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Commissioner of Income Tax, Chennai Versus Hackbridge Hewittic & Easun Ltd.

2015 (3) TMI 408 - MADRAS HIGH COURT

Goodwill v/s non compete fee - Tribunal held that no part of the consideration should be apportioned towards goodwill, and that the entire amount should be treated as non compete fee contrary to the ruling of this Court in the case of G.D.Naidu (1985 (11) TMI 5 - MADRAS High Court) - Held that:- The admitted fact in this case is the assessee company has transferred the technical know how and other advantages to the joint venture company consisting of the assessee company and MR and the assessee .....

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ome Tax Act was repelled by the Tribunal rightly on a plea that the said provision came into effect in the year 1998-99, whereas the assessment year in the present case is 1996-97. Therefore, there was no basis to fall back on the said provision. As has been recorded by the Commissioner of Income Tax (Appeals) and the Tribunal, we find, in the facts of the present case, that the non-compete fee received by the assessee is capital in nature. See Guffic Chem. P. Ltd. V. Commissioner of Income-Tax .....

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ar 1996-97 was admitted on the following substantial question of law: i) Whether on the facts and circumstances of the case, the Tribunal was right in holding that no part of the consideration should be apportioned towards goodwill, and that the entire amount should be treated as non compete fee contrary to the ruling of this Court in the case of G.D.Naidu (165 ITR 63) 2. The brief facts of the case in a nutshell are as follows: The assessee company entered into an agreement with Machinenfabrik .....

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tap changers including MA2 and MA9 drive mechanism, a sum of ₹ 6.89 crores (approx.) was received by the assessee as a consideration for complying with the terms of agreement and claimed the same as exempt as capital receipt. However, the Assessing Officer held that there was absolute transfer of business's independent unit with all tangible and intangible asset. The Assessing Officer further held there was a separate consideration received for the sale of plant and machinery and relat .....

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lowed the appeal holding that there was no element of goodwill in the agreement entered into by the assessee with MR in regard to the transfer of business and non-compete clause in the agreement and hence, the entire receipt should be attributed to restrictive covenants/non-compete fee. Accordingly, the Commissioner of Income Tax (Appeals) deleted the addition. 4. Not satisfied with the order of the Commissioner of Income Tax (Appeals), the Revenue pursued the matter before the Income Tax Appell .....

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n Syntans Investments (P) Ltd. (2007) (106 TTJ 388) held that the assessee company surrendered all its trade names, customers list, suppliers list, licenses, permits, approval under an agreement with another company, and the latter having continued the business using its own logo and trade names, there was no intention to acquire the goodwill of the assessee and therefore, the non-compete fee received by the assessee cannot be treated as goodwill and it is not taxable as income. The recourse to .....

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rcumstances of the case, we are in full agreement with the findings of the ld. CIT(A) that this compensation was not at all taxable." 6. Aggrieved by the said order of the Tribunal, the Revenue has filed the present Tax Case (Appeal). 7. Learned counsel appearing for the assessee submitted that the issue involved in this appeal has been considered by the Supreme Court in in the case of Guffic Chem. P. Ltd. V. Commissioner of Income-Tax reported in (2011) 332 ITR 602, wherein, the issue was .....

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n any clause which could be referred to transfer of goodwill, since the payment is in relation to cessation of certain manufacturing activity of the assessee company giving exclusive right to M/s.MR. The Appellate Authority as well as the Tribunal accepted the assessee's plea that it is not a payment in respect of goodwill. 10. The admitted fact in this case is the assessee company has transferred the technical know how and other advantages to the joint venture company consisting of the asse .....

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on Section 55(2)(a) of the Income Tax Act was repelled by the Tribunal rightly on a plea that the said provision came into effect in the year 1998-99, whereas the assessment year in the present case is 1996-97. Therefore, there was no basis to fall back on the said provision. As has been recorded by the Commissioner of Income Tax (Appeals) and the Tribunal, we find, in the facts of the present case, that the non-compete fee received by the assessee is capital in nature. 12. As rightly relied on .....

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receipt. On appeal, the High Court reversed the said decision. However, On further appeal, the Supreme Court held as follows: "7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency was in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this Court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive bus .....

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the transaction. In the present case, we are of the view that the High Court has erred in interfering with the concurrent findings of fact recorded by the CIT(A) and the Tribunal. One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide Finance Act, 2002 with effect from 1.4.2003 that the said capital receipt is now made taxable [See: Section 28(va)]. The Fi .....

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