TaxTMI 
TaxTMI 
2008 (9) TMI 127
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.... 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 and others held in M/s. Vision Healthsource India Private Limited under share purchase agreement dated 15.04.2003. In accordance with the said share purchase agreement the consideration for the sale of shares was in the following two terms:- (I) An amount equal to US $ 23 lakhs (2.3 U.S. million dollars) payable at the time of transfer of shares and (II) Balance constituting the contingent payments to be made in first year, second year and third year after t....
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....llowing 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 existence of the EBITDA, namely Earnings Before Interest, Tax Depreciation Allowance, can be determined only when the EBITDA as per clause (1) of the said share purchase agreement dated 15.04.2003 relating to the three contingent payments as defined in clause (1) therein is computed. By whom paid and nature of payment Year in which to be paid Where defined Payer and provider First Year Contingent Payment For year ended 31.3.2004 Exhibit A Payer and provider S....
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....ction (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 petitioner it is contrary to Sections 45, 48, 28 and 17 of the Act, that even in respect of the closing payment of Rs.2.3 million US dollars as well as the 7 million US dollars of contingent payment though they are in respect of the transfer of shares the consideration are indeterminable and therefore no liability of the capital gain could be made under Section 45 of the Act, that indeterminable contingent payment does not form part of the consideration while including salaries as provided in lieu of or in addition to salary as taxable under t....
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....es 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 approach to the advance ruling authority is enabled for the benefit of the non-residents so as to enable such person to get the clear picture of tax liability even before the assessment in respect of the transaction which is a high level body presided over by a retired Judge of the Supreme Court and the petitioner having preferred of the advance ruling authority and having invited a ruling it is not open to him to say that the said ruling should be quashed. 11. The basic contention of the learned senior counsel for the petition....
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....o 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 forfeiture can only be treated as a penalty and can never be linked with purchase agreement and anything related with the consideration thereon and therefore according to him the ruling of the first respondent in basing reliance on the contents of the employment agreement is outside the scope of reference. To substantiate his contention that the capital gain assessment under Sections 45 and 48 of the Act can be only on the determined amount he would rely upon the judgments reported in (i) C.I.T. v. B.C. Sr....
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....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 the entire documents including the rulings given by the first respondent makes it is clear that the basic issue that is raised by the petitioner in this petition is as to whether the ruling of the first respondent in directing that the lumpsum payment equal to 2.3 million US dollars as closing payment attracts capital gain and hence chargeable under Sections 45 and 48 of the Act and in so far as the contingent payment for three years namely in the end of 31.03.2004, 31.03.2005 and 31.03.2006 with a minimum of 7 million US dolla....
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....ment 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 Critical Policy (after written notice and a period of at least five days to cure such failure); (b) violation of any term or condition of this agreement (after written notice and a period of at least five days to cure such violation); (c) Willful misconduct or gross negligence in the performance of a material duty to Company; (d) commission of an act of fraud embezzlement or theft involving more than $ 1,000 or conviction of, or plea of noto contendere to, a felony or for a crime involving moral turpitude; or (e) the failure of the sum ....
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....pect 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 business of the Indian Company, there is no reason why failure on the part of the applicant in regard to fulfilling his obligations under the employment agreement (which include the achieving the target mentioned above) should result not only in termination of the agreement for the specified cause but also in foregoing receipt of the second part of the consideration by way of contingent payments under the share purchase agreement and in refunding the same to the company where he has already received them. A combined reading of the employment agr....
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.... 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 decision of this court in R. B. Shreeram Durga Prasad and Fatechand Nursing Das v. Settlement Commission [1989] 176 ITR 169 (SC), which too was an appeal against the orders of the Settlement Commission. Sabyasachi Mukharji J., speaking for the Bench comprising himself and S. R. Pandian J., observed that, in such a case, this court is "concerned with the legality of the procedure followed and not with the validity of the order". The learned judge added "judicial review is concerned not with the decision but with the decision-making proc....
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....ication; 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 applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. (2) The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced." 22. It is also relevant to the point out that under Section 245 (T) of the Act the ruling of the advance ruling author....
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....on, 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 salaries or in addition to the salary the same cannot be said to be against law. The reliance placed by the learned senior counsel on the judgment of the Supreme Court in CIT v. D.P. Sandu Bros. Chembur P. Ltd. [2005] 273 ITR 1 has no application since that is a case relating to tenancy right surrender of such right would attract Section 45 of the Act and therefore it was held that the same cannot be treated as a casual and non-recurring deposit under Section 10(3) of the Act subject to tax under Section 56. 26. It was on that factual situation the Supreme Court ha....