Income Tax Appellate Tribunal - Bangalore
Kwality Biscuits Pvt. Ltd.,, Bangalore vs Assessee on 1 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH 'A'
BEFORE SHRI N.BARATHVAJA SANKAR, VICE-PRESIDENT
(THIRD MEMBER)
ITA No.1223(Bang)/2009
(Assessment year: 2001-02)
M/s.Kwality Biscuits Pvt. Ltd.
PB No.3902, 6th Mile,
Mysore Road,
Bangalore-560 039. ... Appellant
PAN: AACCK 312H
Vs.
Asst. Commissioner of Income-tax
Circle-11(5), Bangalore. ... Respondent
Appellant by: Shri Dilip S Damle.
Respondent by: Shri G.V.Gopala Rao.
Date of hearing : 01-12-2011
O R D E R
As there was a difference of opinion between the Members who heard the appeal, the Hon'ble President, ITAT has nominated me as Third Member u/s 255(4) of the Income-tax Act, 1961 [hereinafter referred to as "the Act"], to resolve the difference.
ITA No.1223(Bang)/2009 Page 2 of 29
2. The question referred to me is as follows:
"Whether in the facts and circumstances of the case, the assessee is entitled to claim the amount of `.30 crores received from M/s.Britania Industries Ltd., as non-taxable capital receipts for the assessment year in appeal or is it liable for taxation as long-term capital gains?"
3. The main issue for consideration is whether the receipt of `.30 crores for transfer of trade marks, copyrights and designs received from M/s.Britania Industries Ltd. ('BIL' for short) is chargeable to capital gains tax under the provisions of the Act.
4. On 29-3-2001, the assessee-M/s.Kwality Biscuits Pvt. Ltd., executed three Deeds of Assignment assigning intellectual property rights (IPRs) being trade marks, designs and copyrights. In terms of the Deeds of Assignment, the said three IPRs were assigned to BIL for an aggregate consideration of `.30 crores. In the return filed for assessment year 2001-02, no capital gains on transfer of IPRs was disclosed by the assessee on the ground that these IPRs were assessee's self-generated assets and, therefore, cost of acquisition was not determinable and therefore computation provisions of the Act relating to capital gains tax were not applicable. Thus, the assessee claimed the receipt of `.30 crores as capital receipt not liable to tax under the head 'capital gains'. However, the AO assessed ITA No.1223(Bang)/2009 Page 3 of 29 `.30 crores under the head 'long-term capital gains' (LGCG) in the assessment made under sec.143(3) read with section 147 of the Act. In his opinion, in the course of transfer of IPRs, the assessee had transferred its right to manufacture, produce or process any article or thing. In terms of sec.55(2)(a) of the Act, 'the cost of acquisition' of such right was nil and therefore the whole of the consideration received by the assessee was liable to tax under the head LTCG. In his opinion, in the garb of transfer of IPRs, the assessee had, in effect, transferred its right to manufacture or produce or process any article or thing. In terms of sec.55(2)(a) of the Act, 'cost of acquisition' of such right was nil and therefore, the whole of the consideration received by the assessee was liable to tax under the head LTCG. In the remand proceedings in the course of appeal, the AO alternatively submitted that the 'trademarks' were nothing but a corporeal representation of 'goodwill' which was transferred by the assessee under the Assignment Deed and therefore the consideration was fully chargeable to tax because u/s 55(2)(a) cost of acquisition of 'goodwill' was to be taken at nil. The CIT(A) upheld the order of the AO. The assessee moved second appeal before the Tribunal and there was a difference of opinion between the Members constituting the Bench and thus it has come before me as a Third Member with the question mentioned elsewhere of this order.
5. The Hon'ble Judicial Member has recorded that his conclusion differs with that of the Hon'ble Vice-President only ITA No.1223(Bang)/2009 Page 4 of 29 regarding the second limb of revenue's contention viz., whether transfer of trademark, patent and design resulted in transfer of right to manufacture, produce or process any article or thing of M/s.Kwality Biscuits Pvt. Ltd.,(assessee).
6. Shri Dilip S.Damle, learned Chartered Accountant appearing for the assessee, submitted that it would be quite evident that each of the IPRs have specific and definite meaning in law and these rights are in no way connected with right to manufacture any particular product. The IPRs, which the assessee was owning and holding, were being used in connection with marketing and selling its products i.e. biscuits. However, 'manufacture' or 'production' of biscuits per se was not dependent on owning and holding the IPRs. He submitted that the assessee transferred only the rights relating to trademark, copyrights and designs to BIL but right to undertake manufacture or manufacturing know-how in relation thereto were never transferred by the assessee. He also submitted that on going through the history of amendments to sec.55(2)(a) (extracted elsewhere of this order), it would transpire that each of the amendments were made applicable prospectively and not retrospectively. In interpreting provisions of sec.55(2)(a), there is no scope for intendment because the expression used for bringing in the sweep of taxation capital assets or rights of different parties are not overlapping or synonymous. Each category of rights or each of such capital assets get included in ITA No.1223(Bang)/2009 Page 5 of 29 sec.55(2)(a) are at different points of time are independent of each other and all distinct.
On the other hand, Shri G.V. Gopala Rao, learned Departmental Representative submitted that the assessee transferred IPRs in the form of trade marks, designs and copyrights along with bundle of other rights including the non- compete agreement. The bundle of rights assigned by the assessee in favour of BIL include the right to manufacture produce or process the biscuits hitherto being manufactured, processed and sold by the assessee under the brand name of 'Kwality'. Thus, the IPRs transferred by the assessee had formed part and parcel of goodwill of the assessee reflected in the market. Thus, the comprehensive arrangements of transfer of these IPRs to BIL was in fact, comes under the sweep of transfer of their right to manufacture biscuits for a consideration of `.30 crores and the same was rightly assessed by the AO. He further submitted that the CIT(A) relied on the booklet published by the National School of Law which says that the goodwill is a comprehensive term which includes trademark and other IPRs. Therefore, the opinion given by a premier National School of Law cannot be ignored in understanding or interpreting law on the subject. The conclusion of the Hon'ble Judicial Member that what is included and can be intended and what is really transferred and what could be subjected to transfer is right to manufacture biscuits in the name of or using the name 'Kwality biscuits' deserves to be supported. The ITA No.1223(Bang)/2009 Page 6 of 29 inclusion of trademark or brand name by the Finance Act, 2001 w.e.f. assessment year 2002-03 is by way of abundant caution and the same is only curative in nature. Right to manufacture, production of any article or thing is a wider and larger right than their right to manufacture, produce any article under trade name or brand name. Thus, the learned Departmental Representative supported the view taken by the Hon'ble Judicial Member that the amendment made by the Finance Act, 2001, by including trademark or brand name is only curative in nature and is applicable with retrospective effect.
7. In his rejoinder, the learned AR submitted that:
(i) The first argument of the learned CIT-DR is that the consideration of `.30 crores paid for IPRs included other bundle of rights and also non-compete fee. This argument is factually incorrect. Apart from `.30 crores paid to the assessee, BIL paid `.8 crores as non-compete fee to the promoters/shareholders of the assessee and not to assessee. The non-compete covenants were accepted by the erstwhile promoters in their personal capacity. One must keep in mind that in law, company is a separate and independent entity from its shareholders and promoters. The company is not bound by acts committed by or agreements entered into by the promoters/shareholders in their personal capacity. The promoters, for separate consideration received individually, agreed not to engage in business connected with the business of the assessee. No sum ITA No.1223(Bang)/2009 Page 7 of 29 whatsoever was received by the assessee for accepting non-
compete covenant from BIL, as submitted by the revenue. In terms of Heads of Agreement to which the assessee was an independent party, the assessee agreed to sell or transfer only its IPRs relating to 'Kwality' brand for a consideration of `.30 crores. It is for this purpose separate assignment agreements were executed in which references were made to specific intellectual property rights i.e. trademarks, copyrights and designs. On assignment of these specific corporeal registered intellectual property rights, stamp duty as per law was also paid. Thus, assessee did not transfer any other right nor relinquished or extinguished its right to manufacture. Besides the IPRs relating to 'Kwality' brand, the assessee owned productive fixed assets, held requisite permission, registration and license for manufacture of biscuits which continued to own and hold and it is on this premise that BIL agreed to purchase entire share holding of the assessee from its existing shareholders. The arrangement between shareholders and BIL was in relation to the shares of the assessee and not in relation to assessee's biscuits business. The intention of the parties was always that the assessee would continue to own and hold all the productive fixed assets as hitherto held and the assessee would continue to manufacture biscuits. Having regard to assessee's production capabilities, productive assets owned by it and keeping in mind assessee's technical know-how in manufacture of biscuits, BIL agreed to purchase shares of the assessee from ITA No.1223(Bang)/2009 Page 8 of 29 existing shareholders for `.16 crores. Had the intention of the parties was that the assessee would cease to own its manufacturing apparatus and/or discontinue its core business of manufacture of biscuits then the prudent investor such as BIL would not have invested `.16 crores in acquiring shares of a company which had agreed not to carry on its core manufacturing business. The CIT(A) relied on the commentary published by the National Law School which stated that goodwill is a comprehensive term which inter alia, includes trademark. The Hon'ble Vice-President (AM) in his order, relying on the decision of the ITAT, Mumbai held that even though goodwill, trademark may belong to the same genealogical specie, yet in law, these capital assets are separate and distinct rights. The Hon'ble Judicial Member was in agreement with the Hon'ble Vice-President that capital asset transferred was 'trade mark' and this is separate from 'goodwill'. The Hon'ble JM disagreed with the Hon'ble Vice-President's conclusion that assessee did not transfer 'right to manufacture'. In Hon'ble JM's opinion, brand name transferred by the assessee was right to manufacture and therefore he held that long term capital gains was assessable because cost of acquisition of such right u/s 55(2)(a) was nil. In the proceedings u/s 255(4), the scope for adjudication for the Third Member is limited to point of difference between the Members. This being the case, the Learned DR was not justified in relying upon the CIT(A)'s finding that transfer of trade mark was chargeable to tax in the ITA No.1223(Bang)/2009 Page 9 of 29 assessment year 2001-02 being transfer of 'goodwill'. As already explained, "right to manufacture biscuits' and "right to market biscuits under "kwality trade mark" are separate and independent rights and it cannot be said that right to manufacture includes 'trade mark' or 'brand name'. Both the rights operate in the independent field and can be operated or acted upon independent of each other as well. Prior to 29-3-2001, right to manufacture and right to market biscuits the IPRs were owned, held and exercised by the assessee. After 29-3-2001 IPRs became BIL's property. The right to manufacture, however, continued to be held and exercised by the assessee. The facts on record show that even after 29-3-2001 assessee continued to manufacture biscuits. For biscuits manufactured and marketed under brand 'Kwality', the assessee paid royalty to BIL. However, the assessee also manufactured biscuits for other biscuit marketing companies against job charges. Such income was earned in the capacity as manufacturer simplicitor and for which no royalty was paid. For earning income from manufacture of biscuits simplicitor, owing the IPRs was not a necessary condition.
(ii) The learned AR of the assessee relied on the following decisions,
(a) Sherwani Industrial Syndicate Ltd. vs. DCIT (99 TTJ 123)(ITAT)(Alld.)
(b) HCL Infosystems Ltd. vs. DCIT (85 ITD
42)(ITAT,Delhi) and ITA No.1223(Bang)/2009 Page 10 of 29
(c) Associated Electronic & Electrical Industries Ltd. vs. DCIT (IT(SS)A No.9(Bang)/2009 dt.6-2-2009) for the proposition that the amendment made to section 55(2)(a), as far as 'trade mark' was concerned, it was w.e.f. 1-4-2002 only and it is not curative or retrospective. He also relied on the decision of the co-ordinate Bench (Mumbai) of the Tribunal in the case of Bombay Oil Industries vs. DCIT (28 SOT
383). He submitted that for the proposition that trade mark or brand name was brought into the scope of sec.55(2) only w.e.f. 1-4-2002 (assessment year 2002-03). He also pointed out that the author of the said order was none other than the Hon'ble Judicial Member who has passed a dissenting order in the present case. The learned AR also relied on the decision of the Apex Court in the case of Guffic Chem Ltd. vs. CIT (332 ITR
602) for the proposition that charging provisions of the Act cannot operate retrospectively but only prospectively.
8. On the other hand, the learned Departmental Representative submitted that the Hon'ble JM was right in holding that the assessee transferred all its rights including the marketing of its biscuits business. For that reason the assessee had no locus standi to manufacture on its own the biscuit business in its erstwhile brand name and market them. He also submitted that the assessee carried on the manufacturing and trading of biscuit business not as an owner of these IPRs but as a licensee for and on behalf of BIL. Therefore, the assessee ITA No.1223(Bang)/2009 Page 11 of 29 had transferred all its rights which included right to manufacture, distribution and marketing of biscuits business in the erstwhile brand name "Kwality". Thus the argument that the assessee continued the business is not correct.
9. Learned Departmental Representative submitted that:
(i) the decision of the Allahabad High Court in the case of Sherwani Industrial Syndicate Ltd (supra) is not applicable to the facts of the present case as the same was rendered mainly to consider the jurisdiction assumed by the CIT u/s 263 of the Act. Although the amendment to clause (a) of sub-section (2) of sec.55 has only prospective effect from 1-4-2002, the effect of the amendment in relation to earlier period is to be necessarily considered while determining the question as to whether the brand name associated with the business was included in the expression 'goodwill', the Kerala High Court in the case of Vysali Chemotherapeutics (P) Ltd. vs. CIT (269 ITR
362) has decided.
(ii) the decision of the Hon'ble Supreme Court in the case of Guffic Chem Ltd. vs. CIT (332 ITR 602) was primarily rendered in the context of amendment in the section 28(va) and not in the context of sec.55(2).
(iii) the decision of the co-ordinate Bench of Bangalore in the case of Associated Electronic & Electrical Industries Ltd.(supra) has no application to the present facts of the case as this related to assessment year 1996-97.
ITA No.1223(Bang)/2009 Page 12 of 29
(iv) the co-ordinate Bench (Bombay) of the Tribunal, in the case of Bombay Oil Industries Ltd (supra), has decided in a brief manner without deeply touching the issue but mainly relying on the decision of the Delhi High Court in the case of CIT vs. Milk Foods Ltd. (280 ITR 331) which related to assessment year 1996-97, much before the amendments. Thus, the learned Departmental Representative pleaded that the Hon'ble JM has taken a right view.
9. In his rejoinder, the learned AR of the assessee submitted that:
(i) In the case of Sherwani Industrial Syndicate Ltd (supra), it could be seen that in paragraphs 36 to 39 of the order, the ITAT adjudicated on the issue of taxability of consideration received for transfer of IPRs on merits and hence, the decision of the Allahabad Bench was very much relevant. It is also relevant for the reason that in both the cases the IPRs transferred were identically the same.
(ii) In deciding the issue one must apply the ratio laid down by the court and one should not try to compare apple with apple and mango with mango. The amendments in sec.28(va) and 55(2)(a) were made simultaneously by the Finance Act, 2002 so as to make the amounts received for surrendering right to carry on any business taxable either as capital gains or business profits. The Apex Court held that the amendment to sec.28(va) was applicable only w.e.f assessment ITA No.1223(Bang)/2009 Page 13 of 29 year 2003-04 as it is a cardinal principle of interpretation of statutes that charging provisions of the Act cannot operate retrospectively but prospectively. Therefore the decision of the Apex Court is squarely applicable in interpreting amendment in sec.55(2)(a) by the Finance Act, 2001 as well.
(iii) The co-ordinate Bench (Bangalore) of the Tribunal, after observing the amendment brought out in the Finance Act,2001, the Explanatory Notes to Finance Bill 2001 and the CBDT circular No.14 of 2001 held that where the asset transferred is trade mark, the same is assessable to capital gains only from 1-4-2002 and onwards. Further, the co-
ordinate Bench, in arriving at the conclusion that 'trade mark' as a capital asset, is separate and distinct from 'goodwill', followed the decision of the Apex Court in the case of S.C.Khambatta & Co. vs. CIT (41 ITR 500) wherein the distinction between these two rights was recognized and accepted by the Apex Court.
(iv) In the case of Bombay Oil Industries Ltd (supra), the Mumbai Bench of the Tribunal, while deciding the said issue not only referred to the decision of the Delhi High Court in the case of Milk Foods Ltd. (supra) but also the decision of the Calcutta Bench in the case of ICI Ltd. vs. DCIT (81 ITD 348). The ITAT, Calcutta, had categorically held that the Legislature made amendment in sec.55(2) by the Finance Act 2001 w.e.f. 1-4-2002 by inserting, the words 'or a trade mark or brand ITA No.1223(Bang)/2009 Page 14 of 29 name associated with a business', after the word, 'goodwill of the business', clearly establishes that as per the intention of the Legislature, trademark cannot be equated with goodwill.
10. I have heard the rival submissions at length, considered the entire facts and material available on record including the orders of the Hon'ble Vice-President and the Hon'ble Judicial Member and also the case laws cited by both the parties.
In order to resolve the difference, I have to address two issues viz., (i) whether the amendment made to sec.55(2)(a) for bringing into the fold of the term 'cost of acquisition', 'trade mark' or 'brand name associated with the business' w.e.f. 1-4-2002 by the Finance Act, 2001 is curative (retrospective) or prospective, and (ii) whether the assessee, while transferring trade mark, patent and design to BIL has transferred the right to manufacture, produce or process any article or thing also.
11. Let me first take up the issue whether amendment made to sec.55(2)(a) is prospective or curative. It would be relevant to quote the provisions of sec.55 of the Act. Section ITA No.1223(Bang)/2009 Page 15 of 29 55(2)(a), as it existed on 1-4-2001 and applicable for assessment year 2001-02, was as follows:
"55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition' (1) . . . . . . . .. . . . . . .. . . . . . . . . . . . . . .
(2) For the purposes of sections 48 and 49, 'cost of acquisition', -
(a) in relation to a capital asset, being goodwill of a business or a right to manufacture, produce any article or thing, tenancy rights, stage carriage permits or loom hours, -
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price ; and
(ii) in any other case (not being a case falling under sub-clauses (i) to (iv) of sub-section (1) of section 49), shall be taken to be nil "
11(i) The memorandum explaining the provisions of Finance Bill 1997 explained the reasons for the amendment as follows:
'Up to assessment year 1988-89, the gains arising on the transfer of goodwill were not liable to tax. This was on account of the judicial view approved by the Supreme Court (CIT vs. B.C.Srinivasa Shetty (1981) (128 ITR 294). This rationale of the Court was that goodwill being a self generated asset and not costing anything in terms of money, the gains could not be computed in accordance with the provisions of the Act. By Finance Act, 1987, the method of computing the cost of acquisition as well as the cost of improvement of goodwill was provided for. Where goodwill is purchased by the transferor the cost of acquisition is taken to be the purchase price and in all other cases it is taken to be nil. The cost of improvement in either case is taken to be nil.
ITA No.1223(Bang)/2009 Page 16 of 29 Instances have come to light where a right to manufacture, produce or process any article or thing have been extinguished for a consideration. This amount is shown as a capital receipt and is not taxable presently under the head 'capital gains'. It is proposed that capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc. is for any consideration. It is proposed that such receipts be also subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill The proposed amendment will take effect from 1st April 1998 and will accordingly apply in relation to assessment year 1998-99 and subsequent years. (emphasis supplied by me) 'Trade mark' or 'brand name associated with the business' was brought within the purview of section 55(2)(a) by the Finance Act 2001.
11(ii). Notes on clauses of Finance Bill 2001 is as under
(248 ITR (St.)126):
"Clause 32 seeks to amend section 55 of the Income- tax Act relating to meaning of the expressions 'adjusted', 'cost of improvement' and 'cost of acquisition'.
Under the existing provision contained in clause (a) of sub-section (2), the cost of acquisition in relation to a capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, shall be taken to be the purchase price in case the asset is purchased by the assessee from a previous owner and in any other case such cost shall be taken to be nil.
It is proposed to amend clause (a) of sub-section (2) to provide that the cost of acquisition in relation to a trade mark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.
ITA No.1223(Bang)/2009 Page 17 of 29 This amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years." (emphasis supplied by me) From the above history of section 55(2)(a) and the Memorandum explaining the provisions of Finance Act, it transpires that the Finance Act 1997 brought 'goodwill of a business' or 'a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours' into the hold of section 55(2)(a w.e.f. 1st April 1998 (assessment year 1998-99). Similarly 'cost of acquisition in relation to 'trade mark' or 'brand name associated with business' was brought into the scope of sec.55(2)(a) w.e.f. 1st April 2002 (assessment year 2002-03).
12. The statute and the rules are constantly amended. Where amendment is from 1st April, it is generally understood that it is applicable from the assessment year starting from 1st April. For example, if the amendment is effective from 1st April 1999, it should apply for the assessment for assessment year 1999-2000 and later years. This is the trite law which has been upheld even by the Apex Court in many cases. Also substantive provisions, unless made specifically retrospective can only be understood as having prospective operation from the date on which it becomes law or any other date specified in the statute. IT Act is one of the most categoric branches of law and its intent is to be gathered from the express words employed to further the current fiscal policy of the Government. It can be ITA No.1223(Bang)/2009 Page 18 of 29 seen from the history of amendments narrated above that 'trade mark' or 'brand name associated with the business' was brought within the purview of sec.55(2)(a) by the Finance Act, 2001 and it was mentioned in the Memorandum explaining the amendments specifically that this amendment will take effect from 1st April 2002 and will apply in relation to assessment year 2002-03 and subsequent years. The intention of the Legislature can be gathered from the Memorandum explaining the amendment and the Memorandum has clearly stated that it is applicable from 1st April 2002 (assessment year 2002-03).
12(i) The CBDT circular No.14 of 2001, vide paras.42 to 42.3 clarified as under:
"42. Providing for cost of acquisition of certain intangible capital assets under section 55 42.1 Under the existing provisions of sub-section (2) of section 55 of the Income-tax Act, the cost of acquisition of an intangible capital asset, being goodwill of a business or a right to manufacture, produce or process any article or thing, tenancy rights, stage carriage permits or loom hours, is the purchase price in case the asset is purchased by the assessee from a previous owner, and nil in any other case. It was pointed out that certain similar self- generated intangible assets like brand name or a trade mark may not be considered to form part of the goodwill of a business, and consequently it may not be possible to compute capital gains arising from the transfer of such assets.
42.2 The Act has therefore amended clause (a) of sub- section (2) to provide that the cost of acquisition in relation to trade mark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.
42.3 This amendment will take effect from 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-2003 and subsequent years."
ITA No.1223(Bang)/2009 Page 19 of 29 Hence, it cannot be interpreted to have retrospective effect. Also there is force in the contention of the learned C.A. of the assessee that the cardinal principle of interpretation of statutes that charging provisions of the Act cannot operate retrospectively but only prospectively.
12(ii) The Apex Court in the case of Guffic Chem Ltd. (supra), while dealing with the amendment made to sec. 28(va) w.e.f. 1-4-2003, held that compensation received under non- compete agreement became taxable as a capital receipt and not as a revenue receipt by specific legislature amendment vide sec.28(va) and that too w.e.f. 1st April 2003. In that case, the Apex Court held that amendment to sec.28(va) is mandatory and not clarificatory. I also find that the amendments to sec.28(va) and 55(2)(a) were made simultaneously by the same Finance Act. I find that the Apex Court, in the context of sec.28(va) held that it is only prospective. Hence, following the same analogy, I hold that the amendment made to sec.55(2)(a) by bringing in 'trade mark' is also prospective.
12(iii) Also the decision of the Delhi Bench of ITAT in the case of HCL Infosystems Ltd. (supra) and the decision of the Allahabad Bench of the ITAT in the case of Sherwani Industrial Syndicate Ltd (supra), as rightly contended by the learned C.A. have also dealt with the merits of the case apart from dealing with the jurisdiction u/s 263. In that decision, the Bench has held that 'trade mark' or 'brand name associated with the ITA No.1223(Bang)/2009 Page 20 of 29 business of the assessee' came within the purview of the computation of capital gain w.e.f. 1-4-2002 only.
12(iv) In the case of Associated Electronic & Electrical Industries Ltd.(supra) the Division Bench has observed as under:
"So far as trade mark is concerned, the capital gains on the transfer of the same became assessable by virtue of the amendment made to section 55(2)(a) by the Finance Act, 2001 w.e.f. 1-4-2002. We are concerned with the block period commencing from the assessment year 1988-89 and ending with the date of search, namely, 16-10-1997. The capital gains have been assessed as undisclosed income for the assessment year 1996-97. Therefore, the assessment to capital gains can be sustained only if the capital asset transferred was the goodwill of the assessee-company; if what is transferred is the trade mark, there will be no capital gains to be assessed since the amendment making the cost of acquisition of trade mark to be taken at Rs.nil came into effect only from1-4-2002."
12(v). In the case of Bombay Oil Industries (ITA No.2985(MUM) of 2005 for assessment year 2001-02 reported in 28 SOT 383, the Division Bench held as under:
"It was an admitted fact that trademark/brand name of 'Parachute' and 'Saffola' was a self-generated asset and the cost of the same was nil. The receipt on sale of trademark/brand name was not exigible to capital gains tax, prior to the introduction of the words 'Trademark or Brand name associated with business'. The same has been clarified by the judgment of the Delhi High Court in the case of CIT vs. Milk Food Ltd. (2006) 280 ITR
331. Therefore, for the relevant assessment year the sale receipt on account of transfer of trademark/brand name mentioned above was not liable to capital gains tax and, hence, the additional ground raised by the assessee was to be allowed."
12(vi) Reliance by the learned Departmental Representative on the decision of the Kerala High Court in the ITA No.1223(Bang)/2009 Page 21 of 29 case of Vysali Chemotherapeutics (P) Ltd. (supra) has no relevance in this appeal because the case of the Hon'ble JM is not that of goodwill. The Hon'ble JM is also of the view that the capital asset transferred was 'trade mark'.
12(v). In the CBDT circular No.14 of 2001, at para.42.1 the Board has observed as under:
"42.1 Under the existing provisions ......................... It was pointed out that certain similar self-generated intangible assets like brand name or a trade mark may not be considered to form part of the goodwill of a business, and consequently it may not be possible to compute capital gains arising from the transfer of such assets."
By reading of the above, it would be clear that the CBDT was of the view that 'trade mark' or 'brand name' are different from 'goodwill' of a business. That is why perhaps, in para.42.2 of the Circular it is mentioned that clause (a) of sub-section (2) is amended to provide that the cost of acquisition in relation to trade mark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case.
12(vi). In case it was the intention of the Legislature to include trade mark or brand name in the ambit of 'goodwill', there was no need for the Legislature to make this amendment as made in the Finance Act. Instead it would have amended the word 'goodwill' itself to include trademark and brand name. Hence, it cannot be said that it was the intention of the Legislature to treat trademark and brand name as goodwill. Instead it was treated as a separate intangible asset, may be ITA No.1223(Bang)/2009 Page 22 of 29 akin to goodwill. So, I am of the view that trademark or brand name will not fall in the sweep of the word 'goodwill'.
13. I am in agreement with the view taken by the Hon'ble Vice-President that the amendment made to sec. 55(2)(a) by bringing in the term 'trademark' and 'brand name' is only prospective and is applicable only from the assessment year 2002-03. Since the appeal of the assessee relates to assessment year 2001-02 this amendment cannot be applied retrospectively.
14. Now let me turn the other issue whether the assessee, while transferring trademark, patent and design to BIL has transferred the right to manufacture, produce or process any article or thing also, as opined by the lower authorities and the Hon'ble Judicial Member?
15. For arriving at a conclusion on this aspect, I have to mention the following facts:
On 29-3-2001, a tripartite agreement was entered into by and between Shri N.Gourishankar representing the shareholders of the assessee, the assessee (KBPL) and the BIL evidencing comprehensive arrangement arrived at between the parties. The said agreement was titled as 'Heads of Agreement"
(copy thereof at pages 41 to 97 of the first paper book). In terms of the said Agreement, the following things were agreed:
ITA No.1223(Bang)/2009 Page 23 of 29
a) Existing shareholders of the assessee agreed to sell all equity shares to BIL and or its nominees at and for consideration of `16.00 crores
b) The assessee agreed to transfer trademarks, designs and copyrights to BIL for an aggregate consideration of `.30 crores (Clauses 3.1, 3.2 and 3.4 of the Agreement at pages 50 & 51 of the paper book.
c) Promoters of the assessee agreed not to carry on business competing with the biscuits business of the assessee. For accepting restricted covenant, the promoters were paid consideration of `.8 crores (clause 6.1 at page 59)
d) The promoters of assessee agreed to provide certain advisory services to BIL for which separate consideration was agreed to be paid.
The terms and conditions agreed in the 'Head of Agreement' were acted upon by the parties during the financial years 2000- 01 and 2001-02. Simultaneously with execution of Heads of Agreement, the assessee executed three deeds of Assignments on 29-3-2001 details of which are as follows:
a) Agreement for Assignment of trademarks for consideration of ` 12.50 crores (pages 99 to 134 of the paper book)
b) Agreement for Assignment of designs for consideration of `1 crore (pages 135 to 142 of the paper book)
c) Agreement for Assignment of copyrights for consideration of `16.50 crores (pages 143 to 148 of the paper book).
The consideration as provided in the Agreements was paid by BIL on 29-3-2001 and effective from that date the IPRs became property of BIL. The consideration for transfer of shares, ITA No.1223(Bang)/2009 Page 24 of 29 acceptance of restrictive covenant etc., was however paid by BIL separately to the promoters and shareholders of the assessee and these transfers took effect in the subsequent assessment year i.e. 2002-03.
16. The Hon'ble Vice-President considered the question whether transfer of the above rights viz., trademark, patent and designs has resulted in extinguishment of right to manufacture, produce or process any article or thing. According to him, if the transfer of these rights amounted to transfer of right to manufacture, produce or process any article or thing, then the amendment brought with effect from assessment year 1999- 2000 alone would have been sufficient and there was no need to bring further amendment through Finance Act, 2001. He also observed that the history of the amendment on this particular subject matter of capital gains taxation of self- generated assets itself makes it abundantly clear that the right to manufacture, produce or process any article or thing is entirely different from the items of trademark or brand name, at least for the purpose of Income-tax Act and hence, the conclusion of the lower authorities was wrong.
17. The Hon'ble Judicial Member did not accept this finding of the Hon'ble Vice-President. He, referring to the explanatory Note to the Finance Bill, highlights the following sentence:
"and nil in any other case, it has been pointed out that certain similar intangible assets like brand name or a ITA No.1223(Bang)/2009 Page 25 of 29 trade mark may not be considered to form part of the goodwill of a business...."
By quoting the above, he was of the opinion that the intention of the Legislature behind the amendment of the Act is that certain but not all brand names or trademarks may not be considered to form part of the 'goodwill' of the business. When there is a sale of brand name by a company having manufacturing activity, it sells its right to manufacture along with its brand name but when there is a sale of brand name by a company which does not have a manufacturing activity, it sells only its brand name which, according to the Hon'ble JM, can also be the intention of the Legislature when these types of cases were brought into the definition of the said section.
18. If that was the intention of the Legislature, in my opinion, they would have stated in clear terms. One cannot presume contrary to the words specified in the section or memorandum etc., while reading the mind of the Legislature. Hence, in my opinion, distinction made by the Hon'ble JM between company having manufacturing activity and company not having manufacturing activity does not hold good. Further, if that was the intention of the Legislature, as rightly pointed out by the Hon'ble VP, they need not have added trademark and brand name by the subsequent Finance Act when "right to manufacture, produce or process any article or thing' is already in the particular section. Thus it clearly transpires that right to ITA No.1223(Bang)/2009 Page 26 of 29 manufacture, produce or process any article or thing is different from trademark, brand name etc.
19. The learned C.A. of the assessee submitted that prior to 29-3-2001, right to manufacture and right to market biscuits under IPRs were owned, held and exercised by the assessee. After 29-3-2001, IPRs became BIL's property. Right to manufacture, however, continued to be held and exercised by the assessee. Facts on record establish that even after 29-3-2001, assessee continued to manufacture biscuits. For biscuits manufactured and marketed under the brand name "kwality", assessee paid royalty to BIL. However, the assessee also manufactured biscuits for other biscuits marketing companies against job charges. Such income was earned in its capacity as manufacturer simpliciter and for which no royalty was paid. For earning income from manufacture of biscuits simpliciter, owing IPRs was not a necessary condition.
I find that these facts are not rebutted by the department also. However, the Department was of the view that after 29-3-2001, the assessee continued manufacture of biscuits not as an owner of IPRs but as a licensee and therefore it had lost its right to manufacture biscuits.
20. The learned C.A. of the assessee also submitted that if the intention of BIL or assessee was to entirely exit from the business of biscuits manufacture, then no prudent person would have paid such substantive sum to shareholders, particularly when the biscuit business of the assessee was to be ITA No.1223(Bang)/2009 Page 27 of 29 permanently transferred. These facts, considered simultaneously, clearly show that the parties did not at any stage envisage that assessee was to exit from the business of biscuit manufacturing. Rather, the intention of the parties was always that assessee would remain in business of biscuits manufacturing but only IPRs to be transferred to BIL for separate and distinct consideration. BIL had agreed to purchase IPRs in order to increase its own market share of biscuits business. BIL had no intention to acquire or extinguish assessee's right to manufacture biscuits as per se or had no intention to acquire its manufacturing apparatus or know how. BIL did not acquire from assessee either its manufacturing apparatus or factory establishment or it acquired assessee's right to manufacture biscuits. The fact that the assessee continued to carry on manufacturing and trading business is evident from sales tax assessment orders and other facts and hence, it is incorrect to hold that the assessee transferred its right to manufacture thereby ceased to carry on manufacturing or production of biscuits.
I find force in the contention of the learned C.A. that even after 29-3-2001 the assessee was manufacturing biscuits for other biscuit marketing companies such as BIL and Snacko Biscuits Pvt. Ltd., against payment of job charges. I also find that it was only in the matter of marketing, distribution and sale of biscuits under the brand name "kwality", assessee faced restrictions because of IPRs in relation to the brand name ITA No.1223(Bang)/2009 Page 28 of 29 "kwality" no longer belonged to assessee. Just as the assessee worked as contract manufacturer for other biscuit marketing companies, it also got kwality biscuits manufactured from other biscuits manufacturer on payment of job charges. I also find that manufacturing of biscuits was not a necessary concomitant or pre-condition for marketing of kwality biscuits by assessee. Therefore, I am of the considered opinion that right to manufacture biscuits was independent, separate and distinct right from right to market, distribute and sell biscuits under the brand name 'kwality'. In my opinion, if the assessee has transferred right to manufacture or produce biscuits to BIL, then BIL could not have paid `16 crores for purchase of shares of the assessee. I also find that there was a separate agreement for non-compete fee only with the promoter and not with the assessee-company.
21. In view of the above discussion, I hold as under:
i) Right to manufacture, produce or processing of biscuits is a different right from trade mark, brand name and designs.
ii) One cannot presume otherwise, when the Legislature itself has, in clear terms, mentioned its intention in the Act and the Memorandum explaining the provisions of the Act.
ITA No.1223(Bang)/2009 Page 29 of 29 Factually also, the assessee was manufacturing biscuits even after 29-3-2001. In view of the above findings, I totally concur with the view of the Hon'ble VP on this issue also.
22. Thus, I concur with the Hon'ble VP's findings that the amendment made to sec.55(2)(a) by the Finance Act, 2001 is only prospective and applicable from assessment year 2002-03 only and that the assessee, while transferring trademark, patents and designs to BIL has not transferred right to manufacture, produce or process biscuits. In effect, I concur with the finding of the Hon'ble VP that in the facts and circumstances of the case, the assessee is entitled to claim the amount of `30 crores received from BIL as non-taxable capital receipt for the assessment year and the same is not liable for long term capital gains tax.
23. The matter will now go to the regular division bench for passing the order as per majority view.
Sd/-
(N.Bharathvaja Sankar) VICE-PRESIDENT Place: Bangalore Date : 24th January,2012 Eks Copy to :
1. Appellant
2. Respondent
3. CIT(A) concerned
4. CIT
5. DR, ITAT, Bangalore
6. Guard file By Order Assistant Registrar, ITAT, Bangalore