2021 (10) TMI 1157 - HC - Income Tax

High Court rules non-taxable gain on sale of 'technical know-how' & non-competition fee in tax case

The High Court upheld the Tribunal's decision in a tax case, ruling that the gain on the sale of 'technical know-how' was not taxable as capital gain ... Nature of gain - sale of technical know-how - slump sale - capital or revenue gain - goodwill liable to be taxed u/s 45 of the Act as capital receipt at the value given by the purchaser in its financials - HELD THAT:- It cannot be gainsaid that the assets were self-generated and the cost of acquisition of the said assets was indeterminable. The whole exercise was done by the Revenue merely for the reason that the purchaser in his books of accounts has shown the same as the technical know-how. If such technical know-how could not attract capital gains, in view of B.C.Srinivasa Setty [1981 (2) TMI 1 - SUPREME COURT] the Revenue has made an attempt to treat the technical know-how as goodwill in the second round. This reasoning of the Tribunal cannot be faulted with, in the light of the judgment of the Hon'ble Apex Court in B.C.Srinivasa Setty supra. The gain from transfer of business by implication was not a Revenue receipt chargeable to tax either under Section 28 or under Section 56 or Section 10[3] of the Act. Moreover, the order passed by the Tribunal at the first instance has reached finality. Hence, this substantial question of law has to be answered in favour of the Revenue and against the assessee. Non-competence fee receipt - Since we have held that the technical knowhow is not a goodwill, the arguments of the Revenue for remand would not inspire any confidence. The non-competence receipt was received by the assessee in cash. See case of Mahindra & Mahindra Ltd [2003 (1) TMI 71 - BOMBAY HIGH COURT]wherein it is held that Section 28[iv] does not apply to benefits in cash or money, referring to the judgment of the Hon’ble High Court of Gujarat in CIT V/s. Alchemic Pvt. Ltd. [1980 (8) TMI 42 - GUJARAT HIGH COURT] The non-competence fee was in fact a payment for sharing customer database and sharing of trained employees. The receipt towards the said transfer is not attributable to transfer of any assets or right and the mere fact that the receipt is not attributable to noncompete covenant, it cannot be automatically concluded that the receipt was either from business or income of an activity recurring in nature. - Decided in favour of assessee. Interest under Section 244A - HELD THAT:- If the orders under which such refund was made, subsequently if gets reversed, the interest paid to the assessee under Section 244A if to be withdrawn, no fault can be fixed on the assessee for the delay caused in the entire process, thereby seeking for compensatory interest. Claiming interest on the interest paid under Section 244A of the Act not being provided under the Statute, the Tribunal rightly held that the Assessing Officer shall recompute the interest chargeable under Section 220[2] of the Act by reducing only the principal amount of tax from the refund granted earlier and not to charge interest on the interest granted earlier under Section 244A of the Act, the same cannot be held to be unjustifiable. Thus, we find no perversity or illegality in the order of the Tribunal impugned. Issues Involved:1. Taxability of gain on sale of 'technical know-how' under Section 45 of the Income Tax Act.2. Taxability of non-competition fee of Rs. 30 crores as revenue receipt.3. Levy of interest under Section 220(2) of the Income Tax Act.Issue-wise Detailed Analysis:1. Taxability of Gain on Sale of 'Technical Know-how':The primary issue was whether the gain on the sale of 'technical know-how' should be treated as a capital receipt chargeable to tax under Section 45 of the Income Tax Act. The Assessing Officer considered the gain as capital in nature, equating it to goodwill, and thus taxable under Section 45. However, the Tribunal disagreed, holding that technical know-how and goodwill are distinct and cannot be equated. The Tribunal relied on the judgment of the Hon'ble Apex Court in CIT v. B.C. Srinivasa Setty, which established that goodwill, being a self-generated asset, does not have a cost of acquisition and thus cannot be taxed under Section 45. The Tribunal concluded that the profit on the sale of technical know-how cannot be brought to tax as 'capital gain' under Section 45.2. Taxability of Non-competition Fee:The second issue was whether the non-competition fee of Rs. 30 crores should be treated as a revenue receipt and thus taxable. The Assessing Officer had added this amount as income under Section 2(24) of the Act. However, the Tribunal found that the non-competition fee was a payment for sharing customer databases and trained employees, and not attributable to the transfer of any assets or rights. The Tribunal referred to the judgment of the High Court of Bombay in Mahindra & Mahindra Ltd. v. CIT, which held that Section 28(iv) does not apply to benefits in cash or money. Therefore, the Tribunal ruled that the non-competition fee was not taxable as revenue receipt.3. Levy of Interest under Section 220(2):The third issue was the levy of interest under Section 220(2) of the Act. The Tribunal had set aside the interest levied by the Assessing Officer, who had charged interest on the interest paid under Section 244A. The Tribunal found this approach incorrect, stating that there is no provision in the Act for charging interest on interest. The Tribunal's decision was based on the principle that compensatory interest for delay in refunds should not be unjustifiably withheld, as established in the case of Sandvik Asia Ltd. v. Commissioner of Income Tax I, Pune. The Tribunal directed the Assessing Officer to recompute the interest chargeable under Section 220(2) by reducing only the principal amount of tax from the refund granted earlier and not to charge interest on the interest granted under Section 244A.Conclusion:The High Court upheld the Tribunal's findings on all three issues. The gain on the sale of 'technical know-how' was not taxable as capital gain under Section 45. The non-competition fee was not taxable as a revenue receipt. The interest under Section 220(2) should be recomputed without charging interest on the interest paid under Section 244A. The appeal by the Revenue was dismissed, and all substantial questions of law were answered in favor of the assessee.