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TMI Blog2015 (12) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... L'), which was initially incorporated as HCL Limited under the Companies Act, 1956 on 17th April 1986, was engaged in the manufacture, distribution and sale of computers and services in India. At that stage most of the computer products being manufactured by it were designed in-house. 4. Hewlett Packard Inc (HP), a company incorporated in the United States of America (USA), is engaged in the design, engineering, manufacture, assembly and sale of certain types of computers, along with their components and peripherals. It has substantial experience, expertise and reputation in its area of operations. Hewlett-Packard India Pvt. Ltd. ('HPI') is the subsidiary of HP in India and is engaged in the manufacture of computers in India under licences from HP. The JVA 5. On 2nd April 1991 HCL Limited, HP, HPI and a majority of its shareholders which included, Mr. Shiv Nadar, Ms. Kiran Nadar, Roshini Nadar, S.S. Nadar, Shiv Nadar Investments Pvt Ltd. and certain other individuals, viz., Ajai Chowdhry, D.S. Puri, Arjun Malhotra, Y.C. Vaidya and Subhash Arora and the companies and individuals named in Exhibit 'A' attached to the Agreement (hereinafter referred to collectively as 'the Control G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Clause 7 of the JVA, there was to be a transfer of know-how by HP for the manufacture, assembly and sale of selected HP transfer products in India. Clause 7.4 stated that HP would grant certain limited and restricted rights in HP copyrights, HP trademarks and HP patent rights to the HCL HP Ltd on terms and conditions to be negotiated between the two companies. It was made clear that no such grant shall confer upon HCL, the Control Group or HCL HP Ltd. any rights of ownership whatsoever in HP copyrights, HP trademarks or HP patent rights. In terms of Clause 7.5 of the JVA to the extent certain intellectual property rights used by the computer division of HCL Ltd. were not transferred to HCL HP pursuant to the 'Spinoff', HCL agreed to provide to HCL P on a royalty-free basis a non-exclusive licence to use and sub-licence such property rights in perpetuity. 9. Under Clause 1.24 'Spinoff' was defined to mean 'the scheme of arrangement' under which HCL's computer division including the rights under the Technology Licence and Technical Assistance Agreement (TLTAA) together with the remainder assets of HCL would be transferred to HCL HP. The TLTAA was separately execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. 14. The idea behind the NCA was that the parties desired to "avoid competition with each other by limiting HP India from entering into any new business activities in respect of products directly competitive with the computers/workstations and related software product range manufactured or distributed by HCL HP". For the first time in November 1991, at the request of HCL HP Ltd., HP India released its employees solely engaged in handling business of the said products to HCL HP. In consideration of HP India not agreeing to compete with HCL HP, HCL HP was to pay HP India a sum of Rs. 4.30 crores at a mutually agreed time. The NCA was to be in force for a period of five years from the effective date. The termination agreement 15. The JVA was terminated by an agreement dated 1st April 1997. The termination agreement was entered into between HP, HCL HP, HPI and the Control Group. It was acknowledged that since the formation of HCL HP, the competitive landscape had changed significantly "due to increased investment and interest in India by HP's global competitors." It was accordingly decided that the implementation of HP's worldwide model for the distribution of personal computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le I, Nine million dollars ($9,000,000) (hereinafter referred to as the 'Final Instalment'). HP's obligations to pay instalments under this Article are expressly conditioned on SAAP's being in full compliance with the terms of this Agreement." 18. The payment of the aforementioned sum by HP to HCL HP was Rs. 60.82 crores, which forms the subject matter of the case. The question is about treating the aforesaid sum as income under the Head 'Capital Gains'. The Assessment order 19. In the assessment order dated 31st January 2001 under Section 143 (3) of the Act, the Assessing Officer ('AO') noted that the compensation was indeed a capital income but held that it was nevertheless taxable under Section 55 (2) of the Act. The AO held that the extinguishment of these bundle of rights by termination of the JVA resulted in transfer of an asset in terms of Section 2(47)(ii) of the Act. The AO rejected the contention of the Assessee that the said capital receipt was not taxable. He held: "The amendment to Finance Act, 1997 also very clearly states that if the extinguishment of the capital right to manufacture is for consideration it will fall under Section 55. The Assessee is, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gains was inserted with effect from 1st April 2002. Therefore, the ITAT held that at the relevant time there was no provision for subjecting the compensation received pursuant to the termination of the JA to capital gains tax. The ITAT held that no capital gains tax could be levied under Section 45 of the Act in respect of those capital assets for "which no cost of acquisition is incurred by the Assessee." Reference was made to the decision of the Supreme Court in Commissioner of Income Tax v. B.C. Srinivasa Setty 128 ITR 294. Accordingly, the ITAT agreed with the Assessee that the amount received upon termination of the JVA was not taxable as income under the head 'capital gains'. Submissions of counsel 24. It is submitted by Mr. Raghvendra K. Singh, learned counsel for the Revenue, that the Assessee had by its own admission enjoyed a bundle of rights under the JVA including a right to manufacture, and not merely the brand name associated with the business. Further, the Assessee had stopped manufacturing its own computers. Instead, it began manufacturing in-house developed high-end computer products which were technologically more superior. According to him, the cost of acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), whereunder MBC agreed to purchase the entire shareholding of KBCL in FWJC; procure repayment of all the loans advanced by KBCL to FWJC and to procure that FWJC will compensate KBCL for the loss of office in the sum of Rs. 3,50,000 after KBCL resigned as its managing agent. KBCL tendered its resignation as managing agent and received Rs. 3,50,000 from FWJC. The question was whether the amount received by KBCL to relinquish the managing agency was a revenue receipt liable to tax. It was held that by relinquishing the managing agency, KBCL parted with an asset of an enduring nature. It mattered little that the KBCL did continue to conduct the remaining managing agency of other companies even after the termination of its agency with FWJC. It was held that it cannot be said as general rule that what is determinative of the nature of a receipt on the cancellation of a contract of agency or office is the extinction or compulsory cessation of the agency or office. Where payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of his business or deprive him of what in substance is his source of income, termination of the contract b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment in the hands of the payee. Secondly, if any payment was made for sterilization of the very source of profit making apparatus of the Assessee, or of a capital asset, then that would also amount to a capital receipt in the hands of the recipient. On the other hand, if forest leases were merely stock-in-trade and payments were made for taking over the stock-in-trade, then no question of capital receipt arises. The sum would represent payments of revenue nature or trading receipts. Whether, in a particular case, payments were capital receipts or not would depend upon the facts and circumstances of the case." 29. In Khanna and Annadhanam v. Commissioner of Income Tax (2013) 351 ITR 110 (Del) the Assessee was a firm of Chartered Accountants (CA) from the year 1983. Under an informal agreement, it was referred work by a CA firm in Calcutta which in turn had work referred to it by a firm of CAs based outside India. The understanding between the Assessee and the Calcutta firm was limited to the work in Delhi and surrounding areas only and was formalized by an agreement dated 14th August 1992 between the Assessee and the foreign firm. In 1996, the foreign firm wanted a CA in Bombay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be the cost for which the previous owner of the property acquired it." For determining the cost of acquisition of an intangible asset changes were made to Section 55 (2) of the Act. 33. Section 55 (2) (a) as it presently stands reads as under: Section 55 (2) For the purposes of Sections 48 and 48, cost of acquisition (a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business, or a right to manufacture, produce or process any article or thing or right to carry on any business tenancy rights, stage, carriage permits or loom hours, - (i) in the case of acquisition of such asset by the Assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) in any other case (not being a case falling under sub-clauses (i) to (iv) of Sub-section (1) of Section 49, shall be taken to be nil." 34. While the words "or a right to manufacture" was inserted in clause (a) of sub-section (2) with effect from 1st April 1998, the words 'or a trade mark or brand name associated with a business' was inserted by the Finance Act, 2002 with effect from 1st April 2002. The said amendment was explained as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing shall be inserted with effect from 1st day of April 2003, namely (vii) any sum, whether received or receivable in cash or kind, under an agreement for- (a) not carrying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business of commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Explanation - For the purposes of this clause - (i) 'agreement' includes any arrangement or understanding or action in concert, - (A) Whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings; (ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at were extinguished. The AO proceeded on the basis that the entire sum received by the Assessee was for it giving up the right to manufacture HP computers. This overlooked the factual position concerning the extinguishment, as a result of the termination of the JVA, of the entire bundle of rights not limited to the right to manufacture HP computers. The right of HCL HP to revive manufacturing its computers cannot be construed as a 'transfer' of a right. At the same time HP HCL lost its status as an exclusive distributor of HP products. The transfer, if any, of the intangible assets of the kind described under the JVA could not, at the relevant time, be held to fall within the ambit of the kinds of capital assets that were contemplated in Section 55 (2) (a) as it then stood. Therefore, their cost of acquisition could not have been deemed to be 'nil' in terms of Section 55 (2) (a) (ii) of the Act as it stood at the relevant time. Conclusion 41. The Court, therefore, holds that the receipt of Rs. 6080.95 lakhs by the Assessee as a result of the termination of the JVA during AY 1998-99 was a capital receipt but in light of Section 55 (2) (a) of the Act as it stood at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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