 ITR (AT) 314. It is further noted by the Ld. CIT(A) in that case the Tribunal has followed another Tribunal decision rendered in the case of ITO Vs Gurinder Kaur as reported in 258 ITR (AT) 207. Ld CIT(A) directed the A.O. that the entire receipt of Rs.3,80,02,500/- be assessed as 'long term capital gain' as against the 'business income' assessed by the A.O. Now, the revenue is in appeal before us.
4. The Ld. D.R. for the revenue supported the assessment order. It is further submitted by him that a clear finding has been given by the A.O. on page 7 of the assessment order that the assessee has not sold whole of its business but only surrendered his rights regarding publication og journal and hence provisions of Section 28(va) of the I. T. Act are applicable and hence the A.O. was justified in assessing its receipt of Rs.380.02 lacs as 'business income', as against the 'long term capital gain' treated by the assessee. Our attention was drawn to Para 5 of the order I.T.A. No. 4086 /Del/2009 4/14 of Ld. CIT(A) and in particular to Para 5.1 of his order wherein a finding is given by him that there is no co-relation between the two businesses i.e. the business of healthcare journals and communication and the business of clinical trial. It is submitted by him that there is no basis for this finding given by the Ld. CIT(A). It is also submitted by him that the assessee has also given an undertaking to the buyer that it will not compete with the buyer i.e. CMP Medica India Pvt. Ltd. for a period of 6 years and hence some portion of the sale consideration should be allocated towards non compete fee and that portion must be assessed as business income. He strongly supported the assessment order and it is urged by him that the order of Ld. CIT(A) should be reversed and that of the A.O. should be restored.
5. As against this, Ld. counsel for the assessee has strongly supported the order of Ld. CIT(A). It is also submitted by him that the relevant agreement between the assessee company and the buyer, M/s. CMP Medica India Pvt. Ltd. is available on pages 149-184 of the Paper Book. Our attention was drawn to page 155 of the Paper Book containing Para 2 of the transfer agreement, as per which, the assessee company has transferred various assets such as periodicals, the products, the business intellectual property rights along with goodwill, customer database and records and editorial materials and the contracts. It is submitted that no doubt, the assessee has agreed for no competition with the buyer for a period of 6 years but this is not the main consideration for the contract. It is submitted that the I.T.A. No. 4086 /Del/2009 5/14 contract is mainly for transfer of these intangible assets and not for giving undertaking for non-competition. Our attention was also drawn to page 185 of the Paper Book containing Deed of assigning the Trademarks and it is pointed out that out of total consideration of Rs.380.02 lacs, the amount of Rs.2 lacs was specified on account of assigning of trademarks. It is submitted that the balance amount of Rs.378.02 lacs was specified on account of assignment of copyright and our attention was drawn to Deed of Assigning of Copyright as available on page 191 of the Paper Book. It is submitted that the copyright assigned by the assessee included periodicals including its title, product database and editorial material along with goodwill attached and appurtenant thereto and for these intangible assets, the balance consideration of Rs.3,78,02,500/- was received by the assessee from the buyer and hence no part of consideration can be assessed as business income. Regarding clause No.8 of the main agreement with regard to non compete, it is submitted that the same is available on pages 161 and 162 of the Paper Book and it is submitted that it has been specified in the agreement that in consideration of CMP Medica purchasing and acquiring the specified assets and the business intellectual Property Rights from the assessee, the assessee undertakes to the buyer that the assessee shall not do any business for a period of 6 years in connection with the similar of periodicals and products. It is submitted that this undertaking was given by the assessee in addition to the transfer of intangible assets and hence the consideration received by the assessee has to be appropriated I.T.A. No. 4086 /Del/2009 6/14 towards these intangible assets and, therefore, should be assessed as long term capital gain and not as business income. Reliance was placed on the Tribunal decision rendered in the case of Rohan software Pvt. Ltd. Vs ITO as reported in 304 ITR (AT) 314.
6. We have considered the rival submissions, gone through the material on record, orders of authorities below and the Tribunal decision followed by the Ld. CIT(A), which is also cited before us. We find that in the present case, the A.O. has invoked the provisions of Section 28(va) of the Act. For the sake of ready reference, the provisions of Section 28(va) are reproduced herein below:
"S.28(va) any sum, whether received or receivable, in cash or kind, under an agreement for-
(a) not carrying out any activity in relation to any business; or
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provisions for services;
Provided that sub-clause (a) shall not apply to-
(i) 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 carry on any business, which is chargeable under the head "Capital gains";
(ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the I.T.A. No. 4086 /Del/2009 7/14 Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government o India. Explanation- For the purposes of this clause,-
(i) "agreement" includes any arrangement or understanding or action in concert,-
(A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;
(ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging;"
7. As per the provisions of section 28(va) as reproduced above, sub-clause (a) of sub-section (va) of Section 28 will not be applicable if the amount in question is received on account of transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head 'capital gain'. In the present case, the assessee has transferred / assigned all its trademarks and also periodicals I.T.A. No. 4086 /Del/2009 8/14 including the title, product database and editorial material along with goodwill as attached and appurtenant thereto and in addition to this, the assessee has agreed that in consideration of CMP Medica (P) Ltd., purchasing and acquiring the specified assets and the business intellectual property right from the seller i.e. assessee, the assessee undertakes that it will not procure or cause to procure for a period of 6 years, periodicals and products in any other language including in English etc. This goes to show that in fact the assessee has received this amount of Rs.380.02 lacs on account of transfer of right to carry on business of healthcare journals and communication and hence this proviso is applicable in the present case and the impugned receipts of the assessee are not hit by Section 28(va) (a) of the Act. At this juncture, we feel that the findings of Ld. CIT(A) on these aspects as contained in paras 5.0, 5.1 and 5.2 are relevant and for the sake of ready reference, the same are reproduced herein below:
"5.0 I have considered the submissions of the learned Authorised Representative of the appellant company. I have also gone through the various agreements produced by the appellant during the course of the present proceedings. It is found that the appellant company was incorporated in the year 1995 to conduct the business of Healthcare Journals and Communications such as publications of the medical journals activities for the pharmaceuticals industry and professionals and production of customized, print audio and video healthcare communications. It is also a matter of fact that all the journals I.T.A. No. 4086 /Del/2009 9/14 published by the appellant company was obtained from the office of the Registrar of Newspaper of India (Ministry of Information and Broadcasting) Govt. of India. Declaration in Form B for all publications have been filed with the Deputy Commissioner of Police (Licensing), New Delhi and the publications were indexed by India National Scientific Documentation Centre (INDOC) Govt. of India. The appellant seems to be exclusive owner of Trademark and Copyright of these publications. The details and documents submitted by the Ld. A.R. also support the contention that the publications i.e. journals were indeed capital assets of business duly registered with the Trade Mark authorities, The Registrar of New Paper of India, and possessed the copyrights of the journals under the Indian Copyright Act.
5.1 From the chart as given above in para 4.5 page 8/9 of this order, it is clear that the appellant has sold all its intangible assets like trademarks, brands, copyrights and goodwill which constituted the assets of the business or the profit earning apparatus meaning thereby that the appellant, on selling the entire business apparatus, has deprived itself of any earnings in the subsequent years. No income has been generated by the appellant company after sale of intangibles to M/s MP Medica India (P) Ltd. Consequent to such sale, the appellant company has relieved the entire workforce from their duties/jobs since the entire business (except for clinical trials) with its data base, net works, goodwill, trademark, copy right clientele etc. has been transferred to M/s CMP Medica india (P) Ltd. Bangalore.
I.T.A. No. 4086 /Del/2009 10/14 These facts make it very clear that the appellant has wholly given up its right to carry on the Healthcare Journals and Communications business for a specified period. Regarding the assessing officer's contention that the appellant has not transferred the whole business as even after transfer, the appellant is still carrying on the business of clinical trials, I have checked up the accounts of the appellant company and found that there is no correlation between the two businesses. Business of Healthcare Journals and Communications was clearly a distinct and separate business as before sale of intangibles like trademarks, brands, copyrights and goodwill, appellant had not derived any income from the clinical trails. It is only after the sale of business of publication of health care journals and communications that the director of the appellant company started clinical trials and earning income therefrom. With above facts in mind, I am of considered view that in giving up its entire Healthcare Journals and Communications business, the appellant has lost the source of income and section 28(va) of the Act therefore has no application to the facts of the case.
5.2It is also quite clear that giving up the right to carry on the Healthcare Journal & Communications Business was only one part of the agreement. The main part of the agreement was the transfer of all intangible assets being trade marks, brands, copyrights and the associated goodwill of its Healthcare Journals and Communications business. It follows that the consideration of I.T.A. No. 4086 /Del/2009 11/14 Rs. 3,80,02,500/- was not received; only for giving up the right to carry on the Healthcare Journals and Communications business but was mainly for the transfer of all intangible assets being trade marks, brands, copyrights and the associated goodwill of the Healthcare Journals & Communications business. As per the law, the consideration for the transfer of intangible assets being trade marks, brands, copyrights and the associated goodwill of Healthcare Journals and Communications business is taxable as long term capital gain. Even the consideration as may be allocated to the giving up of right to carry on Healthcare Journals and Communications business is also taxable as long term capital gain by virtue of section 55(2)(a) read with clause (i) of the proviso to section 28(va). The A.R. has also relied on the provisions of section 45(1) read with 2(14), 2(11) (b), 48 and section 55(2)(ii) of the Act. The combined reading of the above provisions and of section 28(va) leaves no ambiguity that law makers specifically excluded the income from the purview of main section 28(va)."
8. The tribunal decision rendered in the case of Rohan Software Pvt. Ltd. also supports the case of the assessee although the basis of decision in that case is different. In that case, the assessee has transferred assets of business and also right in business and improvement in business except certain building and cars etc. The sale consideration received by the assessee was offered by the assessee as assessable under the head 'long term capital gain'. In that case, the allegation of the A.O. was I.T.A. No. 4086 /Del/2009 12/14 that no asset whatsoever mentioned in the balance sheet of the assessee company has been transferred the consideration of Rs.1.78 crores has been received for utilizing the services of two directors of the assessee company and their intellectual property and hence this is a receipt of consideration for rendering the services by the assessee company to M/s. ICICI Infotec Services Ltd. It was also the case of the A.O. that for these reasons, the impugned receipt was assessable as business income of the assessee company. Under these facts, it was held by the Tribunal hat the sale consideration received by the assessee of Rs.1.78 crores was to be assessed as long term capital gain because the assessee had transferred all the assets and property of the assessee company in the business including intellectual property, codes formulae and design other than the building, cars etc. It was held by the Tribunal that the buyer could continue the activities of purchase even in the absence of building and motorcars, which has not been transferred. Regarding this allegation of the revenue in that case, that even if there was a transfer of business, the transfer was not permanent but only for 3 years and this objection of the revenue was also rejected by the Tribunal in that case, on the basis that the promoter of the assessee company could not associate themselves directly or indirectly with any business similar to or identical with the business carried on either by it or the transferee. In the present case also the facts are similar, although the reasoning given by the A.O. for assessing the impugned receipts as business income are different. But still I.T.A. No. 4086 /Del/2009 13/14 the facts remain similar and same, receipts under similar circumstances were held to be assessable as capital gain by the tribunal in that case, in the present case also, the receipt is assessable as capital basis only.
9. One more objection is there in the present case of the revenue that the assessee has not transferred to the buyer, the total business and even after the sale, the assessee was doing the business of clinical trial. The case of the revenue is that both these businesses i.e. the business of healthcare journal and communication and the business of clinical trial are interconnected and composite and hence the assessee has not transferred the business as a whole but only one activity of the said business was transferred. The contention of the assessee is that both the businesses are not at all connected and are independent. Regarding the business of clinical trial, it has been submitted that clinical trial is the scientific process by which a drug or a medical device or any other product, having health implications is clinically tested and tried on a representative sample target population to assess its safety, efficacy, and potential side effects (if any) of the drug/product. It was also submitted before us that before the sale of the business of healthcare journal & communication, the assessee company was having 40 employees whereas 19 were shifted to the buyer M/s. CMP Medica (P) Ltd. and the balance 21 employees were also released and none of them is on the payroll of the assessee software company. Considering all the facts of the present case, we are in agreement with Ld. CIT(A) that both I.T.A. No. 4086 /Del/2009 14/14 these businesses are independent businesses and hence the assessee has transferred the full business of healthcare journal & communication and not only one activity of composite business. Considering all these facts, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue and hence we uphold the same.
10. In the result, the appeal of the revenue stands dismissed.
11. This decision was pronounced in the open court on 02nd July 2010.
Sd./- Sd./- (RAJPAL YADAV) (A K GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:02nd July, 2010 Sp. Copy forwarded to 1. Appellant 2. Respondent 3. CIT True copy: By order 4. CIT(A) 5. DR Dy. Registrar, ITAT, New Delhi