TMI Blog2010 (12) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... ement - the appellant's claim with regard to the bifurcation of the composite consideration amount of Rs.1,16,59,500/- is rejected being unfounded, unreasonable and unrealistic. Amount of Rs.1.16 crore received on account of transfer of intangible assets - whether represents a long term capital gain or a short term capital gain - Held that:- It goes without saying that the assessee would have certainly adopted some criterion to arrive at that figure in its own international calculation and in the absence of any better alternative and also in absence of any definite date of acquisition available from record it is most appropriate and practical to hold the view that this intellectual assets are in the nature of long term capital assets. Whether out of Rs.1,16,59,500/- the balance amount of Rs.40 Lacs is in the nature of non-compete fee or not? - Held that:- As find from the valuation report that it clearly contents that this was for the purpose of proposed agreement, which clearly contains that the company will be restricted from entering into any competitive business, directly or indirectly, for the period of next five years from the date of agreement. The buyer being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urative in nature and would apply retrospectively w.e.f. 1-4-1988. Accordingly, following Apex Court in the case of Alom Extrusions Ltd. (2009 (11) TMI 27 - SUPREME COURT) and P.M. Electronics Ltd. (2008 (11) TMI 3 - DELHI HIGH COURT) allow the claim of the assessee. - ITA No. 485 and 829/Ahd/2008 - - - Dated:- 24-12-2010 - N.S. Saini, Mahavir Singh, JJ. Sunil H. Talati, AR, for the Appellant K. Madhusudan, SR-DR, for the Respondent ORDER Mahavir Singh: These cross-appeals by Revenue and by assessee are arising out of the order of Commissioner of Income-tax(Appeals)-I, Baroda in appeal No.CAB/I-02/05- 06 dated 12-10-2007. The assessment was framed by the ACIT, Circle-1(1), Baroda u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide her order dated 31-01-2005 for the assessment year 2002-03. 2. The first common and inter-connected issue in these cross appeals is as regards to assess ability of the receipt of Rs.1,16,59,500/- on account of Business Transfer Agreement and Assignment Agreement. For this, Revenue has raised the following ground:- "1. On the facts and in the circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r narrated the brief history that the assessee-company was incorporated on 26-02-1998 and thereafter Shri Dinesh Mills Ltd. subscribed 51% of its share holding and it became subsidiary of Shri Dinesh Mills Ltd. The balance 49% holding was subscribed McGean Rohco Income. USA with effect from 17-04-1998. The assessee-company entered into Transfer Agreement dated 19-01-1998 with Shri Dinesh Metal Ltd. for taking over the fixed assets, current assets, and current liabilities of the "Platwell Processing and Chemical Division" as going concern for a consideration of Rs.1.60 crores. MRI was engaged in manufacturing of general metal finishing business and also being 49% share holder in the assessee-company, was using technology of the assessee-company. The AO also noted that technology or other process or formulations in form of intangible were never purchased by the assessee-company or owned by the assessee-company in any form but were only made available on account of MRI being 49% share holding with the assessee-company. MRI during the year under consideration had sold its world-wide Metal Surface Finishing Chemicals business right to Atotech Inc. USA due to global re-organization of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipt. Alternatively, the Assessing Officer has held the entire receipt of Rs.1,16,59,500/- as a short term capital gain. In this background, firstly it is to be decided if the total receipt of Rs.1,16,59,500/- is a business revenue receipt or a capital receipt or it represents short term capital gains, as held by the Assessing Officer. If required, the appellant's alternate plea that Rs.40,00,000/- constitutes capital receipt and Rs.76,59,500/- represents long term capital gains will be examined. This may require examination of the applicability of sec. 28(va) to the appellant's case. In this background, it is observed that it is undisputed that no tangible assets have been transferred and only intangible assets in the form of contracts, intellectual property, trade secrets, documents and goodwill have been transferred. The purchase asses have been given at para 1.1 of Article-I of the Agreement. As per para 1.3 of Article-I the buyer has also agreed to pay and discharge any liability relating to the ownership, use or operation of the purchased assets to the extent such liabilities arise after the Closing Date. As per para-2.1 of Article-II, as consideration for transfer of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore as a composite receipt is for the transfer of intangible assts. As regards the cost of acquisition, the appellant has clearly mentioned that the same is Nil. It is not under dispute by the Assessing Officer either. As regards the date of acquisition of these intangible assets, it is observed that no specific date has been mentioned against each of these assets mentioned in the DTA. The appellant has argued that these have been acquired over a period but this has not been further broken up into various dates or periods with the result no specific date of acquisition is available on record and it cannot also be so worked out. The Assessing Officer has also not suggested or pointed out any definite date of acquisition of these assets while proposing to tax the gain as short term capital. However, it is observed that the appellant has itself, in its alternate submission, worked out an amount of Rs.76,59,500/- representing long term capital gain. It goes without saying that it would have adopted some criterion to arrive at that figure in its own international calculation. In the absence of an other better alternative and, in the absence of any definite date of acquisition availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof, contain the entire understanding of the parties hereto with respect to the subject matter contained herein and therein. This agreement supercedes all prior agreements and understandings between the parties with respect to subject matter... In other words, there is no other separate agreement whatsoever for payment of any other amount by the Buyer to the Seller. All transfers and payments are as per this agreement only. This is also evident from various clauses of the Agreement wherein the responsibilities of the Buyer and the Seller have been laid down in detail at the closing stage. In the circumstances there is no scope 'regarding in to the lines' to bifurcate the lump sum payment made by the Buyer to the assessee in to payment for Non Competition fee and other heads. Non Competition is one of the clauses of the Agreement like any other condition of the Agreement. There is no such clause attributing any amount towards various activities/transfers in the Agreement. If that was the understanding, it would have been mentioned in the elaborately drafted Agreement. 2. Bifurcation of the lump sum amount received, towards Non competition and towards other transfers is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee deals in Electroplating salts, Chemicals, Brighteners and Additives etc. but the Buyer acquired only some of the business of the assessee as per the Agreement and also documents on records. Preliminary statement: Seller desires to sell and the Buyer desires to purchase from the seller certain assets owned by the Seller in its general metal finishing and electronic business comprised of the product lines identified on Exhibit-I attached hereto (the "Business") .. meanwhile, Max autotech had shown interest in acquiring metal surface finishing chemicals business rights and therefore MRDL had executed Business Transfer, including Assignment and supply Agreements with Max Autotech Ltd. on 24.8.2001. Exhibit-I contains the product lines purchases by the Buyer out of many product lines of the assessee. Here it may be mentioned the paper Book submitted by the assessee does snot contain the list of product lines. Non Competition and Non disclosure of information (cl.5.7) See 4th para on pg 47 of PB Notwithstanding anything contrary in this section 5.7 the parties agree that the Seller may continue to operate the business (other than the Business) it currently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms and conditions of this Agreement, at the closing, Seller shall sell, transfer, convey, assign and deliver to Buyer, and Buyer shall purchase, acquire and accept from Seller, the interests of Seller in and to the Business comprising of the following described assets used in the operation of the Business (the "Purchased Assets"), fee and clear of an lien, charge, mortgage, pledge, encumbrance, security interest, title defect, option or any other restriction or third-arty right of any kind ("Encumbrance"): (a) Contracts. The Selected Contracts and Selected Contractors in accordance wit the procedure laid down in Section 1.4 (b) Intellectual Property. All of the intellectual property rights belonging to and/or used by Seller in relation to the Business heretofore, including but not limited to patented (if any) and unpatented inventions or technologies, trademarks (registered and unregistered), trademark registrations and applications, trade names/brand names of the Products (unregistered) belonging to and/or used by Seller in relation to the Business (collectively, the "Intellectual Property") (c) Trade Secrets. All trade secrets, formulations, confidential processes a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Buyer shall have the right to use the Seller's name and permutations thereof and product literature containing such names for a period not to exceed beyond two months from and after, determination or sooner termination of the Supply Agreement referred to in Section 7.1(f) and any extension of its term, or for such shorter period as may be permitted by regulatory authorities with respect to any regulated products, on labels on Buyer's existing inventory. Each data sheets and material safety data sheets, subject to approval of McGean Rohco, Inc. and Shri Dinesh Mills Limited (being the joint venture partner of McGean Rohco, Inc. in Seller). Shri Dinesh Mills Limited has, by its letter dated August 24, 2001, which is attached hereto as Schedule 1.2(f) granted its approval for the aforesaid. We find from the above clauses of Agreement that the assessee has sold the purchase assets as defined in para-1.1 Article-I consisting of following six items:- (a) contracts (b) intellectual property (c) trade secrets (d) documents (e) goodwill Further from the above it is noticed that there is specific exclusion of certain assets like real property, cash and accounts re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was earlier doing the business in the name of Platwell Process and Chemicals being division of Dinesh Mills Ltd. since 1980. The said business of Dinesh Mills Ltd. of manufacturing Electro-plating salts and chemicals, brightness and additives (which are being sold worldwide as Metal Surfacing Finishing Products in the name of Platewell Process and Chemicals Division) was acquired by the assessee-company earlier was incorporated as McGean-Rohco Dinesh Ltd and was effectively owning all these intellectual properties as mentioned in the Business Transfer Agreement right from 1980 and continued to own and process the same. It was only that the business of electro-plating having such intellectual properties earlier being subsidiary/division of Dinesh Mills Ltd was now owned by the assessee-company namely Dinesh Platechem Ltd (formerly known as McGean-Rohco Dinesh Ltd). In any event as correctly held by CIT also the Assessing Officer has not suggested or pointed out any definite date for acquisition of these assets as to why they are held for a period of less than 36 months. The CIT(A) as well as we find that it goes without saying that the assessee would have certainly adopted some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the principle laid down by Hon'ble apex court in the case of Best and Co. Pvt. Ltd. (supra), we confirm the order of CIT(A) on this issue and grounds raised by revenue as well as assessee are dismissed. 10. Coming to second and third ground of appeal of the assessee, the only issue is that, whether out of Rs.1,16,59,500/- the balance amount of Rs.40 Lacs is in the nature of non-compete fee or not, in the given facts and circumstances. Before us Ld. Counsel for assessee stated that an amount of Rs.40 lakh received is certainly in nature of non-compete clause and therefore capital receipt and hence not taxable. According to him, the very first paragraph of Valuation Report prepared by a Chartered Accountant clearly mention that the value of consideration for non-competition and non-disclosure of information that may be considered for the purpose of inclusion in proposed agreement for transfer of division/business and that is how Valuation report is dated 24-07-2001. He argued that the buyer being foreign collaboration company was not agreeable of any bifurcation of different intellectual property and insisted for a total and composite cost of Rs.1,16,59,500/- and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived as non-compete fees be treated as capital receipt not taxable. 12. First of all, we have to go to clause 5.7 of Article 5 of Business Transfer Agreement from where we can find out that the assessee agreed for non-competition in the same line of business and that the same is mentioned at clause-5.7 of Article- V of the Business Transfer Agreement, which reads as under:- "5.7 Non-competition and Non-Disclosure of Information. (a) Noncompetition. Seller agrees hat it shall not at any time during the fiveyear period immediately following the Closing Date, do any of the following, either directly or indirectly as an owner, partner, shareholder, consultant, agent, or otherwise: (i) engage in any business which compets with the Business or invest in any person or entity which competes with the Business; (ii) sell, solicit or accept business or orders from customers or prospective customers of the Business, with the term "customer" including any purchaser of products from the Business at any time during the 12 moths immediately preceding the date of this Agreement; (iii) interfere with, disrupt or attempt to disrupt relationships, contractual or otherwise, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "Basis of Valuation By value of the proposed agreement, the company will be rest5icted from entering into any competitive business, directly or indirectly, for the period of next five years. This implies that it is deprived off the profit that might have been earned by the company for the said period of five years. The expected profit for the future years can be computed only on the basis of the past performance. Since, the company has completed two year of its operations, we have to work out the value of consideration for the restrictive conditions on the basis of performance of the said two years only. As already mentioned above, the operating profit of the company for the for the financial year 1999-2000 and 2000-2001 were Rs.21,14,190/- and Rs.9,01,997/- respectively. These shows sharp decline in the operating profit after tax in he second year as compared to first year. As the performance of the last year is more important and give better idea of the presented profitability, the weighted average should be taken to arrive at the expected profit. The same is worked out as under: Net Cash flow - as determined above A= 1-2 Rs.9,01,997 Rs.21,14, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st paragraph of valuation report prepared by Chartered Accountant, it is clear that the valuation of consideration for non-compete fee was made prior to the proposed Business Transfer Agreement and the very purpose of the valuation report was the proposed agreement. The relevant para reads as under:- "We have been retained by Dinesh Platechem Limited to determine the value of consideration for non-competition and non discloser of information that may be considered for the purpose of inclusion in proposed agreement for transfer of division/business Further we find from the valuation report that it clearly contents that this was for the purpose of proposed agreement, which clearly contains that the company will be restricted from entering into any competitive business, directly or indirectly, for the period of next five years from the date of agreement. The buyer being a foreign collaborator company not agreeable of any bifurcation of different intellectual property and instead insisted for a total and composite cost from the agreement it can be clearly brought out that there is a specific clause 5.7 of Article-V regarding non-competition and therefore Rs.40 lakh is really at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in loss of source of the assessee's income. The receipt in the hands of the assessee was a capital receipt. 15. Similarly, the Hon'ble Madras High Court in the case of CIT v. Saraswathi Publicities (1981) 132 ITR 207 (Mad) held as under:- "The cases decided by the Supreme Court thus fall into two categories. The fist category consists of those cases where there is a mere loss of a trading agency of a company which has a number of such agencies. The second category covers those cases where the receipt is not for the loss of an agency but for certain restrictive covenants preventing the assessee from carrying on business to that extent. While the learned counsel for the revenue proceeded as if the case on hand fell within the ambit of the first of the two propositions, the attempt of the learned counsel for the assessee was to bring it in the latter category. In view of the finding of the Tribunal, which we have already extracted, that in the present case the receipt is referable to a restrictive covenant, we have to hold that the principle of the decision in CIT v. Best and Co. (P). Ltd. [1966] 60 ITR 11 (SC) in so far as it considers the restrictive covenant and the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el over the matter of valuation report and once a valuation report had been obtained from a competent person in respect of one of the two components of the consideration, it is not open to the authorities to object to it on the ground that there was no valuation report for the other component of the consideration without any doubt on the defined value. We find that the lower authorities have treated the non-compete fee as taxable just because there was no valuation report for the other component of the consideration and it is unfortunate that they have refused to consider such vital facts for some how or the other, getting over the substance of which the non-competition clause of the Agreement were made and acted and which prevented the assessee from continuing to carry on the relevant business, so much so that it had to terminate employment of a large number of employees employed in that business. Accordingly, we are of the considered view that the decision of the lower authorities in assessing this non-compete fee as short term capital gain rather this compensation is for loss of source of income and accordingly capital in nature not taxable. This issue of the assessee's appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Williamson (Assam) Ltd. (supra) and Vinay Cement (supra) as well as a contrary view of the Division Bench of its own Court in Synergy Financial Exchange (supra). The Division Bench of the Madras High Court has explained the effect of the dismissal of a special leave petition by a speaking order by relying upon the judgment of the Supreme Court in the case of Kunhayammed and Ors.vs. State of Kerala and Anr. (2000) 162 CTR (SC) 97: 119 STC 505 at p. 526 in para 40 and noted the following observations: "If the order refusing leave to appeal is a speaking order, i.e., gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Art. 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the Court. Tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the apex Court of the country. But, this does not amount to saying that the order of the Court ..... X X X X Extracts X X X X X X X X Extracts X X X X
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