TaxTMI 
TaxTMI 
2013 (10) TMI 749
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....ax in making addition of capital receipts received by the appellant company by way of non compete fees to the tune of Rs.10,00,00,000/- treating the same as income from business. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 4. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) ought to have granted relief to the appellant company by deleting the addition made at the time of assessment pro to the tune of Rs.10,00,00,000/-. 2.1. At the outset, ld.AR Mr.M.K. Patel has stated that Ground Nos. 1 & 2 are general in nature, hence not pressed. These two grounds are, therefore, dismissed being not pressed. Apropos to Ground No.3, facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the IT Act, 1961 dated 28.11.2002 were that the assessee company has commenced its manufacturing operation during the year. The assessee has manufactured certain intermediates like Choral, TCSE, non-synthetic pyrethroid, insecticides, etc. (a) The assessee-company was originally formed under the name M/....
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....along with management control of M/s.Mitsu Industries Ltd. was purchased by Hoechst Schering AgrEvo S.A. (France) as per a Joint Venture agreement. In the said Joint Venture Agreement, Hoechst Schering AgrEvo S.A. caused the assessee-company through its Director and their family members to undertake non-compete obligation for a period of four years. Therefore, the assessee-company had received a sum of Rs.10 crores and claimed the same as non-compete fees. A showcause was issued and in compliance assessee has provided a detailed information in writing; only relevant portion is reproduced below:- "Letter dated 08.02.2002 b) M/s.Mitsu Industries Limited was promoted as a closely held company by Shri Anjum G.Bilakhia and Shri Yunus G.Bilakhia in the year 1991. The main object of the company as manufacturing of chemicals especially agro chemicals i.e. Pesticides, Insecticides and Herbicides. Within a medium span of 8 years the company grew in size and operations and became a leading exporter of various kinds of pesticides. The operational highlights of the company during the Financial Year 97-98, 98-99 and 99-00 is as under:- Year D....
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.... "Letter dated 04.03.2002 (Additional reply on letter dtd. 01.02.2002] 6.3. "Further to our explanation to non-compete fee vide our submission dated 08.02.2002, we wish to bring to your kind notice that in the recent Union Budget presented by the Honorable Finance Minister, has brought receipts by way of non-compete fees/exclusivity rights under the purview of taxation as business profits. By this it is evident that non-compete fees were not eligible to tax till now and hence he brought this amendment. We therefore request your goodself to treat the said receipt as capital receipt and not liable for tax." (i) During the course of survey proceeding, a statement of Shri Anjum G.Bilakhia was recorded. Some of the questions and the answers are reproduced below:- "Q.No.20 Please read page 8 (ESCROW No.1 page 55 (Article 13(b), Page 36 (Article 13(c) & Exhibit 13(c). Please read out the name of the parties to whom the non-compete fee payable? Ans. I have read page No.8 ESCROW No.1 is as "Rs.253.09 crorres to be paid to....
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....ed that "noncompete fees" was received only by the confirming parties of the said agreement as set forth in Article 13 page 8 of the ESCROW No.1 as also confirmed in Article 13; relevant paragraph from ESCROW No.1 is reproduced below:- "Rs.253.09 Crores to be paid towards purchase of MIL Shares AGREvo from confirming parties and Rs.25.51 Crores to be paid towards non compete covenant by the confirming parties, Mrs. Bilakhias, HIL and MINT as set fort Article 13". 2.2. After having a detailed discussion and considering the provisions of the Act, AO has finally opined that the impugned sum of Rs.10 crores, credited in the books of accounts, was not a capital receipt but a business income and to be added in the total income of the assessee u/s.28(v)(ia) of the IT Act. Being aggrieved, the matter was carried before the first appellate authority. 3. At first, ld.CIT(A) has held that the amendment which took place by Finance Act, 2002 was made applicable with effect from 1st March-2003, i.e. A.Y. 2003-04. Ld.CIT(A) has thus held that there was no mention in the said enactment that it was with retrospective effect. The year under assessment wa....
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....he period of restrictive covenant. Therefore, the compensation received from Hoechst Schering AgrEvo S.A. (France) pursuant to agreement was nothing but a capital receipt for the loss of source of income. Ld.AR has placed reliance on the decision of Hon'ble Apex Court in the case of (i) Guffic Chem.P.Ltd. vs. CIT - CIT vs. Mandalay Investment P.Ltd. (2011 332 ITR 602 (SC) and (ii) ITAT Ahmedabad Bench "D" in the case of Shri Yunush G.Bilakhia vs. ACIT in ITA Nos.3086 & 3087/Ahd/2003 [crossappeals - for AY 2000-01] order dated 4.1.2008. 5. From the side of the Revenue, ld.CIT-DR Mr.Ravindrakumar appeared and vehemently opposed the contention of the assessee that the amount in question received was a capital receipt in the hands of the assessee. A detailed note in this regard was placed on record, relevant portion is extracted below:- "OFFICE OF THE COMMISSIONER OF INCOME-TAX (ITAT)-V, 2ND FLOOR, NEPTUNE TOWER, NR. NEHRU BRIDGE, ASHRAM ROAD, AHMEDABAD- 380009 No.CIT (ITAT)-V/ITAT/ML/'D' Bench/2012-13 Date: 19.04.2012 To: The Hon'ble Members, ITAT, 'D' Bench, Ahmedabad. &n....
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....pellant company. It would also not be out of place to mention that the audit report is prepared by the auditor only after the end the Financial Year. 4. Further it would be seen from the Profit and Loss A/c and the Annual Accounts of the appellant for this year at Page 6 of paper book, that the appellant was an existing company since this annual report is the seventh annual report of the company. It would also be seen that the company has started operations only after acquiring the Non Synthetic Pyrethroid Business Division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) 5. The share capital of the company as on 31.03.1999 was only Rs.7,000/- and it had no assets what so ever as on 31.03.1999. This is reported in the Balance sheet as on 31.03.2000 at Page 15 of the paper book. Further it would be seen that the profit and loss account does not show any major salary payments, implying thereby that it did not have any employees who could possess such knowledge as to offer any kind of competition to Bilag Industries Ltd. (formerly Mitsu Industries Ltd.). It also had no intangible assets. It would thus be seen that the appellant did not have any....
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....ts worth only (Rs.95 crores X 51/100) = Rs. 48.45 crores. The self serving nature of the arrangement of the sellers i.e. the Bilakhia Family would be obvious when it is seen that the Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) which represented assets worth 35 crores was purchased by the appellant by paying only Rs.35 crores i.e. almost the book value of the assets. This is as against nearly 5 times the book value charged from the purchasers. It would also be seen that the reserves and surplus of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the extent of Rs.103.75 crores were transferred to the Bilakhia Family as dividend. 11. Thus it would be seen that while transferring the assets of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the purchaser assets worth Rs.48.45 crores (being 51 % of assets of Rs.92 crores) were valued at Rs.253.09 crores whereas when it came to transferring the Non Synthetic Pyrethroid Business division of Bilag Industries Ltd. (formerly Mitsu Industries Ltd.) to the appellant in which the Bilakhia family had controlling interest, assets were transferred at almost....
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....nbsp; (i) Perform directly or indirectly or through contracts with third parties any research, development, manufacture, formulation, marketing, distribution and/or sale of Products; (ii) grant licenses relating to the Products to any third party in any country whatsoever; (iii) directly or indirectly mange, operate, joint, or participate or be or become interest in, or be or become connected in any manner with, as a partner, advisor, or otherwise, in any entity engaged in a business competitive with the business of the Company relating to the Products. Provided that the aforesaid shall apply only to business of the Company relating to the Products. Subject to clause (d) below Mitsu shall use its best efforts to cause all directors, officers and senior scientific personnel of MIL and MINT to undertake in writing, with effect no latter than as of the Closing Date, not to engage directly or indirectly in any activity which may compete with the Company Business, during their office, employment or collaboration....
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....tails have not been produced clearly indicate the agreement of non compete is truly a sham and only a device to evade tax. This is obvious from the following details which are extracted from the account and agreement and paper books filed by the appellants. 19. In view of the above it is clear that as far as the non compete fee of Rs.10 crore is concerned the money received is not for not offering competition and hence is entirely taxable. Yours faithfully, Sd/- (RAVINDRA KUMAR) Commissioner of Income Tax- V,'D' Bench, ITAT, Ahmedabad." 6. From the side of the assessee, ld.AR Mr.M.K.Patel has submitted a written rejoinder which has been considered by us and the relevant portion of the rejoinder is extracted below:- "The Honorable Members ITAT "D" Bench Ahmedabad In the case of M/s. Mitsu Limited AY 2000-2001. ITA No. 3088/A/2003 & 3119/A/2003 Honorable Sirs On direction from the Honorable Bench we are pleased to submit our rejoinder to the written submission filed the Ld. DR dated 19.04.2012 On the outset we would like to place our object....
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....ating that the amount of Rs.10.cr is not non-compete fee. 1. In view of the fact that the appellant was not the party to the agreement. 2. Disclosure of the binding nature of non-compete agreement in the audit report is clearly an after thought Our Comments: 1. The company has ratified and adopted the non-compete agreement by passing a resolution of board of directors and disclosed the same in the notes to the accounts which has been filed with the return of income and filed with the registrar of companies. 2. The accounts and notes to the accounts reflect facts of the company during the particular year and constitute public documents whose contents are binding upon the company. 3. Even without signing the agreement by adopting a declaration in the meeting of the BOD and by handing over the same to the beneficiary company the non-compute obligations ha....
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....estion of competition. In fact the LD DR has wrongly understood the transaction that the Bilakhia family through Mitsu Industries Ltd was manufacturing all kinds of pesticides. For the limited purpose of understanding and classification the products were described as Synthetic Pyrothoid pesticides (i.e SP) and pesticides other than synthetic pyrothoid (i.e. NSP).The Indian promoters at that point of time opted to continue manufacturing NSP and there was no question of purchasing the same business which were owned by them and carried on for last 8 years at that point of time. As per the agreement they hived off manufacturing of NSP products to the appellant company along with all infrastructure including machinery and employees. The machinery consists of mainly reactors and the appellant company was thus capable of manufacturing and offering competition to the joint venture company being the same field. Without considering the actual facts the Ld DR has kept on repeating in this written submission that the appellant is not capable of offering competition. 7. Same as above. 8. In paragraph 8 & 9 of the rejoinder ....
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....nbsp; 17. In Para 17 theLD DR states that the appellant company was also bound by the agreement being an entity in which the Bilakhia's were interested. He has commented without any reason that there was no reason to make payment to this entity for noncompetition. Since no such payment has been made to other entities of Bilakhia's family. In our humble opinion the receipt of non-compete fee is the result of a commercial agreement between the foreign company and the appellant company. The taxability of such receipt which has been disclosed to the Government of India and approved by it is the subject matter of this appeal and the assessment has been completed by the Learned assessing officer after considering all the facts which are on record. The legal aspect of the transaction has been approved by the government of India which is now been characterized by the learned departmental representative as a sham transaction. This is merely an attempt to redirect the proceeding before the bench by characterizing the dispute as a question of genuineness of the transaction. The real ground of appeal is as to whether the non-compete fee received by the appellant is liable for tax during ....
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....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 or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Provided that sub-clause (a) shall not apply to- (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head "Capital gains"; (ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation : For the purposes of this clause,- (i) "agreement" includes any arrangement or understanding or action in concert,- &n....
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....Miraustrasse 54 13509 Berlin Germany (hereinafter called "AgroEvo GmbH") Hoechst Schering AgrEvo S.A., a Societe Anonyme with a capital of FF 242,000,000, incorporated under the laws of France, registered with the Commercial Register of Entry under the number B 393 339 585, having its main offices at Les Algorithmes, Immeuble Thales, Saint Aubin, 91197 Gif sur Yvette, France, (hereinafter referred to as "AgrEvo"). Party of the first part and Mitsu Industries Limited, a company organized and existing under the Laws of India with a capital of Rs.5,00,00,000/-, having its registered office at 304/2, H Phase, GIDC Vapi - Gujarat 396 195, India, (hereinafter referred to as "MIL") and the following Directors - Mr. Yunus Gafulbhai Bilakhia, born on 13th October, 1957 in Vanda, Bhavnagar, Gujarat, domiciled at "Parishram", Vapi-Daman Road, Chala, Vapi 396 191; Mr.Anjum Gafulbhai Bilakhia, born on born on 2nd August, 1961 in Vanda, Bhavnagar, Gujarat domiciled at "Parishram", Vapi-Daman Road, Chala, Vapi 396 191; Mr.Zakir Gafulbhai Bhilahia, born on 20th February, 1970 in Vanda, Bhavnagar, Gujarat, domiciled at "Parishram", Vapi-Daman Road, Chala, Vapi 396 191; (hereinafter referred to as "....
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....shall have taken the agreed steps of restructuring of MIL and complied with other terms and conditions mentioned therein;" ... "14. Whereas Mrs. Bilakhias are being made parties to this Agreement, as they have been shareholders of MIL, but in the future, may cease to be the shareholders and only for the purpose of the non-compete obligations undertaken by them under Article 13 and the rights and obligations under Article 12 to the extent applicable." 7.3. As per Article 2 of the said J.V., the position of the share capital of the company as per clause 2.6 was narrated. The objection of the CITDR was that as per the pattern of the share capital of the company, there was no reference of holding any share by the assessee, i.e. Mitsu Limited. Further, our attention has also been drawn on clause 3.5, i.e. "Transfer of Shares held by MIL in MINT". It is mentioned that at the time of transfer of the non-pyrethroid assets of MIL to Mitsu Pesticides Limited, which shall be prior to the Closing Date, Mitsu Pesticides Limited shall pay the entire consideration amount payable for the non-pyrethroid assets, including for the shares held by MIL in MINT and othe....
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....n writing not to engage directly or indirectly in any activity which may compete with the company business. Thus, 'clause c' states that AgrEvo shall pay Rs.25.5 crores to the persons specified in the "Exhibit" as consideration for non-competition covenant set forth in Article 13. There was a reference of "confirming parties" in one of the clauses of Article 13 and in this connection our attention was drawn on 'clause f', reproduced below:- "(f) Wherever the reference is made to 'the Confirming Parties' in this Article, the same shall also include Mrs Bilakhias. Mrs. Bilakhias have been merely shareholders in the Company without being actually involved in the day to day affairs of the Company. Eventhough they may cease to be the shareholders in the Company, they have agreed to be bound by the obligations under this Article. Mrs. Bilakhias, if they remain shareholders of the Company after Closing shall also be bound and be entitled to the obligations and the rights respectively, applicable to the Confirming Parties under Article 12 as well, as if they are the Confirming Parties. Subject to the aforesaid, Mrs. Bilakhias shall have no rights or obligations under any ot....
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....riting. Such an agreement should be a legal document, so that enforceable in the eyes of law. The clauses of the agreement ought to be clear and specific through which the "transferor" be abstained from competition in respect of the business transferred in favour of a "transferee". 7.7. Thus, we are of the opinion that the promise of non-competition has to be one-to-one promise. A promise for not to take up any assignment or trade which creates competition has to be made by a "person" and such undertaking ought to satisfy the other "person" who is making the payment in lieu of the said promise. 7.8. We may like to add that one has to keep in mind that non-compete is not an asset such as, franchise, licence, good-will, etc. Non-compete is not an existing asset which is being transferred. It is plainly a promise, rather a gentleman promise, not to compete in that field of business for which on transfer a consideration is received. Therefore, in our humble opinion, the payment of non-compete fees is made with the soul purpose to Ward Off a competitor. 7.9. Applying a common man understanding, a payee should be apprehending a definite and ascertained competition likely to be i....
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....rt of the transaction through which certain capital assets are transferred? As far as the assessee is concerned, he cannot be said to be a party to the transaction through which business were transferred. There was no apparent logic for such payment to the assessee. (d) Whether the recipient is a signatory, so that under legal obligation to honour the commitment? As far as the assessee is concerned, no such legally enforceable obligation was created against the assessee. A Company being a separate legal entity is always represented by a legally authorized representative. There was no such legally authorized representation in the said agreement for and on behalf of the assessee-company. 8. At the outset, ld.AR has cited a decision of ITAT "D" Bench Ahmedabad pronounced in the case of the Directors, namely, Shri Yunush G. Bilakhia vs. Asst.CIT and Shri Anjum G.Bilakhia vs. Asst.CIT in ITA Nos.3086 & 3087/Ahd/2003 respectively for A.Y. 2000- 01 order dated 04/01/2008. The foremost distinction is that these two Directors are the parties of the agreement. In the capacity of Directors of M/....
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....IC. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 9.1. On the basis of the month-wise details of payment of PF & ESI AO has noted that the payments have not been made within the due date. As per AO, the payment of PF should be within 15th day and the payment of ESI should be within 21st day of the succeeding month. AO has drawn a conclusion that since the payments were beyond the due dates, therefore the impugned amount was added back in the total income of the assessee. When the matter was carried before the ld.CIT(A), it was held that section 43B does not condone late payment. The disallowance was upheld. 10. Now, before us the assessee has furnished the details of payment which were stated to be placed before the Revenue Authorities as well. The list of payment of ESI shows that the payments have actually been made in the succeeding months and not beyond that. Likewise, in the case of PF payment, it was noticed that the amount was deposited within the succeeding month. In view of the evidence on record, reliance was placed on two decisions; namely Vinay Cement 213 CTR 268 (SC) and Alom Extrusions....
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....y and exclusively for the purpose of the business. The case of Abdul Razak & Co. 136 ITR 825 (Guj.) was decided by the Hon'ble Court on the facts of the case because in that case the assessee was engaged in the business of Commission Agency. The assessee has advanced the amount to the principle which was written off. On those facts, the Hon'ble Court has held that the written off of the amount was allowable as a business loss. On the contrary, the assessee has not placed any supporting evidence through which it could be established that the said write off was for the purpose of the business. Rather, assessee himself had offered the said amount for tax during the course of assessment proceeding, hence the view taken by the Revenue Authorities for this disallowance is hereby confirmed. This ground is dismissed. 12. Ground No.7 reads as under:- 7. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in not directing the Learned Assistant Commissioner of Income Tax to correctly compute the deduction admissible to the appellant company U/s.80IA/80IB of the Income Tax Act. 12.1. At the outset,....
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....gard, the only contention of the assessee before us is that instead of the total interest amount, a netting is to be granted as held in the case of Shri Ram Honda Power Equip & Ors. 289 ITR 475(Del.). Once a legal position is now settled, then the sub-ordinate authorities are required to follow the view taken by the Hon'ble Courts. Hence, in the interest of justice, we hereby restore this issue back to the stage of ld.CIT(A). The assessee is directed to furnish the complete interest account, so as to inform the ld.CIT(A) about the nature of interest received and thereafter assessee is also to furnish the details of the interest expenditure which was now claimed to be netted against the interest received. With these remarks, this ground of the assessee may be treated as partly allowed that too for statistical purposes. 14. Ground No.9 reads as under: 9. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in not directing the Learned Assistant Commissioner of Income Tax to correctly compute the deduction admissible to the appellant company U/s.80HHC of the Income Tax Act. 14.1. At the out....
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....xamine the correct factual position and recalculate the computation of deduction u/s.80HHC in the light of the law pronounced by the Hon'ble Supreme Court. This ground is allowed as per the directions. 16. Ground No.11 reads as under: 11. On appreciation of the facts and circumstances of the case and law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming the action of learned Assistant Commissioner of Income Tax in not accepting the claim of the appellant company at the time of assessment proceedings i.e. gift given by the appellant company to its employees as an allowable expenditure to the tune of Rs.1,312,260/-. The action of the Learned Commissioner of Income Tax (Appeals) is contrary to the facts and law and deserves to be deleted. 16.1. The appellant had given gifts to employees amounting to Rs.56,71,933/-. It was stated that the amount was treated as perquisite in the hands of the employees. It was also informed that the TDS was deducted. The AO has disallowed the same, which was confirmed by ld.CIT(A). 17. Now, before us a decision of the Tribunal in assessee's own case is placed, wherein ITAT "A" Bench Ahmedabad vide order da....
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....O specially when the AO had commented that the assessee-company had failed to furnish the specific details. According to us, the action of the AO of 1/5th disallowance was fair and reasonable by holding that the expenditure was not wholly incurred for the purpose of the business. Resultantly, we hereby reverse the finding of CIT(A) and uphold the action of the AO, thus this ground of the Revenue is hereby allowed. 19. Ground No.2 reads as under: 2. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in deleting addition on account of foreign travel expenses amounting to Rs.1,81,130/-. 19.1. Out of the total traveling expenses of Rs.28,98,347/-, it was noted by the AO that the assessee had debited foreign travel expenses of Rs.9,05,648/-. The assessee was asked to furnish the details as prescribed under Rule 6D of IT Rules. According to AO, the duration of the stay in foreign country was not furnished. The AO has thus held that 1/5th of the expenditure was to be disallowed amounting to Rs.1,81,130/-. The said addition was contested before ld.CIT(A) who has held that the issue was covered....
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....resaid condition and accordingly the expenditure for those days which have been proved to be spent for the business purpose is to be allowed. In absence of specific justification given by the assessee in respect of various visits to foreign countries, it is held that part of days stayed by different persons is not used for the business purpose of the assessee company. It is further noticed that in most of the cases, the assessee has not even given the total duration of stay in foreign country in a particular visit what to talk that about in stay in particular city and in a particular country separately. From the aforesaid facts, it is very clear that the veracity of aforesaid expenses being incurred wholly and exclusively for the purpose of the business of the assessee is not verifiable. Therefore, 1/5th of the expenditure is disallowed under rule 6D, which comes to Rs.1,81,130/-." 20. Considering the export activity of the assessee and the reasons given by the assessee for the visit of the Employees and Managers out of country. It appears that the expenditure towards foreign travel was for the purpose of the assessee's business. It is not the case of the Revenue that the employ....
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.... of Income tax (Appeals) Surat has erred in deleting addition on account of valuation of closing stock including excise duty on finished goods amounting to Rs.4,84,127/-. 23.1. As per AO, while valuing the closing stock, the assessee has not considered the Excise Duty paid on the goods. Accordingly, the addition was made. Before ld.CIT(A), it was explained that the assessee has consistently valued its stock at cost. Ld.CIT(A) has accepted the assessee's contention and allowed the claim. Now this issue is squarely covered by the decision of Indo Nippon Chemicals 261 ITR 275 (SC). Resultantly, this ground is hereby dismissed. 24. Ground No.6 reads as under:- 6. On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) Surat has erred in allowing to include the following items while calculating profit of business U/s.80HHC:- (1) Scrap Sale Rs. 437903/- (2) Insurance claim Rs. 27930/- (3) Exchange Difference Rs.1500103/- (4) Advance licenses benefit Rs. 978959/- (5) Discount Rs. 688696/- (6) Miscellaneous receipts Rs.137463/- 24.1. In this regard, the ld.AR Mr.M.K....