TMI Blog2009 (9) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... ration received for transfer of marketing net-work of pharmaceutical products with the necessary evidence and reasons as to why the same was treated as long-term capital gain. The assessee-company filed its explanation dated January 13, 2004 and submitted the agreement for transfer of marketing network dated July 27, 2000 (wrongly mentioned in the Assessing Officer s order as July 14, 2000). The Assessing Officer has reproduced significant clauses in the assessment order. The agreement had been entered into between the assessee namely Bayer Crop Science Ltd. formerly known as Bayer (India) Ltd. (in short referred to as BIL) party of the (first part), Bayer AG (in short referred to as BAG), a company organised and existing under the laws of Federal Republic of Germany, party of the (second part), and Bayer Pharmaceuticals Ltd. (in short referred to as BPL), a company incorporated under the Companies Act, party of the (third part). M/s. BAG was the proprietor/licensor and beneficial owner of certain trade marks relating to pharmaceutical products which were licenced to the assessee-company under a non-exclusive trade mark licence agreement dated June 21, 1989. This licence agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which BPL would provide assessee-company a fair return on assets. After examining three agreements dated July 27, 2000 with BAG and BPL, the toll agreement entered with the BPL and the valuation report, the Assessing Officer concluded as under : (i) The assessee-company is engaged in diversified business of manufacturing, marketing and sale of agro-chemicals, rubber chemicals, pharmaceutical and consumer care products, out of which the one main manufacturing activity is the manufacturing of pharmaceutical products on the basis of the use of trade mark agreement dated June 21, 1989. So the assessee-company is engaged not only in the business of manufacturing, marketing and distribution of BAG branded pharmaceutical products but also engaged in similar activities for agro-chemicals, rubber chemicals and consumer care products. (ii) The assessee-company acquired the use of trade mark under licence agreement executed on June 21, 1989 from BAG which is having 51 per cent. equity stake in the assessee-company. For use of trade mark the assessee-company did not pay any royalty. BAG terminated the agreement with the assessee-company on mutual consent on establishing a wholly owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee held and its termination did not impair the profit-making structure of the assessee. It was for the Department to clearly establish that the case fell within the exception to the ordinary rule. He also relied on the decision of the hon ble Mumbai High Court in the case of Blue Star Ltd. v. CIT [1996] 217 ITR 514, wherein, it was held that the termination of agency did not result in cessation of business of the assessee. Compensation was held, assessable as a revenue receipt. The Assessing Officer further observed that the agreement was terminated with mutual consent. BAG was holding 51 per cent. shares of the assessee-company, so there cannot be a question of loss due to termination of the agreement with BPL in consequence of termination of agreement but the same was incidental to the business of the assessee-company. He, accordingly, taxed a sum of Rs. 7 crores under section 28 of the Income-tax Act, 1961. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer s action for the following reasons : (i) The arrangement between the assessee and BPL had not resulted into cessation of the assessee s business as the assessee-company was engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that the assessee had not filed any revised return. The learned Commissioner of Income-tax (Appeals) did not allow the assessee s ground on the ground that the assessee was taking shifting stand. He, therefore, adjudicated the only issue whether the amount of Rs. 7 crores was taxable as business income or long-term capital gain. Learned counsel submitted that the assessee had two sources of income as per licence agreement, viz., manufacturing and trading out of which one of the sources of the assessee s income got sterilised and, therefore, it is a capital receipt. He further submitted that this being in the nature of capital receipt where no cost was involved, therefore, there cannot be any long-term capital gain. Learned counsel further submitted that merely because the assessee continued to do manufacturing, it would not lead to the conclusion that one of the sources of earning income had not sterilised because marketing and manufacturing are two different sources of income. Learned counsel for the assessee relied on the decision of the hon ble Supreme Court in the case of CIT v. Vazir Sultan and Sons [1959] 36 ITR 175, wherein, it was held that the agency agreement in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to get higher remuneration. As regards reliance placed by the Assessing Officer on the decision of the hon ble Supreme Court in the case of Karam Chand Thapar and Bros. P. Ltd. [1971] 80 ITR 167, learned counsel submitted that the said decision only supports the findings of the Tribunal that receipts on account of termination of managing agency was capital receipt, wherein the hon ble Supreme Court observed as under (page 172) : Where, on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated), the receipt is revenue : where by the cancellation of an agency the trading structure of the assessee is impaired, or such cancellation results in loss of what may be regarded as the source of the assessee s income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. On applying these tests to the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llation of the agency, the trading structure of the assessee was not impaired. Learned counsel submitted that for a particular receipt to come within the purview of revenue field, it should have been received in lieu of stockin-trade or in lieu of circulating capital. The learned Departmental representative submitted that the trade mark agreement was entered into in 1989 and terminated in July, 2001. The learned Departmental representative referred to page 1 of paper book, wherein, the trade mark agreement is contained. He pointed out that M/s. Bayer Aktiengesellschart (M/s. Bayer AG) was required to furnish Bayer (India) Ltd., the necessary specifications, directions and other technical information required for efficient manufacture of the goods and M/s. Bayer India Ltd., was required to carry out the manufacture of the said goods strictly in accordance with the specifications, directions and information so furnished. No royalty or remuneration was required to be paid by M/s. Bayer (India) Ltd. to M/s. Bayer Aktiengesellschart. The learned Departmental representative referred to various pages of the paper book containing schedule to agreement dated June 21, 1989 referring to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee as compensation for loss of revenue from these 14 products. The learned Departmental representative again referred to page 5 of paper book and pointed out that the trade mark agreement was in respect of 19 items within the category of pharmaceuticals. He pointed out that detigon as appearing in page 5 is not at page 34 of paper book. Similarly edinol and entodon are also not appearing in the schedule 1 to agreement dated July 27, 2000 contained at page 34 of paper book. With reference to the above comparison of the schedule appearing in the trade mark agreement dated June 21, 1989 and the agreement dated July 27, 2000, the learned Departmental representative pointed out that the agreement dated July 27, 2000 was only for 14 items given up and not the entire. Therefore, in any case, there was no impairment of profit earning structure per se. He pointed out that this amount has allegedly been received by the assessee for giving up right to market these products only and, therefore, it is in the revenue field. In regard to the reliance placed by learned counsel for the assessee in the case of Vazir Sultan and Sons [1959] 36 ITR 175, the learned Departmental representative submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacture as per covenant No. 5 of the agreement as per which, it was expressly agreed that until BPL is granted licence to manufacture and market pharmaceutical products in its own name, BIL shall carry on and be deemed to carry on manufacture of pharma products and activities relating thereto for and on account of BPL with reasonable diligence. He further referred to the decision of the hon ble Madras High Court in the case of CIT v. T. I. and M Sales Ltd. [2003] 259 ITR 116 and pointed out that in the said decision, there was no negative covenant but in the present case, agreement was two-fold as the assessee was allowed to manufacture and market even after the agreement. Therefore, the ratio of the decision laid down in the case of CIT v. T. I. and M. Sales Ltd. (supra) is not applicable to the facts of the present case. In rejoinder, learned counsel submitted that in the case of Karam Chand Thapar and Bros. P. Ltd. [1971] 80 ITR 167, out of 27 companies, for which the assessee acted as a manufacturing agent, only one company was given up. Learned counsel further pointed out that in the case of Godrej and Co. v. CIT [1959] 37 ITR 381, commission was reduced from 4 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion regarding the learned Commissioner of Income-tax (Appeals) s finding in not considering the issue whether the impugned amount was long-term capital gains or not. In this regard, the assessee had shown Rs. 7 crores as long-term capital gain for the consideration received on transfer of marketing network of pharmaceutical products. The Assessing Officer, after detailed consideration of various covenants in the agreement, concluded that the impugned amount was the assessee s income taxable under section 28 of the Income-tax Act. The assessee preferred an appeal before the learned Commissioner of Income-tax (Appeals), who has confirmed the findings of the Assessing Officer and has held that the impugned amount was in revenue field. Therefore, no fruitful purpose would be served by restoring the matter to the file of the learned Commissioner of Income-tax (Appeals) because the question of long-term capital gain could arise only when the learned Commissioner of Income-tax (Appeals) had reached the finding that the impugned amount was in the capital field. We, therefore, proceed to decide the issue before us as to whether the impugned amount was in capital field or revenue field. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the schedule under the supervision and control of BAG. No royalty was paid by the assessee to BAG. The assessee got the right to manufacture the said goods and also to market the same under the supervision and control of its proprietor, viz., BAG. As per the first covenant, BAG had granted to BIL nonexclusive right to use the said trade marks. No royalty or other remuneration was payable to the user (BIL) by BAG for the permitted use of the said trade marks. The assessee had no right to acquire the said trade marks or any of the payment to the BAG. As this was a non-exclusive agreement between BAG and BIL, therefore, BAG could enter into an agreement with other persons also of similar kind of trade marks agreement on their becoming registered user of the trade marks. Accordingly, BAG entered into an agreement dated July 24, 2000 with BPPL. The recitals A and B of this agreement read as under : A. The licensor is the beneficial owner and registered proprietor of the trade marks registered in India under the Trade and Merchandise Marks Act, 1957 (hereinafter referred to as the said Act ) a list and particulars whereof are contained in Schedule I hereunder written hereinaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licence agreement dated June 21, 1989 had been terminated with effect from July 27, 2000. As per the first covenant of the agreement dated July 27, 2000, BIL had agreed to sell and transfer and BPL had agreed to acquire the network absolutely at and for a lump sum consideration of Rs. 70 million on the basis of valuation carried out jointly by the two valuers appointed by BIL. BIL also agreed with BAG and BPL to take the following steps : (i) To cancel and/or terminate various agreements entered into by and between BIL and its stockists and distributors ; (ii) Simultaneously with the cancellation and termination of the agreements referred to in (i) above, BIL agrees to cause such stockists and distributors to enter into fresh agreements with BPL on the same terms and conditions without break of continuity ; and (iii) To offer to its employees in the sale and marketing division of the pharma business, transfer of their service to BPL on the existing terms and conditions with continuity of service without any interruption. Thus, the consideration of Rs. 7 crores paid by BPL to BIL was allegedly in regard to transfer of the network to BPL as stated above and this payment w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade in the various items on the basis of licence agreement entered into with BAG. In course of time, the assessee had acquired the marketing network, which was its trading apparatus and if the consideration was paid in lieu of transferring entire trading apparatus then it was in capital field. However, in the present case on account of cancellation of the licence agreement, it cannot be said that the entire business activity of the assessee had come to a standstill. Whatever loss of profits was caused that was recouped to the assessee by BPL. The amount received by the assessee was purely incidental to the assessee s business being carried on in pursuance of the licence agreement. As noted earlier, agreement with BPL was only in respect of few items and not for all the items for which the agreement existed as per the agreement dated June 21, 1989 between BAG and BIL. Though as per recital D in tripartite agreement dated July 27, 2000, it is stated that the licence agreement had come to an end but at the same time as per clause 5 of the said agreement, BIL continued to manufacture and trade in respect of various items. Therefore, it cannot be said that there was cessation of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In December, 1955, the assessee obtained an industrial licence to manufacture diesel engines in collaboration with a foreign company. The venture was not proving profitable to the assessee. According to the assessee, the venture might have proved profitable if they were allowed to manufacture trucks also into which engines could be fitted. The Government granted licence in the interest of rationalisation of the automobile industries. However, due to lack of foreign exchange, it was not possible for the assessee to secure the licence. Accordingly, in 1961, an agreement was arrived at between the assessee and PAL for the transfer of the assessee s undertaking pertaining to the manufacture of Meadows engines to PAL subject to cancellation of licence dated December 9, 1955 and for termination by mutual consent of the licence granted by the foreign company to the assessee, PAL was to pay Rs. 24 lakhs. The assessee-company was not to engage themselves in the manufacturing and assembling or selling of automotive diesel engines in future. Under these facts, it was held that a sum of Rs. 24 lakhs received by the assessee was capital receipt because the assessee s entitlement to manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mercantile system of accounting. It was further submitted that the change was statutorily required to be done and was not done with the intention to claim any unlawful deduction. The learned Commissioner of Income-tax (Appeals) noticed from the valuation certificate that the incremental liability of the previous year was at Rs.1,43,06,438, which was as under: Actuarial value of the leave liability as on March 31, 2001 Rs. 5,28,79,548 Less : Leave liability as on March 31, 2000 Rs. 3,85,13,110 Incremental leave liability for the year as on March 31, 2001 Rs. 1,43,06,438 After considering the assessee s submissions, the learned Commissioner of Income-tax (Appeals) following the decision of the hon ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428 held that the amount of Rs. 1,43,06,438 was allowable and disallowed the balance amount. Being aggrieved, both sides are in appeal before us. Learned counsel for the assessee referred to the decision of the hon ble Bombay High Court in the case of CIT v. West Coast Paper Mills Ltd. [1992] 193 ITR 349 and pointed out that since the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etax (Appeals) has therefore, rightly allowed the incremental liability pertaining to the assessment year in question and not the entire liability following the decision of the hon ble Supreme Court in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428. We, accordingly, uphold the findings of the learned Commissioner of Income-tax (Appeals). Hence, ground No. 3 of the assessee and ground No. 1 of the Revenue are dismissed. Ground No. 4 taken by the assessee is that the learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of Rs. 16,85,000 under section 14A being expenditure incurred related to exempt income. The Assessing Officer noticed from the statement of income that the assessee had claimed income from dividend from domestic companies and UTI of Rs. 35,41,463 as exempt under section 10(33) of the Act. The Assessing Officer invoking the provisions of section 14A, disallowed interest attributable to investment in UTI of Rs. 16,85,000. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer s action. At the time of hearing, learned counsel for the assessee submitted that the assessee does not press this ground. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was an ISO-9002 company and the repair expenses were incurred for the purpose of preserving and maintaining already existing assets and no new assets were brought into existence. In most of the cases, parts of the machinery or components of machinery were replaced to maintain machinery in running condition. These findings have not been controverted by the Department. Hence, no interference is called for with the order of the learned Commissioner of Income-tax (Appeals). This ground of the Revenue is dismissed. Ground No. 3 taken by the Revenue is that the learned Commissioner of Income-tax (Appeals) erred in allowing the deduction of Rs. 23,63,586 being cost of advertisement film treated by the Assessing Officer as capital in nature. The facts are that the assessee had incurred Rs. 23,62,586 on cost of film production for advertisement. The Assessing Officer disallowed the same holding that the assessee derived enduring benefit. The learned Commissioner of Income-tax (Appeals) deleted the disallowance, inter alia, following the decision of the hon ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. Learned counsel for the assessee submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
