TMI Blog2015 (3) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign company entered into the non-competition agreement after this approval given by the Government of India, Ministry of Industries, Department of Industrial Policy and Promotion, Foreign Collaboration-II Section. The Tribunal erred in holding that the amount paid by the foreign company to the assessee/appellant is by the employer to the employee, which conclusion, on the face of it, is not correct, as there is no relationship of employer and employee between the foreign company and appellant/assessee and this conclusion arrived at by the Tribunal is a misreading of the agreement. On a plain interpretation of Section 15 read with Section 17 of the Act, we are unable to subscribe to the view of the respondent/Revenue as has been confirmed by the CIT (Appeals) and the Tribunal, that the payment received in this case is in the nature of salary. The principles, as laid down by the Supreme Court in Guffic's case (2011 (3) TMI 6 - Supreme Court) is squarely applicable to the facts of the present case. In view of the aforesaid reasoning and findings, this Court holds that the payment in this case, received by the appellant/assessee, is not in the nature of a salary and it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Drives, power electronic equipments, such as High Power Battery Chargers and UPS Systems. He has proficiency in Design, Development and Commissioning of Drives in Core Industries such as Paper Mills, Rolling Mills, Sugar Plants, Cement Plants, etc. It is the further stand of the appellant that he also acquired proficiency in high power charging equipments to be used by Baba Atomic Research Centre, National Thermal Power Corporation, etc. Similarly, he also gained expertise and proficiency in commissioning of High Power UPS Systems in Customs Dept., Texas Instruments, Dalmia Cements, etc. The proficiency acquired by the appellant in Industrial Drives is put to use in industries where large motors are used for production purposes. Since the power of these motors vary between few kilowatts to 100's of kilowatts, for the purpose of controlling those motors, the appellant/assessee, using his expertise, designed and implemented power electronic controls to drive the motors. These Power Electronic Converters (for short 'PEC') are called Industrial Drives. The Industrial Drive System, according to the appellant, is a specialized equipment involving power system, electronic co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ries, Department of Industrial Policy Promotion, Secretariat for Industrial Approvals, Foreign Collaboration-II Section, granted approval for changing the shareholding pattern, which is quoted hereunder :- 1 Name and Address of Foreign Collaborator M/s.CONTROL TECHINIQUES PLC ST. GILES, NEWTOWN POWYS SY 16 3AJ UNITED KINGDOM 2 Item(s) of manufacture/activity covered by foreign collaborator 1) STATIC CONVERTORS 2) BOARDS PANELS 3 Proposed Location District State DEVELOPED PLOT-117b ELECTRONIC ESTATE MADRAS TAMIL NADU 4 Foreign Equity Participation : Increase from 51.00% (Rs.40.80 Lakhs) to 85.00% (Eighty five Percent) amounting to ₹ 425.00 Lakhs (Four Hundred Twenty Five Lakhs) in the revised paid up capital of ₹ 500.00 Lakhs, in your undertaking. 7. After obtaining approval as above, since the stakes of the UK company, viz., CT-PLC was increased from 51% to 85%, correspondingly, the shareholding of RSM came to be reduced from 49% to 15%. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Industrial Drives business save and except RAVEENDRAN's participation as a shareholder and operating executive of the 'CTI' under mutually agreed terms. E. RAVEENDRAN is desirous of giving an undertaking not to compete with CT. It is expedient to record the terms and conditions relating to the aforesaid matters in writing : NOW THIS AGREEMENT WITNESSES AND THE PARTIES HERETO MUTUALLY AGREE AND STATE AS FOLLOWS : 1. CT recognises that RAVEENDRAN possesses the necessary expertise and has with considerable efforts, set up the Industrial Drives System business of RSM and has enjoyed a good reputation and sufficient market recognition in the territory which has constituted substantial source of income for RAVEENDRAN and that RAVEENDRAN has spent and incurred substantial expenditure in establishing the Industrial Drives business. 2. RAVEENDRAN agrees to give up, part with and cease and desist from carrying on the Industrial Drives business anywhere in the territory, and further agrees that such business shall be carried on only by the 'CTI' wherein RAVEENDRAN will be a shareholder and a partner. 3. RAVEENDRAN shall not directly or indirectly own, man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as capital receipt. Note-2 of the return filed for the assessment year 1996-1997, financial year ending 1996, is relevant for the present case and the same is extracted hereinbelow, for better clarity :- 2. I have received a sum of ₹ 9,83,385/- from M/s.Control Techniques, England in accordance with non competition agreement entered into between the assessee and the said company. This amount is treated as a Capital Receipt in view of the legal opinion from M/s.Subaraiya Iyer Padmanabhan and Ramamani, Advocates. This is not received as cash but the equivalent shares will be issued by the Companies. 11. In the statement of income, besides this amount received from CT-PLC, the appellant/assessee has also shown salary that he received from the joint venture Indian Company, viz., CTIL. According to the assessee/appellant, this amount is a capital receipt and, hence, exempt from tax and also entitled to immunity from capital gains as the cost of acquisition is 'Nil'. The Assessing Officer took the view that non-competition agreement, which is a fall out of the formation of the joint venture company between CT-PLC and RSM with 51% share to the UK company and 49% sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be seen that when the assessee was taken over as Director he had agreed not to work against the business interests of CTI, and the very appointment was the reward for his non-competition. 12. The Assessing Officer, further went on to hold that there was no justification for the assessee/appellant for entering into the non-competition agreement and for better clarity, the reasons recorded by the Assessing Officer in paras 14 and 15 of the assessment order are extracted hereinbelow :- 14. Case Laws :- In this connection, the assessee has presented two case laws for my consideration, but I find that both the case laws are not applicable to the case of the assessee. In Saraswathi Publications 132 ITR 207 (Mad) the agreement was between two different concerns working in the same field to the effect that they will mutually refrain from overlapping in business in respect of specified clients and specified area. In G.D. Naidu 165 ITR 63 (Mad) , the payment was between partners of a firm in a process of new partners joining and old partners quitting so that the business is ultimately handed over to the new partners. On the one hand, these case laws have been delivere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment is in addition to remuneration. The Assessing Officer, therefore, held that the above stated receipt is assessable under the head 'salary'. 15. In the alternative, the Assessing Officer concluded as under :- 18. Alternatives :- Whether it is assessed as Capital Gain or Salary , the entire receipt is taxable. For the sake of clarity, I am bringing the sum of ₹ 9,83,385/- to assessment under the head Salary as the payment is one between the employer and the employee and also since it is essentially connected with his past, present and future services. But is is made known that this does not discount the scope of assessing it as Capital Gains on Goodwill, which will remain as an equal alternative. It is made clear that the receipt is assessable whether it is treated as Capital or Revenue. 16. In the end, the Assessing Officer held that the amount received as non-competition fee is salary and in the alternative it should be treated as goodwill and capital gains tax was sought to be levied. However, in the computation of assessment, the said amount was treated as salary. 17. Aggrieved by the above order, the assessee preferred appeal to the CIT (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the learned D.R., if it is a non-competition fee, it has to be paid to RSM Electronics Pvt. Ltd., and not to the assessee. The assessee converted his business into Pvt. Limited company and the same Pvt. Limited company has entered into a joint venture project. Therefore, if at all anything to be paid as non-competition fee, it has to be paid to RSM Electronics Pvt. Ltd., and not to the assessee. Furthermore, RSM Electronics Pvt. Ltd., continued to do its business even after the formation of the joint venture company. The assessee himself admits in his letter dated 16.5.99 addressed to the first appellate authority. According to this letter, the entire business was not taken over by the joint venture company and even on 31.3.96, RSM Electronics Pvt. Ltd., was in existence and it appears the assessee has filed a copy of the audited accounts to show that RSM Electronics Pvt. Ltd., was in existence. It was the case of the assessee before the first Appellate authority that RSM Electronics Pvt. Ltd., was an independent company and it was not merged with Control Techniques PLC. If that is the factual situation and when the RSM Electronics Pvt. Ltd., continued its business eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes what salary means and what incomes should be construed as salary, which have not been construed in proper perspective by the authorities below and, therefore, the impugned order deserves to be set aside. 22. Per contra, learned standing counsel appearing for the respondent/Revenue submitted that the appellant/assessee having received the amounts while under employment with CTIL, the said amounts were rightly considered as salary by the authorities below as RSM had merged with CT-PLC to form a new company CTIL of which the appellant/assessee was made a Director and CT-PLC was holding 51% of the shares in CTIL. Thus there exists an employer-employee relationship and, therefore, any monies received thereof while in employment shall have to be construed as part of the salary. Therefore, it is submitted that no interference is called for with the order passed by the authorities below. 23. Heard Mr.Sridhar, learned counsel appearing for the appellant/assessee and Mr.Ravikumar, learned standing counsel appearing for the respondent/Revenue and perused the materials available on record as also the decisions relied on by the learned counsel for the parties and the relevant Sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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. 27. In a recent decision in Guffic Chem Pvt. Ltd. - Vs - C.I.T., Belgaum Anr. (2011 (332) ITR 602 (SC)), the Supreme Court has distinguished the difference between 'capital receipt' and 'revenue receipt' and the circumstances in which the receipt would fall under the particular category. For better appreciation of this case, it is useful to extract the relevant portion of the said judgment, as hereunder :- 5. The position in law is clear and well settled. There i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reasonings given by the Assessing Officer to support his findings, that what was paid and received by the appellant/assessee is salary, is correct. The findings in para-11 of the original authority's order this business of RSM was taken over by CTIL and a new company came into operation from 1.10.1993 in relation to the non-competition agreement is stated to be erroneous, as the joint venture company, CTIL came into existence in September, 1993 with effect from 1.10.93. The company, RSM Electronics continued its other operations, viz., battery charges, UPS systems, etc. It is only in relation to Power Electronic Converters or Industrial Drives that RSM entered into a joint venture collaboration with CT-PLC to form the joint venture company. In view of the above reasoning, the finding of the original authority that the business of RSM was taken over by CTIL is not correct. No doubt, the fact that two Directors of RSM became Directors of CTIL and they were receiving salary from that assessment year from the joint venture company is not in dispute. The Original Authority, on considering the joint venture company and also the non-competition agreement has held in para-13 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such business, which is akin to industrial drives. The finding of the Assessing Officer is merely based on surmises and conjectures and not borne by any documents. 34. The non-competition agreement should be read in relation to the language used therein and the intentment behind signing of such agreement. Employment by itself is not reason to say that it amounts to non-competition agreement. Such a finding cannot be accepted, since a person with wide knowledge, as that of the appellant, in a particular field, is a potential threat to the foreign company, viz., CT-PLC, as well as to CTIL and, therefore, to curb any such threat of any kind, the non-competition agreement appears to have been signed by CT-PLC with the appellant/assessee and by no stretch of imagination, the payment in lieu of the non-competition agreement could be called as salary. 35. The further finding of the Assessing Officer is that there was no reason to pay the amount of ₹ 9,83,385/- as on 14.12.95, as there was no competition and that if there was any competition, it ended 27 months earlier when RSM merged with CT-PLC to form CTIL and the assessee was made a Director. The reasoning of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, could be attributed as goodwill, paid by the foreign company to the assessee and to substantiate the same, falls back on Section 55 (2) (a) (ii) and comes to the conclusion that it has to be taxed as capital gains. However, the Assessing Officer, without following the said string to its logical conclusion, further states that the payment in this case was received from his employer and, therefore, it is salary for all purposes, which is evident from the last portion of para-17, which has been extracted supra, which shows that any form of payment, viz., salary, remuneration, commission, etc., would form part of salary as per Section 17 (1) of the Act. 38. The contention of the assessee/appellant is that he has clearly shown in his return of income what his salary is, together with a note appended, showing capital receipt on the basis of the non-competition agreement. It is clear from the documents on record that the salary portion was received from CTIL, whereas the non-competition fee has been received from CT-PLC and, therefore, both the transactions are distinct entities. It is clear from the record that the payment made by the foreign company, viz., CT-PLC, consequent to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him; (c) any arrears of salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year. [Explanation 1]. For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due. [Explanation 2. Any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purposes of this section.] Deductions from salaries. 16. The income chargeable under the head Salaries shall be computed after making the following deductions, namely : (i) [***] (ii) a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee or [interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy. Explanation. For the purposes of this sub-clause, the expression Keyman insurance policy shall have the meaning assigned to it in clause (10D) of section 10;] [(iii) any amount due to or received, whether in lump sum or otherwise, by any assessee from any person (A) before his joining any employment with that person; or (B) after cessation of his employment with that person.] 42. A reading of the above Sections make it clear that salary due from an employer or former employer to the employee, whether paid or not, Section 17 makes it clear that for the purpose of Sections 15 and 16, 'salary' would include, salary, wages, any annuity or pension, gratuity and any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. A conjoint reading of both Sections 15 and 17 make it clear that salary that is due from an employer or former employer alone should be taken for the purpose of computation of total income. The plea of the learned counsel for the respondent/Revenue that it wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich RSM had 49% shareholding. On the contrary, the individual assessee is only a paid employee of the joint venture company. 44. Further, it is evident from the record that when the shareholding pattern of the Indian company, viz., RSM, was reduced from 49% to 15% in lieu of the grant of approval by the Government of India for increasing the shareholding pattern of the foreign company, viz., CT-PLC, at that stage, the foreign collaborator thought it fit to enter into a non-competition agreement with the assessee, since the assessee had the knowledge, experience and capacity in the field of industrial drives and, therefore, to safeguard the interests of the joint venture company, in which the stakes of the foreign company was increased from 51% to 85%, the foreign company thought it fit to make the non-competition agreement with the appellant/assessee. There is no material anywhere before the Assessing Officer or the CIT (Appeals) or the Tribunal to say that to look after the business and overall interests of the joint venture company, the foreign company had nominated somebody, muchless the assessee and they paid the consideration to take care of the entire joint venture compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry issue that has to be considered. This payment, under the non-competition agreement, by no stretch of imagination could be stated as salary for taking care of the interests of the foreign company in the newly formed joint venture company. The Tribunal erred in holding that the amount paid by the foreign company to the assessee/appellant is by the employer to the employee, which conclusion, on the face of it, is not correct, as there is no relationship of employer and employee between the foreign company and appellant/assessee and this conclusion arrived at by the Tribunal is a misreading of the agreement. 48. In the present case, this Court finds that the employment contract is between the joint venture Indian company, viz., CTIL and the assessee and the terms and conditions of the employment is restricted only in relation to three items, which we have already referred to in the earlier part of this order and there is nothing to show that it has any relation with the industrial drives in question and, therefore, the foreign collaborator was justified in entering into a non-competition agreement, i.e., only after 26.9.95 when the Government of India, Ministry of Industries, gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salary', which is erroneous and the conclusion arrived at by the authorities below, which is based purely on conjectures and surmises, have been interpreted in its proper perspective. The interpretation given by the authorities below does not fit into the provisions of Sections 15 and 17 of the Act, as interpreted by the Tribunal, but falls within the purview of capital receipt, as held by the Supreme Court in Guffic's case (supra). Therefore, what has been considered and decided by this Court is a pure question of law relating to interpretation of a particular Section in the Act, which has been held in favour of the appellant/assessee. Therefore, the abovesaid decision stands distinguished in the facts of the present case. 51. On a plain interpretation of Section 15 read with Section 17 of the Act, we are unable to subscribe to the view of the respondent/Revenue as has been confirmed by the CIT (Appeals) and the Tribunal, that the payment received in this case is in the nature of salary. The principles, as laid down by the Supreme Court in Guffic's case (supra) is squarely applicable to the facts of the present case. In view of the aforesaid reasoning and findings, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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