TMI Blog2015 (5) TMI 690X X X X Extracts X X X X X X X X Extracts X X X X ..... o. The value to be ascribed to each transaction must obviously depend upon the evidence and the facts in each case. The tax of whatever nature, must be levied on the basis of the true value of the asset of the transaction and not merely on the basis of the value ascribed to it by the assessee. Indeed, the view to the contrary could cause severe prejudice to the revenue itself. To accept the contention would enable assessees to ascribe artificial values to assets enabling them to avoid tax.The first contention therefore stands rejected. The Tribunal was right in coming to the conclusion that the consideration ought to be bifurcated and a part thereof apportioned towards the restrictive covenants. - Decided in favour of the respondents/assessees Whether there was infact no consideration payable in respect of the negative covenants? - Held that:- According to the Groz Beckert group, the application for registration of that trade mark was made without prior consultation and it objected to the registration thereof. Groz Beckert Saboo Ltd. ultimately withdrew its application on the condition that Groz Beckert group would register its trademark in its own name and Groz Beckert Saboo Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The valuation at ₹ 106.90 per share was arrived at on the basis of Rule 14 of Schedule-III of the Wealth Tax Act, 1957; of the business as a whole, at ₹ 118.90 per share on the yield basis and at ₹ 93.12 on the basis of Rule 11 of Schedule III of the Wealth Tax Act i.e. breakup value. There is nothing to indicate that the valuation report was dishonest or malafide for any reason. Nor is there anything to indicate that it is unsustainable for any reason. It is important to note that there is no ground of appeal before us against the Tribunal’s acceptance of the valuation report. The appellants themselves have not valued the shares. In that event even assuming that some valuation is to be attributed to the covenants/negative covenants contained in the Share Purchase Agreement other than Clause 5.5, it would make no difference. The apportionment of sum of ₹ 100/- out of ₹ 400/- towards clause 5.5 would in any event be reasonable. We agree with the findings of the Tribunal that in view of the above facts the apportionment of 25% of the value of shares towards the negative covenants was on conservative basis. -Decided in favour of the respondents/assesses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by this common order and judgment. We will for convenience, however, refer to the facts in ITA No. 557 of 2006. 3. The case in a nut-shell is this. The respondents in the above appeals are members of the Saboo group. Groz Beckert Saboo Ltd. was a joint venture between the respondents and M/s Theodor Groz Sohne Ernst Beckert Nadelfabrik Commandit Gesellschaft, a partnership firm in Germany (Groz Beckert group). The Saboo group and Groz Beckert group held 40% and 60% shares of the equity capital of Groz Beckert Saboo Ltd. respectively. Disputes arose between two groups leading to the Saboo group filing a petition for oppression and mismanagement under sections 397 and 398 of the Companies Act, 1956. The petition was dismissed. The Saboo group filed an appeal under section 10F of the Companies Act, 1956 before Delhi High Court. The matter was ultimately settled in terms of a Share Purchase Agreement dated 21.01.1993. ₹ 400/- was stated to be the consideration for the sale of all the shares held by the Saboo group to the Groz Beckert group. The agreement also contained restrictive/negative covenants given by the Saboo group. The respondents contended that they were entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group held 60% shares and the said Saboo group i.e. the respondents held 40% shares of the equity capital. 8. In or about the year 1988 disputes and differences arose between the Groz Beckert group and the Saboo group. On 22.01.1992, the Saboo group filed a petition under sections 397 and 398 of the Companies Act, 1956 against the Groz Beckert group for mismanagement and oppression of minority shareholders before the Company Law Board at New Delhi. The Company Law Board by an order dated 22.10.1992 rejected the petition and directed the Saboo group to sell its 40% shares in Groz Beckert Saboo Ltd. to the Groz Beckert group at a value to be determined by M/s S.B.Bilimoria Company, Chartered Accountants. The Saboo group filed an appeal under section 10(F) of the Companies Act, 1956 before Delhi High Court in which an interim order staying the operation of the order of the Company Law Board was passed. 9. The members of the Saboo group and the Groz Beckert group settled the matter in terms of a Share Purchase Agreement dated 21.01.1993. The Groz Beckert group is referred to therein as the purchaser and the members of the Saboo group are referred to therein as the seller ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any entities owned or controlled by the sellers to cease doing business with it or in any way interfere with the relationship with them; or c) do any other act detrimental to the Sellers or any firms or Companies or entities owned and controlled by the Sellers, its affiliates or the business of any of them. 5.8 Intellectual Property Rights: From an after the closing, sellers will not use or disclose to any third party any confidential information relating to the company or its business (including customer lists). Sellers shall not use and shall do nothing to challenge or otherwise impair the trade name, logos and trade marks and other intellectual property of the Company or the Purchaser. xx xx xx xx xx xx xx xx 6.4 This agreement will be filed by the parties in the appeal pending in the High Court of Delhi at New Delhi being Appeal No. 23 of 1992 with a request to the Hon ble High Court to take the same on record and to adjourn the appeal to a date after 31st August, 1993, on which date the appeal shall be withdrawn and disposed of upon fulfillment of the terms of this agreement and the Escrow Agreement. 10. The respondents contended that out of the sum of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovenants merely followed upon the Groz Beckert group taking over the management. He observed that if there were to be apportionment of the sale consideration, the Directors who relinquished office would get a higher amount than the other members of the Saboo group. It was contended before us that infact there was no apportionment. 12. The C.I.T. (A) held that the respondent in ITA No. 557 of 2006 was neither a Director nor an employee of the company; that she was not a technical expert; that the sale of the shares could not have an element of managerial control. It was held that as the respondent was not a Director or an employee of the company, she could not have any element of managerial control and that she did not have any expertise to run a venture similar to the one run by the purchaser of the shares i.e. Groz Beckert group. He further concluded that the restrictive covenant was not applicable to the respondent in ITA No. 557 of 2006. It was, therefore, held that the entire amount of ₹ 400/- per share was received against the sale of the share and the Assessing Officer had rightly treated the entire amount as a part of the capital receipt liable for capital gains. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 1948-49 contending that the sale price of each share should be taken at ₹ 65/- i.e. the price mentioned in the agreement. The assessee contended that the market price of the shares on the date of the agreement was ₹ 46/- per share and it is that price which ought to be taken into consideration for determining the capital gain. The Tribunal accepted the department s contention which led to the reference before the Division Bench. Chief Justice Chagla speaking for the Court held:- Now, the Tribunal has found as a fact, and there can be no dispute about it, that the main object or rather the only object of the agreement of the 7th September, 1946, was to get the purchasers of these shares appointed the managing agents of the company. The Tribunal also points out in its order that this was not an ordinary agreement of purchase and sale of shares of the company entered into in the ordinary course of business, and the only reason why it has rejected the assessee's contention was that the parties did not apportion the price of ₹ 65 to the shares and to the managing agency. Under section 12B(2) for the purpose of computing capital gain the full v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs they obtained it in respect of the capital asset and the whole of the capital gain must be brought to tax. Now, it is not the case of the Taxing Department and it has never been their case that the capital asset in respect of which capital gain was made by the assessee and which is sought to be taxed was the shares and the managing agency. The whole of the reference is based upon the fact that the only capital asset we are concerned with is the shares and not the managing agency. Therefore, we must separate the managing agency from the shares in considering what is the value to be put upon the shares. Let us test the attitude taken up by the Department from this point of view. Assuming that the parties had put ₹ 5 or ₹ 10 as the value of the shares and they had valued the managing agency for the balance of the consideration, would the Department have accepted the artificial value put by the parties upon the shares if that value was far below the market value? The position is the same here. The parties have put upon the shares a value which is much higher than the market value. Admittedly, it is an artificial value and it is artificial because the value put upon the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. 1966 Income Tax Reports (60) 11, dealt with this very issue. Having found that apart from giving up the agency, the parties had also entered into restrictive covenants, the Supreme Court held :- .We, therefore, hold that the compensation agreed to be paid was not only in lieu of the giving up of the agency but also for the assessee accepting a restrictive covenant for a specific period. In the present case, the covenant was an independent obligation undertaken by the assessee not to compete with the new agents in the same field for a specified period. It came into operation only after the agency was terminated. It was wholly un-connected with the assessee's agency terminated. We, therefore, hold that that part of the compensation attributable to the restrictive covenant was a capital receipt and hence not assessable to tax. The next question is whether the compensation paid is severable. If the compensation paid was in respect of two distinct matters, one taking the character of a capital receipt and the other of a revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the selling agency/distributorship agreement and also in respect of the restrictive covenants. Relying upon the judgment of the Supreme Court in the case of CIT v. Best and Co. P. Ltd. [1966] 60 ITR 11 (SC), the Division Bench upheld the apportionment. 21. Ms. Suri also relied upon the judgment of the Division Bench of Patna High Court in Raghubar Narain Singh v. Commissioner of Income Tax, 1984 Income Tax Reports 447. We will refer to this judgment shortly while referring to a judgment cited by Ms. Dhugga. 22. The submission that the assessee is not entitled to apportionment towards the price of the shares and price of the restrictive covenants merely because the Share Purchase Agreement itself did not bifurcate the same, is rejected. Where the agreement between the parties indicates that the lump-sum consideration was in respect of two or more promises, it is liable to be bifurcated and apportioned between each of the assets. At times bifurcation operates in favour of the assessee and at times in favour of the revenue. In whose favour it operates is irrelevant. In such cases, the consideration must be apportioned towards each of the assets if it is possible to do so. 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrolling interest is but an incidence of the shareholding and has no independent existence. Similar view was taken by the Madhya Pradesh High Court in the case of Smt. Maharani Ushadevi v. CIT [1981] 131 ITR 445, wherein also it was pointed out that the controlling interest in a company is an incident arising from holding of a particular number of shares in the company and that such controlling interest cannot be transferred without transferring shares. The judgment does not support Ms. Dhugga s contention that if due to the negative covenants the price of the share is higher, it still is a part of and constitutes the price of the shares and is not independent of the value of the shares. The controlling interest may well be a part of the value of the shares for it emanates and is dependent upon the shares themselves. As held by the Division Bench, the controlling interest is an incidence of the shareholding and has no independent existence. We have already held that the negative covenant was a distinct right independent of the right of ownership of the shares. The case is, therefore, clearly distinguishable from the one before us. 24. The Division Bench then referred the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset which can be acquired or transferred independently of the shares. We see no justification for the view. Controlling interest is an incidence arising from holding a particular number of shares in a company. It cannot be separately acquired or transferred. It flows from the fact that a number of shares are held by a person. If for acquiring that number of shares, a person is required to pay more than the market price of a share and if the transaction is genuine, as has been found in the present case, then, really speaking, the cost of acquisition of the block of shares purchased by the assessee is that which she has in fact paid for holding that block. The other decision relied upon by the Tribunal is Baijnath Chaturbhuj v. CIT [1957] 31 ITR 643 (Bom). In that case, it was found that the consideration received by the assessee was really a composite consideration for the transfer of shares and the assignment of managing agency. No doubt, there can be a case of composite consideration but in that case there should be two distinct assets, each capable of being acquired or transferred separately. In our opinion, controlling interest by itself cannot be acquired or trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (2012) 6 SCC 613 :- 167. As stated, CGP was treated in the Hutchison structure as an investment vehicle. As a general rule, in a case where a transaction involves transfer of shares lock, stock and barrel, such a transaction cannot be broken up into separate individual components, assets or rights such as right to vote, right to participate in company meetings, management rights, controlling rights, control premium, brand licences and so on as shares constitute a bundle of rights. (See Charanjit Lal Chowdhury v. Union of India [AIR 1951 SC 41 : (1950) 1 SCR 869], Venkatesh v. CIT [(2000) 243 ITR 367 (Mad)] and Maharani Ushadevi v. CIT [(1981) 131 ITR 445 (MP)].) Further, the High Court has failed to examine the nature of the following items, namely, non-compete agreement, control premium, call and put options, consultancy support, customer base, brand licences, etc. 168. On facts, we are of the view that the High Court, in the present case, ought to have examined the entire transaction holistically. VIH has rightly contended that the transaction in question should be looked at as an entire package. The items mentioned hereinabove, like, control premium, non-compete ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmission that merely because the written agreement entered into between the parties does not bifurcate the consideration and apportion the same, the authorities and/or the assessees are precluded from doing so. Indeed, the issue, as it arises before us, was not considered by the Supreme Court. The Supreme Court considered the aspect in an entirely different context. To understand these observations, it would be necessary to read the judgment in Vodafone International Holdings BV vs. Union of India (supra) as a whole. The dispute related to the acquisition by Vodafone International Holdings (VIH) of the entire share capital of CGP Investments (Holdings) Limited (CGP) by an agreement dated 11.02.2007. The revenue contended that the purpose of the agreement was to acquire a 67% controlling interest in another company, Hutchison Essar Ltd. (HEL). CGP in turn indirectly held through other downstream companies shares in HEL as well as other rights, such as, option to acquire further shares in HEL. The matter concerned Section 9(1)(i), namely, transfer of a capital asset situate in India. It is important to note that the lead judgment delivered by the Chief Justice repeatedly noted and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held that VIH acquired the CGP share with other rights and entitlements. The VIH on the other hand contended that it had acquired all the rights through the CGP share alone. It was on the consideration of the facts of that case that Supreme Court come to the conclusion that the matter concerns a share sale and not an asset sale. It was, therefore, found as a matter of fact that there was no transfer of capital asset other than by way of transfer of the CGP share. The Supreme Court did not hold that even if it had come to the conclusion that the case concerns sale of share and other assets, there could be no bifurcation and apportionment of the consideration stipulated merely because the Share Purchase Agreement did not itself bifurcate the consideration qua the independent components. 30. Our view is, therefore, not inconsistent with the judgment in Vodafone s case (supra). As we noted earlier, this is the view of a Bench of three learned Judges of the Supreme Court in CIT v. Best and Co. P. Ltd. (supra), which dealt with the very point in issue before us. We are, therefore, in any event bound by the judgment in CIV v. Best and Co. P. Ltd. (supra). 31. The first co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. In 1973-74, the Government required the Groz Beckert group to reduce its equity ownership in the company but considering the nature of the technology, the Reserve Bank of India permitted the Groz Beckert group to retain 60% of the equity and the Saboo group supported the same. This according to Ms. Dhugga indicated that the technology was of a high level and valuable and that it is the Groz Beckert group that was in possession of the same. She also relied upon the observations in the order of Company Law Board that in the petition the Saboo group alleged that the imported raw material and consumables and most of the imported machinery were purchased by the company i.e. the Groz Beckert Saboo Ltd. from the Groz Beckert group. The Groz Beckert group had ensured that no effective steps were taken for indigenization of raw material supply and that the Groz Beckert group had taken steps to ensure that the Saboo group remained totally dependent on imported supplies. 34. We will assume that the members of the Saboo group did not possess the technical expertise to run a similar business themselves. That does not render clause 5.5 meaningless. It is of vital importance to note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the employees of Groz Beckert Saboo Ltd. 39. This is also irrelevant. Assuming that there was a breach, that by itself would not indicate that the clause was sham or bogus or was never intended to be acted upon. Merely because Groz Beckert Saboo Ltd. may not have filed any action to enforce the negative covenants it does not necessarily follow that the covenant was sham and was not intended to be acted upon. They may have refrained from doing so for a variety of valid reasons. 40. The contention that the covenants/negative covenants were sham, bogus and were never meant to be acted upon, is belied by at least one fact. As noted in the order of the Company Law Board, several disputes had arisen between the parties including as regards the expansion programme, transfer of technology, failure of the Groz Beckert group to give a commitment to buy back the needles at the stipulated price, frequent use of casting vote by the Chairman, illegal import of spare parts at inflated cost through the Groz Beckert group and the failure of the Groz Beckert group to take steps for indigenization of raw material supply and transfer of technology to Groz Beckert Saboo Ltd. One important disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the various clauses of the Share Purchase Agreement. She submitted that a value must then be attributed to all the covenants/negative covenants such as in Clauses 5.6, 5.7 and 5.8 set out earlier. 44. This submission must be rejected for at least two reasons, the second more important than the first. 45. Firstly, as rightly pointed out by Ms. Suri, this contention was not raised by the Assessing officer. Nor was it raised before the C.I.T. (A) or before the Tribunal. Ms. Dhugga contended that this is a pure question of law and the Department, therefore, ought to be allowed to raise the point before us although it was not raised before the CIT(A) and the Tribunal. Ms. Suri s objection is well founded. There is no justification for allowing the appellant to raise this point for the first time in the appeal before us. Had the contention been raised before the C.I.T. (A) or before the Tribunal, the respondent could conceivably have had several answers to it. If we allow the appellant to raise this contention before us we would be depriving the respondents the opportunity of adducing evidence to deal with the same. This would be unfair to the respondents. 46. Secondly, and mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ometax under the head Profits and gains of business or profession - i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. ii) any compensation or other payment due to or received by, (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) any person, by whatever name called, managing the whole or substantially the whole of the affairs in India of any other company, at or in connection with the termination of his office or the modification of the terms and conditions relating thereto; 50. Section 28 (ii) (a) (b) are inapplicable to the facts of this case. The members of the Saboo group held only 40% of the equity shares in Groz Beckert Saboo Ltd. Their share holding even together did not give them the right to manage the whole or substantially the whole of the affairs of Groz Beckert Saboo Ltd. The terms of the collaboration agreement are important. Under the collaboration agreement, the general a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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