TMI Blog2008 (10) TMI 593X X X X Extracts X X X X X X X X Extracts X X X X ..... race period of five days as stipulated under these Acts. However, the amounts which were paid beyond the grace period were held to be rightly disallowed. Both the sides have come in appeal against their respective stands. We have heard the rival submissions and perused the relevant material on record. In so far as the Departmental ground is concerned, the learned Departmental representative has fairly conceded that the amount was deposited by the assessee within the prescribed grace period of five days. In our considered opinion, the learned Commissioner of Income-tax (Appeals) was justified in ordering the deletion of this disallowance in the light of the judgment rendered by the hon ble Madras High Court in the case of CIT v. Shri Ganapathy Mills Company Ltd. [2000] 243 ITR 879. Now turning to the ground raised by the assessee here again, we observe that the learned Commissioner of Income-tax (Appeals) did not commit any error in sustaining the disallowance in view of the judgment of the hon ble jurisdictional High Court in the case of CIT v. Godaveri (Mannar) Sahakari Sakhar Karkhana Ltd. [2008] 298 ITR 149 (Bom) in which it was held that the amendment made to section 43B by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h domestic and export. Even if the amount was to be considered as consideration for transfer of long-term capital asset, the assessee stated that it had already invested the entire consideration in terms of section 54EC and, hence, the capital gain was not chargeable to tax. Regarding non-compete fees, the assessee stated that it was a capital receipt not chargeable to tax under the head Capital gains as there was no cost attached to the assets sold. The Assessing Officer did not concur with the submissions advanced on behalf of the assessee. He observed that the transaction of the assessee with DIL was in alignment with the worldwide policy of BASF AG, the parent company of the assessee which was holding more than 50 percent of the shareholding in the assessee-company. It was further noted that the management and control of the assessee-company was in the hands of its parent company situated abroad. The parent company decided along with other companies, viz., Bayer AG and Hoechst AG to sell the textile dyestuffs worldwide through a joint venture. To align with the worldwide policy of the parent company, the assessee-company entered into certain transactions with DIL. He opined t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, named as assignor in the said agreements, is an Indian subsidiary of BASF AG and the second party DIL, the assignee in these agreements is a wholly-owned Indian subsidiary of DyStar Textilfarben GmbH, Germany. BASF AG, the assessee s holding company, entered into an agreement with Bayer Aktiengesellschaft ( Bayer for short), Germany and Hoechst Aktiengesellschaft ( Hoechst for short), Germany to combine the worldwide textile dyestuff business of BASF AG and Dy Star Textilfarben GmbH, an existing joint venture of Bayer and Hoechst. BASF AG agreed to transfer or procure the agreement to transfer to DyStar Textilfarben GmbH, DyStar Textilfarben GmbH and Co. or such members of DyStar group as DyStar Textilfarben GmbH may desire. In terms of the aforesaid agreement between the parties, the assignor agreed to transfer its textile dyes business and undertook not to compete in the same line of business for five years against the total consideration of Rs. 7.016 crores apart from the separate value of the net current assets and certain items of laboratory equipment, as may be agreed to be taken over. M/s. DyStar Textilfarben GmbH nominated DyStar Textilfarben GmbH and Co. to acquire an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Rs.7.016 crores. This consideration was paid basically in lieu of non-compete fees and transfer of marketing franchise available with the assessee in the form of distribution network and information relating to the business, dealership arrangement with seven parties and also eight employees of the assessee, whose services were also transferred to the assignee. However, the plant and machinery, etc., available with the assessee along with cash and receivables were excluded from the transfer of the business. Apart from the above, certain other assets, which were to be taken over by the assignee, had separate consideration distinct from the above amount. At the outset, we will like to mention that the transfer of textile dyes business by the assessee to DIL for the stated consideration has not been disputed by the Assessing Officer. Further the fact that the assessee had, in fact, transferred its textile dyes business has also not been controverted by the Assessing Officer. When it is admitted that the textile business of the assessee was lawfully assigned for the stated consideration, then the only question which survives for our consideration is to examine the taxability or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther hand, if the receipt is towards the loss of income and not the source of income, then it is of revenue nature attracting the liability to tax. Adverting to the facts of the instant case, we observe that the assessee transferred its business . Not only the distribution network but also eight employees along with the data relating to the business comprising of customer list, sales data, etc., were also transferred. The fixed assets and some of the current assets continued to remain with the assessee but with the clear understanding that the assessee cannot carry on the similar business in India or abroad at its own. Some other current assets were acquired by the assignee for separate consideration. It is the matter of record that the infrastructure remaining available at the assessee s disposal, was utilised by the assignee for the production purposes as per its own direction and requirements on payment of job charges to the assessee. In so far as the assessee is concerned, its business stood transferred in entirety to the assignee. The sum of Rs. 5.010 crores was received by the assessee on the assignment of the marketing rights for its local as well as export business. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. It is only pursuant to such main agreement entered into abroad, that the assessee-company made agreements with the DIL for giving effect to the terms. It is clearly borne out from the two agreements that this amount was paid for non-competing with the assignee for a period of five years. When both the agreements for the assignment of the business in India as well as abroad, have been accepted by the Assessing Officer as genuine, how a different view can be taken on some clauses of the agreement and that too without any contrary material on record ? The assignee has paid this amount as a quid pro quo for not competing in the similar business and further the amount has been determined on a rational basis on the strength of a valuation report, which fact also finds mention in the body of the assessment order. The assignee has accepted this amount in the same capacity. It is a settled law that the entire agreement has to be read as a whole. If the genuineness of the agreements is not doubted and rather acted upon by the Assessing Officer in accepting the transfer of business by the assessee to DIL for the consideration stated therein, there is no reason for inferring that a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to any business shall be charged to income-tax under the head Profits and gains of business or profession . This amendment is obviously prospective and will apply on and from the assessment year 2003-04. As against this, we are dealing with assessment year 2001-02, in which year it cannot have any operation. We, therefore, hold that the noncompete fees in the given circumstances is not chargeable to tax. The learned Commissioner of Income-tax (Appeals) has held that the amount of Rs. 2.006 crores is liable to tax under the head Capital gains with which finding the assessee is aggrieved. He held that this amount was of the same nature as the other amount of Rs. 5.010 crores, being the consideration received on account of transfer of textile dye business. In the foregoing paragraph we have held that the amount was received by the assessee towards non-compete fee only and not towards transfer of business and, hence, it is a capital receipt not liable to tax at all. Be that as it may, we will also embark upon examining the hypothetical situation created by the learned first appellate authority that such capital receipt is chargeable to tax under the head Capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready been detailed. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. In the case of goodwill generated in a new business there is the further circumstance that it is not possible to determine the date when it comes into existence. The date of the acquisition of the asset is material factor for applying the computation provisions pertaining to capital gains. From the above enunciation of law by the hon ble Summit Court, it clearly transpires that the asset transferred should have some cost of acquisition, if the provisions of Chapter IV-E are to be invoked. Adverting to the facts of the case, we note that what the assessee has transferred is its marketing rights of its business, for which it acquired consideration of Rs. 5.010 crores. As seen from the meaning of the business as per the agreement, the assessee transferred distribution network comprising of dealership arrangements with dealers, some employees and the data/information to the extent the same related to the business, such as customer lists, sales data, etc. It is only with the passage of time and in due cou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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