TMI Blog2001 (2) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. The assessee after manufacturing the said mosquito repellents, mats, and mat heater machines, was also selling and distributing them in the States of Tamilnadu, Pondicherry, Andhra Pradesh, Kerala and Karnataka. During the previous year relevant to the assessment year under appeal M/s. Transelektra Domestic Pvt. Ltd. Bombay, (TDP for short) on 24-5-1995 entered into an agreement with the assessee. The preamble of the agreement indicated that it was a non-competition agreement. The preamble also indicated that the assessee is to discontinue the marketing, sale and distribution of mosquito repellents, mats, etc. hitherto manufactured by it. The main clause of the said agreement is reproduced for the sake facility:-- "Covenant: (Clause 3 of the agreement) PLC hereby agrees with TDP that, during the period PLC shall not, without TDP's prior written consent, directly or indirectly own, manage, operate, join have an interest in control or participate in the ownership, management, operation or control of, or be otherwise connected in any manner with, any body corporate, partnership, proprietorship, trust, estate, association or other business entity which directly or indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution and sale rights of the mats in favour of TDP in no way affected the business of the assessee. The AO further observed that the mention of the 5 year period during which the assessee was not to enter into any competition activity is only a normal feature. He referred to clause 9(b) of the non-competition agreement and concluded that the receipt could be treated as fees for technical know-how because the agreement in no way placed any restriction insofar as the operation and activity of the assessee. He noted that the bar was only with regard to the marketing of the products and not with manufacture. Because the assessee was carrying on job work for BIL, its business activity continued. He referred to Board's Instruction No. 1964 in F.No. 225/22/99-ITA-II, dated 17-3-1999 and observed that the nature and circumstances of each case would decide the issue. The AO was of the opinion that the agreement was a mask and that the receipt could be a profit in view of parting with the technical know-how and the right to carrying on the business and that the component did not contain any remedial measures and the assessee is allowed to resume business after five years. He accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Bombay High Court in CIT v. Principal Officer, Lakshmi Surgical (P.) Ltd. [1993] 202 ITR 601, he observed that a shift from manufacture to job work indicated the assessee to be continuing the same business. He accordingly confirmed the order of the AO insofar as the taxability of non-competition fee of Rs. 2.70 crores as revenue income. 9. The assessee is aggrieved by the order of the CIT(A) and has come up in appeal before us stating that the amount of Rs. 2.70 crores received by it does not have the character of revenue income. The ld. counsel for the assessee Mr. Vijayaraghavan carried us through the agreement with TDP. He referred to the preamble of the said agreement and the same is reproduced for the sake of appreciation of the entire issue:-- "And Whereas PLC has been approached by TDP to discontinue the marketing, sale and distribution of Mosquito Repellent Mats and Mat Heater Machines for which TDP has agreed to pay PLC an adequate consideration as per the terms and conditions contained in this agreement. AND WHEREAS PLC has further agreed with TDP not to carry on for a term of five years in India any business which may compete with the Business in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that is placed on the assessee is similar to an embargo preventing the assessee from entering into any territory that is forbidden by means of its own volition and agreement with TDP. 10. He submitted that the agreement with BIL is in no way a substitution for the distribution, sale and marketing rights, which it had carried on earlier. Because the assessee had the required talent, machinery, labour etc., BIL wanted to take advantage of the said facility and on that basis entered into an agreement with the assessee for manufacture of the products for which BIL had the patent rights. Further BIL had clearly stated that the assessee who is the manufacturer shall sell the manufactured product according to the terms of BIL to BIL only and it would be deemed to be a purchase by BIL from the assessee. The agreement with BIL clearly specified that the product so manufactured must conform to the quality control standards and specifications prescribed by BIL. The manufactured products would be bought by BIL from time to time by placing orders on the assessee at a price that would mutually agreed upon. The agreement with BIL for purchase is on a principal to principal basis. He submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P--manufacturing of mosquito repellents, mats, and mat adapters for Banish Mats--shall be covering its areas of marketing, sale and distribution. By means of this agreement, TDP compelled the assessee to discontinue the marketing, sale and distribution of mosquito repellents, mats and mat heater machines and this agreement was made effective for a period of five years only. He submitted that this cannot be read in isolation from the agreement that was entered into by the assessee with BIL. The agreement with BIL was a contract of work and sale. The contract of work covered manufacturing of identical products which hitherto the assessee was manufacturing in its own right and then distributing and selling and marketing the same in its own rights. The parallel of the activity of manufacture either on behalf of the assessee itself or on behalf of another needs to be appreciated. The other parallel that was pointed out was that the marketing, sale and distribution was carried out by the assessee on its own behalf and as far as BIL is concerned, the assessee is required to sell all those to BIL only. He accordingly pleaded that the activity which was carried on by the assessee earlier th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive years should not be taken seriously for the sole reason that the assessee is allowed from time to time to deal in similar kinds of business for anybody else with the only condition that he shall not carry on distribution, sale and marketing of competing product. 13. The rival contentions as raised before us, and the material that are placed on record have been very carefully perused. It is clear from the fact that are borne out from the records that the assessee had entered into an agreement with BIL on 16-9-1994 for the manufacture of mosquito repellents, mosquito mats, mosquito heaters, etc. and selling them to BIL and this agreement was on a principal to principal basis. The assessee had possessed the manufacturing capability of mosquito repellents which it was carrying on from 1986 onwards. The manufacturing capability and capacity which it possessed, BIL wanted to take advantage which it did by entering into an agreement with the assessee. BIL did not grant the marketing rights of the product so manufactured on its behalf. BIL was to raise its order on the assessee and the assessee would then raise its invoices on BIL. This was generating income to the assessee from 16-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f commission for procuring orders and hence a revenue receipt. 15. To our mind the facts as were before the Madras High Court and the one before us are not parallel to one another and therefore the said decision cannot be applied. One distinguishing feature between the facts of the assessee and that of the Madras High Court is that the assessee had a pre-existing right before it entered into contract with the TDP and this pre-existing right was marketing, distribution and sale of mosquito repellents, mats and heaters etc. The other distinguishing feature is that for a period of five years the assessee will not enter into any market in the same line of business as that of TDP. The third distinguishing feature is that the assessee is carrying on the manufacture of mosquito repellents, mats, heaters, etc. and it is not a distinct business activity from one carried on by the assessee unlike in the case before the Madras High Court. The Madras High Court further in that case the assessee was not carrying on any rival business in the rubber lining and bonding. In the instant case, the assessee was carrying on the rival business in the sale, marketing and distribution of mosquito repell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and trade which is galloping at a very fast phase. In such a situation, the amount received for not being a competitor or rival in a business activity of another as not relatable to a profit-making apparatus but as a profit in itself, to our mind, would be grossly erroneous. One major activity which was developed over a period of years namely marketing, by one stroke of action the assessee is prevented from carrying on of that activity for a period of five years. No doubt the activity of the assessee insofar as BIL is concerned covering manufacture and sale to BIL only is in some manner gives an impression that there is no impairment of the functioning or the activity of the assessee. But it needs to be appreciated from the point that what the assessee was doing out of its own free will and volition of manufacturing and then marketing it, it had surrendered in favour of TDP and agreed not to be its competitor for a period of five years. 18. The surrendering of the rights of marketing etc. in favour of TDP is an action of giving over its profit earning apparatus to TDP entirely. This activity happened to be its main activity for last several years. The curtailed activity of carry ..... X X X X Extracts X X X X X X X X Extracts X X X X
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