TMI Blog2015 (12) TMI 1187X X X X Extracts X X X X X X X X Extracts X X X X ..... L 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. The Court, therefore, holds that the receipt of ₹ 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 the relevant time, the said amount cannot be brought to capital gains tax. At the relevant time, there was no provision in regard to determining the cost of acquisition of the above intangible assets for the purposes of computing capital gains tax. - Decided in favour of the Assessee. - ITA 167/2003 - - - Dated:- 21-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective computer manufacturing, marketing, servicing and sales activities in India of both HCL Limited (subsequently renamed as HIL, the Assessee) and HPI. 26% equity in the JVA was held by HP, through its wholly-owned subsidiary, Hewlett-Packard Delaware Capital Inc. ( HPDC ). HIL was permitted to use the name Hewlett Packard under the JVA. The joint venture company was accordingly renamed as HCL Hewlett-Packard Ltd ( HCL HP Ltd. ) 6. The basic idea behind the JVA was indicated in the preamble to the JVA. It was that HCL had been and continues to be recipient of workstation computer technology from HP pursuant to an agreement entered into with Apollo Computers Domain GMBH, a subsidiary of Apollo Computer Inc. (Apollo) which was subsequently assumed by HP when it acquired Apollo. Further, HCL was, pursuant to a certain Representation Agreement dated 24th October 1990, the exclusive representative of HP s computer products in India. The idea was that instead of both HCL and HPI separately representing HP's interests, it was decided to combine their respective activities into one operation to be conducted by a company in India owned jointly by HP and the shareholders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched any trademark or other agreement which has been or may be entered into between HP and HIL or has engaged in any business practices which violate Indian or US Laws or HP s standards of business conduct, or has failed to meet HP s standards of excellence in such areas as engineering, product quality, support or customer satisfaction or has engaged in any acts which are likely to damage the reputation or business interests of HP or if HP s ownership of HCL HP Ltd. fall below 25% plus one share, then HP may withdraw such consent or permission and the parties were to take all steps necessary to ensure that the name of HCL HP Ltd. was immediately changed so that in the opinion of HP the name no longer contains any reference to HP. 26% of the shares of HCL HP Ltd were to be deposited into an Escrow and were to be released to HP upon HP s depositing into the Escrow an amount equal to ₹ 46.8 crores, which amount would be distributed to the share shareholders in accordance with their entitlement. 11. The term Annual Business Plan was defined under Clause 1.3 of the JVA as the annual plan of HCL and HPI for the current financial year consisting of a. R D manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow HPI the temporary right to establish and manage multiple channels for the distribution and sale of HP personal computer products in India, while retaining HCL HP as a premier channel partner. 16. It was further stated that HP was to develop a more flexible relationship with HCL HP, fully compensate HCL HP for its agreement to allow HP to develop competing channels of distribution as provided in this and related agreements and provide HCL HP key business and financial support to asset it in the transition period from a licensed manufacturer of HP products to a premier solutions partner as well as strong competitor in a field of multiple HP distributors. HP has, therefore, offered for sale its entire shareholding in HCL HP to the members of the Control Group and in turn obtained the freedom to implement in India through HPL (for other wholly or owned HP entity) its worldwide sales, distribution and business models and discontinue manufacturing of HP computers and software in HCL HP under the licensing agreements. Correspondingly, the Control Group (referred to as SAAAP) agreed to acquire HP s share in HCL HP in order to assert more complete ownership and management co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(1i) has been amended w.e.f. 1.4. 98 in order to ensure payments such as these are brought to tax. Section 55 (2) (ii) states that in such cases, the cost of acquisition, where the capital asset is a right to manufacture or produce any article or thing will be Nil. 20. The AO held that the cause and effect of a phenomena have to be considered in totality because they are inter related and inter dependent. The phenomena here is compensation and its cause is termination of JV while its effect is loss of right to manufacture. The cause and effect cannot be artificially separated to arrive at conclusions which are at variance with each other. Accordingly, the entire sum received by HCL HP was brought to tax under Section 45 read with Section 55 of the Act as income from capital gain . The order of the CIT (A) 21. The Assessee took the matter in the appeal before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. By an order dated 31st March 2002 the CIT (A) dismissed the appeal as far as the above issue is concerned. The CIT (A) concurred with the AO and held that under the JVA, the Assessee had acquired a bundle of rights and privileges, which clearly and patently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be computed. He submitted that in terms of the amendment to Section 55 (2) (a) with effect from 1st April 1998, the cost of acquisition of the capital asset was rightly taken to be nil by the AO and the capital gains was rightly calculated on that basis. 25. In reply, Mr. Ajay Vohra, learned Senior counsel for the Assessee, submitted that it was not disputed that upon termination of the JVA, the Assessee s business identity underwent a change affecting its income earning apparatus. Its source of income was sterilised. The termination affected the corporate structure itself severely and not merely the profitability of the company. Therefore, the amount received by the Assessee upon termination of the JVA was in the nature of a capital receipt. However, it was another thing to say that the said sum could be brought to tax under the head 'capital gains' by treating the cost of acquisition to be 'nil'. The error lay in treating the entire bundle of rights as only a right to manufacture. The bundle of rights also included the exclusive right to market the products using the trade mark/HP, which also was extinguished. In fact, simultaneously the parties entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract 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 or 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. This test was followed in Oberoi Hotel Pvt. Ltd. v. Commissioner of Income Tax [1999] 236 ITR 903 (SC). 28. In Commissioner of Income Tax v. Bombay Burmah Trading Corporation Ltd (1986) 161 ITR 386 (SC) the Respondent took a forest lease from the Government of Burma. At the relevant time the company held about 15 forest leases for a period of 15 years each. With the commencement of the Second World War, the Government extended the lease for indefinite periods to enable its renewal. On 4th January 1948 the Government of Burma came into existence and the new government nationalized forest exploitation. The government took over 1/3rd of the area of the lease on 1st June 1948 and the rest of the 2/3rd on 10th June 1949. Under an agreement entered into between the parties, the Respondent was to make over to the Government its residuary rights under the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was no longer to represent the foreign firm in India and after which the foreign firm would not refer any work to the Assessee. In consideration of the termination of the services the Assessee received a sum of ₹ 1,15,70,000. The AO took the view that the receipt was taxable as part of the professional income of the Assessee. That decision was reversed by the CIT (A). Thereafter, the ITAT further reversed the decision of the CIT (A) and agreed with the AO. While allowing the Assessee's appeal, the Court held that in the above circumstances, the compensation was a substitute for the source and therefore, the ITAT was wrong in treating the receipt as revenue in nature. This judgment has been upheld by the Supreme Court by its dismissal of the special leave petition (civil) filed by the Revenue on 31st March 2014 reported in (2014) 365 ITR (Stat) 210. 30. It is plain from a reading of the various clauses of the JVA and the other concomitant agreements, as well as the termination agreement, that as a result of the termination of the JVA, the Assessee s income earning apparatus was impaired and its source of income got sterilised. The Court, therefore, concurs with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to meaning of the expressions adjusted , cost of improvement and cost of acquisition. Under the existing provision contained in clause (a) of sub-section (2), the cost of acquisition in relation to a capital asset, being goodwill of a business or a right to manufacture, produce, or process any article or thing, tenancy rights, stage carriage permits or loom hours, shall be taken to be the purchase price in case the asset is purchased by the Assessee from a previous owner and in any other case such cost shall be taken to be nil. It is proposed to amend clause (a) of sub-Section (2) to provide that the cost of acquisition in relation to a trade mark or brand name associated with a business shall also be taken to be the purchase price in case the asset is purchased from a previous owner and nil in any other case. This amend will take effect from 1st April 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years. 35. Prior to the above insertion of or a trade mark or brand name the cost of acquisition in relation to a capital asset, being goodwill of a business, or a right to manufacture, produce or process any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing, supply of electrical or other energy, boarding and lodging. 38. The explanatory notes to the above amendment read as under: It is proposed to insert a new clause (vii) in Section 28 of the Income Tax Act vide Clause 13 of the Bill so as to provide that any sum whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business; or not to share any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature, or information or technique likely to assist in the manufacture or processing of goods or provision for services, shall be chargeable to income tax under the head Profits and gains of business or profession . It is proposed to insert a new sub-clause (xii) in clause (24) of Section 2 so as to provide that the said sum received or receivable shall be included within the definition of income as defined in that clause. This amend will take place from 1st April 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. 39. What emerges from the above amendments is that till 1st April 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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