TaxTMI 
TaxTMI 
2018 (8) TMI 375
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....y, as compensation for agreeing to discontinue the assessee's business in commodity trading. The factual background for payment of compensation by BNP Paribas to the assessee, are as follows: 3.2 BNP Paribas is a French Bank, who had invested 27.18% stake in the parent company of the assessee, viz., M/s.Geojit Financial Services Limited (GFSL). The GFSL, the parent company of the assessee, is a listed public limited company. BNP Paribas, the French company had sought to increase its shareholding in GFSL by giving an open offer to the existing shareholders. The approval for open offer had to be obtained from Securities Exchange Board of India (SEBI). Since BNP Paribas is a French company, operating in India under RBI license, the SEBI directed it to get clearance from RBI. The RBI for granting clearance, insisted the parent company and its subsidiary companies to withdraw from the commodity trading business, because as per the RBI guidelines no bank should have interest in commodity trading business. Pursuant thereto, BNP Paribas approached GFSL to consider discontinuing the commodity brokerage business undertaken by its subsidiary, i.e., the assessee in order to comply with the ....
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.... u/s 28(ii)(c) of the I.T.Act. The conclusion of the CIT(A) are summarized as follows:- "K. Compensation received: Final summarization and conclusions qqq) From all the above, the following principal positions, decisions, findings and conclusions in the disputed matter above are extracted and listed in the interests of convenient overview. (i) There is an agreement that holds good. There is nothing on hand that that de- legitimizes the documents being the offer letters and the acceptability resolutions exchanged as above from being held as agreements. (ii) Transfer Pricing mandates need to be complied with. If the statutory mandates u/s 92A, 92B and 92CA of the Act have not been followed, the AO may ask the Appellant as to the reasons for the said default(s) and why penal action under the statute may not be taken thereupon. The AO may thereafter take the necessary steps to ensure that the Arm's Length Price of the compensation received by the Appellant (of which the internally set Transfer Price is Rs. 40 crores) is computed by the TPO and the adjustments, if any, that result be incorporated in the taxable income assessed for the A.Y. 2009-10....
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....le. Following the loss of agency to carry out the business of commodities trading as above, the compensation received by the Appellant of Rs. 40 crores is simultaneously held to be for the transition/movement of business opportunity, the concomitant revenue streams and the appurtenances required thereof and for facilitating the same from one business entity of the Group to another. [NB: From the consolidated perspective of the Group, there is no real loss of any kind, as such losses within the group would be momentary and non-existent in nature]. (vii) Compensation to agent for facilitating intra- Group movement of opportunity, conduct, assets and earnings of business is taxable. A payment received for facilitating the movement of revenue streams is operational and business exigent/expedient in nature and cannot be considered to be a capital receipt. Taken together, the receipt by the Appellant of the compensation was therefore towards its loss of agency and the stipulated consequent actions to facilitate the smooth transition and continuing conduct of the business in another financial premises. Such rendering of assistance is revenue in nature. (viii) Compensatio....
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....capital or being visited by the prospects or provisions of Cap Gains taxation. rrr) Any errors/omissions deemed to have been committed by the AO, including non-application of Section 28(iic) of the Act for the purpose of assessment, are now held as having been corrected and cured by me through the analyses above. This has been done in exercise of concurrent and coexistent powers of assessment conferred on me by the statute as also sanctified by the ratio of the Hon'ble Supreme Court of India in the case of M/s Jute Corporation of India Limited vs. Commissioner of Income Tax and Anr [1991] AIR 241, 1990 SCR Sup!. (1) 340. In the cited ratio, the Hon'ble Apex Court held inter alia that "the declaration of law is clear that the power of the Appellate Assistant Commissioner is coterminus with that of the Income Tax Officer. If that be so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Au....
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....ellant for the impugned A.Y. 2009-10. It is also held that owing to the collusive and colourable nature of the transactions following the lifting of the corporate veil, no transfer of rights or extinguishment of rights or loss of business or earnings or potential revenue streams have taken place. The compensation is also held to be paid by BNPP to only to facilitate the movement of the revenue streams from the Appellant to GeL within the financial domain of the Group. Grounds Numbered 2 to 6 are accordingly dismissed. ttt) The AO may also take steps to reopen the assessment proceedings of GFSL for the A.Y. 2009-10 and assess protectively the receipts of compensation totalling Rs. 40 crores 3 above in the hands of GFSL as the principal instigator, manager, controller, recipient of the said compensation. It may be recollected that the agreement that led to the quid pro quo of compensation being received from BNPP for the facilitation of the movement of the impugned business alongside its rights, earnings and appurtenances to GeL as well as the creation and incorporation of GeL was orchestrated, fed and concluded by GFSL. The Appellant was a dominated and therefore compromise....
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....t with the shifting of the plant and machinery from one premises to another premises. The comparison by trying to link all the entities in the group on the ground of piercing the corporate veil is unwarranted as all the group companies were having different shareholding patterns and were individually assessed to income tax. There being no complete identity between the shareholders of the different entities, the conclusion of the Commissioner(Appeals) that the amount received by the appellant is a taxable revenue receipt to compensate for temporary losses and shifting of business from the appellant is wholly unjustified. 4. Commissioner of Income Tax (Appeals) erred in his conclusion that the receipt of Rs. 40,00,00,000 is taxable as revenue receipt under section 28(iic) read with 28(va) of the Act. Section 28(iic) and section 28(va) are applicable in different circumstances and both sections cannot become simultaneously applicable to a single receipt. Commissioner of Income Tax (Appeals) has not concluded which section is applicable, if at all it is taxable. 5. The powers of the Commissioner (Appeals) are co-terminus with that of the AO. It is now well settled tha....
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....ld be taxed u/s 28(va) of the Act which covers negative/ restrictive covenants of the sort involved in the impunged appeal. It is submitted that S.28(va) has wide application and cannot be restricted to noncompete fees. 3. Further, S.28 (ii) (e) effective w.e.f. 01.04.19 cannot be said to be expanding the scope of S. 28(va) from 01.04.2019 only, since the said S.28(ii) (e) is relatable to contracts exclusively and any wider import cannot be imputed to this newly introduced sub-section." 6. We have heard the rival submissions and perused the material on record. The solitary issue for our consideration is whether Rs. 40 crore received by the assessee for discontinuing its commodity trading business is a taxable receipt? The compensation of Rs. 40 crore paid by BNP Paribas to the assessee was credited to the profit and loss account of the assessee for the year ending 31.03.2009 and disclosed as an "extraordinary item". In the income-tax return, the assessee included the compensation of Rs. 40 crore while computing book profit and paid tax thereon as per the provisions of section 115JB of the I.T.Act. For the purpose of computing tax under normal provisions of the Act, the ....
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....ltered the aforesaid basic structure of carrying on business by the appellant, in as much as the appellant could not have continued the commodity brokerage business and accordingly, had to forego its main source of revenue. To reiterate, post settlement with BNP Paribas, the appellant had completely stopped the commodity brokerage business. The said settlement, therefore, resulted in immobilization sterilization, destruction and loss of the existing profit earning apparatus/ business of that appellant and the amount received to compensate the aforesaid loss of source of income/business was in the nature of capital receipt, which was not subject to tax under the provisions of the Act. It is a settled law that compensation received against loss of source of income/profit earning apparatus as opposed to loss of income, is in the nature of capital receipt, which is not liable to tax under the provisions of the Act. Reliance is placed in this regard on the following decisions wherein it has been held that consideration received in lieu of an extinction of a source of income or profit earning apparatus is in the nature of non-taxable capital receipt. CIT v. Vaz....
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....ng that of trading in commodities. The Memorandum of Association of the Company has been amended after the receipt of the impugned compensation. Copies of the original Memorandum of Association and its amended version were obtained from the assessee and perused. It is seen therefrom that the assessee has deleted from its main objects only the following: "A-1 To carrying on the business of all types of commodities trading as Members of Brokers of all various exchangers clients." Following main object has been retained even after the amendment. "To carryon the business of Insurance Agents, Brokers, Investment agents, Third Party Administrators or surveyors, consultants, or otherwise deal in all incidental and allied activities relating to life and non-life Insurance business." (b) In addition to the above main objects, there are four other incidental or ancilliary objects which remains unchanged before and after the amendment consequent to the receipt of compensation. Therefore, when the assessee is engaged in other business activities, it cannot be said that the assesee's entire , profit making apparatus has been impaired. (c) The ass....
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....assessee company to the books of M/s. Geojit Comtrade Ltd. In other words, there has been no discontinuance of business, but only the transfer of entries relating to the commodity broking business from the assessee company's books to the books of M/s. Geojit Comtrade Ltd. (g) M/s. Geojit Comtrade Ltd has entered into an agreement with the assessee's parent company for use of trademark "Geojit". Therefore, in the eyes of the clients, the business is carried on in the same name. (h) M/s. Geojit Comtrade Ltd. has also entered into a service agreement with the assessee's parent Company for the use of its premises, equipments, and their manpower alongwith administrative set up. In other words, the services are rendered by the same company with only a change in name. M/s Geojit Comtrade Ltd. (newly floated Company) makes use of the premises of the assessee's parent company using its Telephone, Fax, fixed assets, Courier Services, Information Technology services including LAN, WAN, ISDN, leased line, Biometric systems, VPN, Internet Platforms, etc. Thus, it is business as usual at the ground level whereas the accounts are maintained in the name o....
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....ng apparatus from the consolidate perspective of the group concerns, viz., 'Geojit', the amount so received by the assessee as compensation cannot be termed as a capital receipt not liable to be taxed under the provisions of the I.T.Act. Therefore, the finding of the Assessing Officer in this context is upheld. 6.4 As regards the issue whether the amount was taxable u/s 28(va) of the I.T.Act, the learned AR referring to CBDT Circular No.8/2002 reported in 258 ITR (St.) 13, submitted that the said provision is only applicable to a situation wherein the assessee receives payment from a competitor in the same business in lieu of accepting restrictive / negative covenant not to carry any particular activity in relation to the business, without there being any transfer of right to carry on the business. It was submitted that such payment restrains the recipient payee from carrying on competitive business for the period for which non-compete agreement was to last, in order to protect the profitability of the payer who is a competitor / rival in the same business. In other words, it was submitted that the amount of compensation would be taxable under the provisions of section 28(va) of....
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....dging. 6.6 The assessee-company in the instant case, had received the compensation for not carrying on any activities in relation to its commodity trading business. The compensation so paid for not carrying any activity in relation to any business (commodity trading business) would be taxable going by the plain meaning of section 28(va)(a) of the I.T.Act. Section 28(va) of the I.T.Act was introduced w.e.f. 01.04.2003. Though there was no written agreement for payment of compensation, the letters of BNP Paribas dated 23.05.2008 and 27.05.2008 and the Board Resolution of the assessee-company stating that it would discontinue the commodity trading business of the assessee on receipt of compensation of Rs. 40 crore, would come within the ambit of an arrangement / undertaking / action in concert, whether or not, the same was formal or in writing or it was intended to be enforceable by legal proceedings and that would tantamount to an agreement for the purpose of section 28(va) of the I.T.Act. The wordings of section 28(va) of the I.T.Act is unambiguous and clear. The said section does not restrict, the bringing to tax only the non-compete fee but any sum that was received or receivab....
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....acts of the instant case and reliance on the same by the learned AR is misplaced. 6.7 Before concluding it has to be mentioned that the CIT(A) has also held that the amount of compensation received by the assessee is also taxable u/s 28(ii)(c) of the I.T.Act. On reading of section 28(ii)(c) of the I.T.Act, it is clear that the pre-requisite condition for applicability of the said section is that there must be an agency relationship between the payer and the payee. The tests for determining existence of principal - agent relationship have been laid down in the Hon'ble Apex Court judgment in the case of Bhopal Sugar Industries Ltd. v. STO [3 SCC 147 (SC)]. The judgment of the Hon'ble Apex Court in the case of Bhopal Sugar Industries Ltd. (supra) was followed by the judgment of the Hon'ble Rajasthan High Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. v. CIT [402 ITR 539]. In the present case, there does not exists any principal-agent relationship between the assessee and GFSL (parent company). The assessee-company as well as GFSL was engaged in distinct and separate business and were functioning as independent business entities. The assessee was not under the control ....