TMI Blog2008 (9) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the Companies Act. Out of the paid-up share capital of the company which was Rs.10,00,000/-, divided into 1,00,000 equity shares of Rs.10/- each, the petitioner was holding 15,000 shares while the other four shareholders were holding the remaining shares. The company was carrying on business in medical billing which is an Information Technology enabling industry. The petitioner and two others were shareholders in a foreign company namely M/s. Vision Health Source Inc., incorporated in USA engaged in out-sourcing business in processing medical bills and medical insurance claims. The petitioner and other two shareholders have also decided to transfer all their respective shares in M/s. Vision Health Sources in USA. and they have obtained approval from the Reserve Bank of India for transferring their shares to one M/s. Perot Systems Investments BV and Perot Systems B.V. Two agreements were entered one relating to transfer of shares of US company M/s. Vision Healthsource Inc., called stock purchase agreement and another share purchase agreement in relation to M/s. Vision Healthsource India Private Limited. The writ petition relates to the transfer of shares by the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by the share purchase agreement dated 15.04.2003 read with exhibits A and B namely which are share purchase agreement and associated employment agreement respectively is chargeable to capital gain taxes or not either wholly or in part. (ii)If the aforesaid gains arising from the above transfer is liable to be charged to capital gain taxes either wholly or in part, in which year of assessment does the liability to pay capital gain taxes arise for the following amount received / receivable as consideration for the transfer of shares aforesaid, which, in aggregate amounts to 93 lakh US dollars (9.3 million U.S. dollars) termed as purchase price as per clause-1 of the share purchase agreement dated 15.04.2003. (i) Initial lump-sum payment equal to 23 lakhs US dollars (2.3 million U.S. dollars) (referred in the share purchase agreement as the closing payment) received on 01.07.2003 in the previous years relevant to assessment year 2004-2005. (ii) contingent payment as per clause (1) of the share purchase agreement dated 15.04.2003 (exhibit A) receivable for each of the three years in the following terms:- Having regard to the fact that these amounts, contingent on the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. (II) Contingent payments as could be determined at the end of the first year 31.03.2004, second year 31.03.2004 and the third year 31.03.2006 under exhibit A-4 are not in truth and substance. A part of the consideration under the share purchase agreement shows that they cannot be taken into account in computing the capital gains but they would be taxable under the head 'salaries'. (III) contingent payments received/receivable by the applicant would fall within the meaning of profits in lieu of or in addition to salary in/ under sub-section (3) (ii) of Section 17 of the Act. 8. The above said rulings of the first respondent are challenged by the petitioner in this writ petition on the ground that the ruling in respect of the initial lump-sum payment and contingent payment by which it was held that the initial lump-sum payment would be treated as consideration for the transfer of shares and therefore the said consideration is taxable under capital gains and in respect of contingent payments in three years since the same is not ascertainable it does not attract the payment of capital gains but at the same time it would be taxable under the head salaries and according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 2005-2006 to be filed. 10. It is the case of the second respondent that when the petitioner / assessee has approached the first respondent for advance ruling the same is having binding effect as per Section 245(S)(1)(c) unless there is a change in law or facts on which the advance ruling has been pronounced. It is the case of the second respondent that inasmuch as it is not even the case of the petitioner that the first respondent Authority has acted contrary to its jurisdiction or has violated the principles of natural justice or acted in such a manner it would violate the legal rights of the petitioner, the writ petition challenging the ruling is not maintainable. It is also the case of the respondents by relying upon a judgment of the Supreme Court reported in R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission (1989) 176 ITR 169 which relates to the settlement commission's decision that in the jurisdiction exercised by the High Court under Article 226 of the Constitution of India, the Court is concerned with the legality of the procedure followed or not as to the validity of the order. It is also stated that the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and it has nothing to do with the employment agreement exhibit B-1. He would submit that the contents of the associated employment agreement dated 15.04.2003 especially relating to the term 'employment' has no relationship with the share purchase agreement at all. It is his further contention that when such associated employment agreement has been entered not with all the five shareholders of the company and only in respect of the petitioner and another employee the contents of such agreement in relation to the employment wherein it is agreed by the petitioner that in the event of the petitioner's termination from the services due to the reasons of material failure to adhere to any critical policy, gross negligence or willful misconduct or commission of an act of fraud embezzlement or theft involving more than 1,000 U.S. Dollars or conviction, of, or plea of noto contendere to, a felony or for a crime involving moral turpitude undertaking that in such an act, he would not be entitled for any proceeds from the future payments made under the purchase agreement including without limitation any contingent payments which may be received will be paid back to the company by way of forfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore it is in violative of principles of natural justice and on the other hand the intention of the petitioner is to find fault with the decision of the ruling authority and not decision making process and therefore the High Court cannot decide about the validity or otherwise of the decision. She also would rely upon a judgment reported in Jyotendrasinhji v. S.I.Tripathi [1993] 201 ITR 611 (SC) to substantiate her contention that when the finding of the settlement commission has become final the validity of it can only be challenged on the ground that there is a defect in decision making. It is also her submission that it is not as if the amount should be treated as contingent inasmuch as the maximum amount of 9.3 U.S. million dollars had been agreed between the parties. She would submit that when the employment conferred to the petitioner and another person is for three years and the contingent amount payable to the extent of 7 U.S. million dollars is also in the said period, the terms of the service agreement has the relationship with the share purchase agreement and there is no illegality or irregularity in the ruling given by the first respondent. 14. A perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appears to be that the share purchase agreement dated 15.04.2003 also should form part of the same. Even in clause (8) relating to employment under the associated employment agreement while there is a forfeiture clause a reference has been made to the purchase agreement also and therefore it cannot be said that the undertaking given by the petitioner to forfeit the contingent, payments which is the crux of the purchase agreement does not form part of the associated employment agreement. Clause (8) of the associated employment agreement makes the same clear which is as follows:- "8. Employment. I understand that this Agreement is for a term beginning on the date hereof and ending on December 31, 2006 unless Company terminates my services for Cause (as defined below) or I resign for Good Reason (as defined below). I understand that Company may transfer my employment among its affiliates and I hereby consent to the assignment of this agreement by Company to an affiliate in connection with any such transfer(s). I agree that this Agreement will continue to apply to me if I am transferred to an affiliate of Company. As used herein, Cause means (a) material failure to adhere to any Cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to any proceeds from future contingents payments payable under the purchase agreement including without limitation any contingent payments and if he had already received any such payment, he is obliged to pay back the amount immediately to the company. The non-competition agreement also includes a clause identical to clause (e) in the employment agreement, quoted above. Clause (4) of the employment agreement refers to non-competition agreement which in turn mentions that the applicant will receive a portion of the purchase price in respect of ownership interest and substantial direct and indirect benefits from the transactions contemplated by the share purchase agreement. The non-competition agreement is linked to the employment agreement which has nexus with the purchase agreement. Indeed, it is stated that the applicant's obligations under the non-competition agreement are a material inducement and condition to the buyer's entering into purchase agreement and the share purchase agreement under which substantial direct and indirect benefits are assured. Had the contingent payments been the second part of the full value of the consideration for the sale of shares and the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a deed by the commission does not bind the authorities in proceedings relating to other assessment years. 19. In that judgment while dealing with the jurisdiction of the High Court under Article 226 of the Constitution of India apart from that of the Supreme Court under Article 36, the Supreme Court has confirmed with approval the earlier judgment in R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission (1989) 176 ITR 169(SC), that the Court is concerned with the legality of the procedure followed and not the validity of the order and the Courts under Judicial Review are concerned not with the decision but with the decision making. The relevant portion of the judgment of the Supreme Court in this regard is as follows (page 623 of 201 ITR):- "The scope of enquiry, whether by the High Court under article 226 or by this court under article 136 is also the same whether the order of the Commission is contrary to any of the provisions of the Act and if so, apart from ground of bias, fraud and malice which, of course, constitute a separate and independent category, has it prejudiced the petitioner/appellant. Reference in this behalf may be had to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993 with effect from 01.06.1993. That the definition of advance ruling in so far as it relates to the factual situation in this case is under Section 245 (N) (a) (ii) which is as follows:- "245N. (a) ....(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident, and such determination shall include the determination of any question of law or of fact specified in the application; the advance ruling authority consists of following members as per Section 245O (ii) namely: 245-O….. (2)(a) a Chairman, who is a retired Judge of the Supreme Court; (b) an officer of the Indian Revenue Service who is qualified to be a member of the Central Board of Direct Taxes; (c) an officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India" the binding effect of the ruling of the advance ruling authority is under Section 245S which is as follows:- "245S.(1) The advance ruling pronounced by the Authority under Section 245R shall be binding only - (a) on the applican ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .L.P. Permission granted with liberty to move the High Court within two weeks, if so advised. For a period of two weeks, the Income Tax Department will not commence the assessment proceedings. Special Leave Petition is, accordingly, permitted to be withdrawn." 24. Hence, it is not necessary for this Court to give any finding as to the jurisdiction of this Court under Article 226 of the Constitution of India. 25. The distinction sought to be made between Section 45 of the Act which is the computation provision and Section 48 which is a charging section, that when the computation provision cannot apply the same is applicable in respect of charging section also as held by the Supreme Court in C.I.T. v. B.C. Srinivasa Setty [1981] 128 ITR 294 and the same is not applicable to the facts of the present case at all. Even if it is taken on fact of the present case that in respect of the contingent amounts payable in three years since the same is not computable the advance ruling authority has come to the conclusion that it cannot be treated as a capital gain but at the same time treated as a salary under Section 17 (3) (2) of the Act by treating it as a profit in lieu of sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in Jyotendrasinhji v. S.I.Tripathi [1993] 201 ITR 611, in case of procedural irregularities in arriving at the process of decision making, this Court can certainly interfere in the writ jurisdiction. On the other hand whether on the factual matrix by construction of two documents namely Associated Employment Agreement and Share Purchase Agreement which cannot be said to be totally different as one document is inter-linked with the other, by applying Section 17 of the Act it cannot be construed that the first respondent has gone beyond the jurisdiction and beyond the scope of reference. 29. In fact question No.3 which has been referred by the petitioner which is as follows:- "If the gains arising from transfer of shares aforesaid is not to be charged as capital gains, either wholly or in part, under what head of income the contingent payments made to/received by the applicant towards transfer of shares covered by the aforesaid Share Purchase Agreement dated 15.04.2003 read with Exhibit attached thereto, are taxable and in which year of assessment?" would be comprehensive enough to enable the first respondent authority to take into consideration the share purchase agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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