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The Commissioner of Income-Tax, The Deputy Commissioner of Income-Tax Versus M/s Associated Electronics And Electrical Industries (Bangalore) Pvt Ltd

2015 (12) TMI 1470 - KARNATAKA HIGH COURT

Computation for the income chargeable under the head 'capital gains' - whether the Tribunal after elaborately considering the clauses in the Settlement Agreement entered into between the parties, has rightly come to the conclusion that the 'capital gains' income is only towards the transfer of trademarks associated with the product 'SHARP' and not to the business of the assessee as a whole? - Held that:- The assessee has suffered a loss during the relevant assessment year as reflected in the ass .....

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iness cannot be construed as a goodwill of a business, as already held, these are two distinct separate intangible assets, both cannot be intermixed.

We have perused the relevant clauses of the settlement deed entered into between the parties extracted supra, which clearly indicates, the assignment made by the assessee company to M/s Sharp Corporation, is only transfer of trademarks and the goodwill associated with the trade marks. It cannot be misconstrued to that of goodwill of a bu .....

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f a business is accepted, then there was no necessity for the Legislature to amend Section 55(2)(a) of the Act inserting the words "trade mark" or "brand name" associated with the business by Finance Act, 2001.

In such view of the matter, we are of the considered opinion that the ITAT, after elaborately examining the terms of the settlement deed, has arrived at a right conclusion and the same does not warrant any interference by this Court. - Decided in favour of the assessee and agai .....

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s in brief are that the Assessee was carrying on the business of manufacture and marketing of electrical appliances and the search was conducted in the premises of the Managing Director of the Company. During the search and survey proceedings, it was noticed that ₹ 3,99,75,400/- had been paid by M/s. Sharp Corporation, Japan to the Assessee-Company for the transfer of trademark 'SHARP' and the common law rights and goodwill accompanying it. In respect of Block Assessment 1988-89 to .....

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'capital gains' in the hands of the Assessee in Block Assessment though the same was deleted in regular assessments. On further appeal before the Tribunal by the Assessee, the Tribunal proceeded to hold that in the case of transfer of good will, the cost of acquisition attributed to 'capital gains' could be taken at Rs. 'Nil'. So far as trade mark is concerned, it is liable to tax under section 55(2)(a) of the Act with effect from 01.04.2002. It is held, what was transfer .....

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associated with 14 items out of 21 items did not attract capital gains tax without taking into account the agreement and assignment deed in the proper prospective and consequently recorded a perverse finding by holding that the same cannot be brought to tax both in the Block Assessment as well as regular assessment?" 3. Learned Counsel Sri. K.V. Aravind, appearing for the Revenue, would contend that section 48 of the Act would contemplate mode of computation for the income chargeable under .....

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sel would vehemently contend that the Tribunal wrongly interpreting the relevant provisions of the Act, reversed the findings of the Authorities while determining the assessment of income to capital gains. It is further contended that, no doubt, sub-section [2] of section 55 of the Act was amended with effect from 1.4.2002 by inserting the words 'or a trademark or brand name associated with a business', the transaction involving transfer of goodwill is liable to tax under Section 55(2) o .....

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ssignment Deed, the Assessee is entitled to manufacture 6 products out of 21 products relating to which trademarks and goodwill were transferred for a consideration of ₹ 3,99,75,400/-. 5. Learned counsel has placed reliance on the clauses of the Deed of Assignment and the relevant clauses are excerpted hereunder: 3. The Assignee is desirous of acquiring the said trade marks along with the goodwill and the said copyrights and the Assignor has agreed to assign unto the Assignee the said trad .....

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t of said trademarks or passing off except under a valid licence from the Assignee nor will the Assignor hereinafter challenge the validity of the trademarks or copyrights or the title of or use by the Assignee hereto. 6. Learned Counsel places reliance on the following Judgments, to contend that goodwill of the business is also transferred along with trademark from the assessee to M/s. Sharp Corporation and as such, the income of 'capital gains' is assessable to levy of tax under the Ac .....

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ee is continuing its business and manufacturing the six products as a licence holder. This would be suffice to hold that the Assessee has transferred only the trademark 'SHARP' to M/s. Sharp Corporation, which is clearly placed on record by the Tribunal in its Judgment. According to the learned Counsel, profit is Sine qua non to the goodwill. Thus, he pointed out the average profit/loss of the Assessee- Company in the assessment year in question as well as the three previous years which .....

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ot the business of a company under loss. Thus, the transfer made by the assessee to the Sharp Corporation is only trade mark not the good will of the business. The goodwill of a business is nothing but a reputation related to the business as a whole, whereas the trademark is associated only with the products. To emphasize on this point, learned Counsel also invites our attention to various clauses of the Settlement Agreement, the relevant clauses are excerpted hereunder: b) AEEI has used the sai .....

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ark SHARP of copyrights and of all pending Trade Mark and copy rights applications and of trade marks similar to or resembling or in association with the mark SHARP. (iii) ASSIGN AEEI's common law rights and goodwill relating to and in trade mark SHARP and other trade marks similar to the trade mark Sharp in favour of SC as set out in the said draft Deed of Assignment. [iv] a) AEEI discontinues the use of the trade mark SHARP or any similar mark other than and strictly in accordance with the .....

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e Million) in an account to the designated by AEEI for the assignment of registered trademarks, pending trademark and copyright applications, common law rights and goodwill and copyrights as contemplated in Article 2(i),(ii) and (iii) and for the covenant and undertaking from AEEI to cease the use of SHARP trade mark in respect of goods under registered trademarks and all other goods (Some of which are presently being manufactured by AEEI and others are not being manufactured by AEEI for diverse .....

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ypeface as approved by SC, in India upon and in respect of the goods identified in Annexure "C" (hereinafter referred to as "the said goods") and manufactured by AEEI. 5.1 AEEI declares and warrants that it will take such steps and means as may be necessary or desirable to prevent confusion or deception between the goods of SC and AEEI declares and warrants that:- (a) AEEI shall prominently display its Corporate name on "the said goods" and on cartons, packets, cont .....

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been manufactured and marketed by AEEI." 9. Thus, it is contended that the Tribunal after elaborately considering the clauses in the Settlement Agreement entered into between the parties, has rightly come to the conclusion that the 'capital gains' income is only towards the transfer of trademarks associated with the product 'SHARP' and not to the business of the assessee as a whole. The transfer of trademark is liable to tax only from 1.4.2002 and not to the relevant assess .....

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cted in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place." 12. Section 48 of the Act reads thus: "48. Mode of Computation The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received .....

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; - (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 .....

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uisition of the asset from the full value of consideration. The cost of acquisition in relation to a 'capital asset' in case of goodwill of a business, shall be taken to be 'Nil', as the question involved is relating to the transfer of goodwill of a business. 15. Section 55[2] of the Act is amended by Finance Act, 2001 inserting the words 'or a trademark or brand name associated with a business'. Thus, it is clear that the cost of acquisition in relation to a trademark or .....

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sidered the Judgments of various Courts, have held as under: "6. It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though many other factors go individually or together to make up the goodwill, though locality always plays a conside .....

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d of Conveyance executed by the liquidators of Guzdar Kajora Colliery Co., Ltd., all the colliery lands, hereditaments and premises, mines, minerals, powers and privileges and all other hereditaments together with the machinery thereon belonging to the latter company. It is held that even if it is not expressly mentioned that goodwill has been sold, it can be shown and ascertained by evidence whether the same has been purchased or not by the Assessee. 18. In the case of R.C.COOPER vs UNION OF IN .....

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s observed thus: "What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start….. if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It .....

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ignable and transmissible, whether with or without the goodwill of the business concerned and in respect either of all the goods in respect of which the trade mark is registered or of only some of those goods". 22. The meaning of the expression "goodwill" as explained in these judgments referred to above vis-à-vis the provision of Trade and Merchandise Marks Act, 1958 makes it clear that the 'trade mark' and 'goodwill' are two distinct separate concepts. Sec .....

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It can be ascertained from the terms of the settlement deed that the assessee company being a company dealing with products under the brand name "sharp" situated in Bengaluru has assigned/transferred the trade mark "sharp" to an international company, M/s Sharp Corporation, Japan for a consideration. This transaction very well fits into the latter part of Section 55(2)(a) of the Act i.e., relating to trade mark or brand name associated with the business leviable to tax with e .....

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settlement deed entered into between the parties, wherein the draft of the assignment deed relied on by the revenue is a part of the settlement deed enumerates that the assessee company has not lost its right to manufacture the products to which licence is granted by M/s Sharp Corporation, Japan. Thus, the business activity of the assessee is continued. The assessee company still subsists. It is engaged in the manufacturing activity of certain products thus, continuing its business. Running comp .....

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in the purchase of trade marks associated with the business and not the business itself as envisaged in the settlement deed. 26. We have noticed that the assessee has suffered a loss during the relevant assessment year as reflected in the assessment order and it is also submitted by the learned counsel appearing for the assessee that in the previous three assessment years also, the assessee had suffered loss. In such an event, it can be observed that the goodwill of a business of a company runn .....

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