TaxTMI 
TaxTMI 
TaxTMI 
2023 (11) TMI 334
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....u Diesel Start Systems Pvt. Ltd. (hereinafter called `the Indian company') was incorporated on 16.10.1996. The assessee and a Germany company started business pursuant to the Joint venture agreement dated 16.12.1996. The assessee, along with his wife, held 51% shares in the Indian company, while the remaining 49% held by BorgWarner Ludwigsburg GmbH, Germany (hereinafter called `the foreign company'). The assessee's wife transferred her shares to the assessee, which point is not disputed. The assessee transferred the resultant total shareholding of 10,71,000 shares in the Indian company to the foreign company for a consideration of Rs. 85.79 crore. After taking the benefit of cost of acquisition of these shares at Rs. 3.82 crore, the assessee offered income on this score as long term capital gain. The Assessing Officer (AO) examined the terms and conditions of Share Sale and Purchase Agreement (SSPA) dated 29.01.2015 between the assessee and the foreign company and show caused as to why the consideration of Rs. 85.79 crore be not treated as receipt for handing over the management and control of the Indian company and hence charged to tax as Business income as against capital gains s....
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....ion involves determination of two points - i. Is entire consideration only for transfer of shares? And ii. How is it taxable? We will espouse these two points in seriatim. I. IS ENTIRE CONSIDERATION ONLY FOR TRANSFER OF SHARES? 5. In order to reach any decision on this factual count, it would be apposite to have a look at SSPA dated 29.01.2015, a copy of which has been provided at page 143 onwards of paper book. The preamble of this Agreement provides that the assessee is a legal and beneficial owner of 10,71,000 Equity shares of the Indian company representing 51% of its issued capital and the foreign company is the legal and beneficial owner of the remaining 10,29,000 Equity shares. Article 6 of the SSPA provides that upon receipt of a copy of the Remittance Instruction, the Seller (assessee) shall tender his resignation from the Indian company. Article 7 is important for our purpose, which states the "Post completion covenants". Articles 7.2 is the "Confidentiality clause", which provides that the details of transactions and any other information and other material marked as confidential shall not be disclosed by the assessee to third parties for a period of two years. Arti....
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....ccepted by the assessee. It becomes more glaring when we note that these negative covenants are integral part of the SSPA have binding force on the assessee in the same way as is the obligation to transfer the shares to the foreign company. It is not a case of the AO inferring the existence of some negative covenants. Rather, such negative covenants actually exist in the SSPA. The consideration of Rs. 85.79 crore is subject to the acceptance of such negative covenants. As the SSPA puts obligations towards the negative covenants, which were also accepted by the assessee, it is simple and plain that the consideration of Rs. 85.79 crore is towards sale of shares and also accepting the negative covenants. 7. Our view gets further fortified by the `Indemnification by the Seller' clause contained in Article 12 of the SSPA, which provides that: `The Seller shall....indemnify, defend and hold BWLG, the Purchaser and their respective directors and employees ... against any and all Losses directly and actually incurred or suffered by the Purchaser Indemnified Person or the Company ... arising from.... (ii) any breach of the covenants or obligations in Articles 7.2 (Confidentiality of this T....
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....sfer of shares. The AO held the entire profit as arising from transfer of business including negative covenants chargeable to tax u/s 28. The ld. CIT(A) held that 10% of the consideration was chargeable u/s 28 towards termination of role in management and non compete obligation leaving the remaining amount towards transfer of shares chargeable as capital gain. For this proposition, he drew strength from the order of the Mumbai Bench of Tribunal in ACIT vs. Savita N Mandhana (ITA No.399/Mum/2010 & Ors) holding that: `it has been stated at the Bar that income attributable to non-compete obligations has been offered to tax as business income.' 9. It is axiomatic that if there is one price given for more than one thing (transfer of shares and negative covenants) and there are separate provisions enshrined in the Act dealing with their taxation independently (as will be discussed infra), then income from transfer of one of these (shares) needs to be computed by considering price paid for such item alone (share) and not the consolidated price. It is for the raison d'etre that income from the other (negative covenants) requires separate determination, governed by the independent provisio....
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.... (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 or profession, 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,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;" 12. The AO invoked both clause (ii)(a) and (va) of section 28 in a combined manner to hold that the amount is chargeable as business income. The ld. CIT(A) assigned 10% value of the total consideration to non-compete clause and termination of management, which are subject matter of sub-clause (a) of clause (va) and sub-clause (a) of ....
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....ing the assessee from inducing the existing customers and suppliers); and Article 7.8 is Non disparaging (prohibiting the assessee from defaming the buyer or his business). This shows that the obligations undertaken by the assessee, having huge financial consequences for their violation in the form of indemnity, are all negative covenants. Any compensation received for the negative covenants will fall for taxation under section 28(va), if the obligations are of the nature covered under sub-clauses (a) and (b) of this provision. Sub-clause (a) of section 28(va) taxes any sum received by the assessee for `not carrying out any activity in relation to any business'. Non-compete clauses contained in Articles 7.4 and 7.5 are directly covered within the purview of this provision. Similarly, Non-solicitation, Non-interference and Non-disparaging clauses contained in Articles 7.6, 7.7 and 7.8 are also extension of `not carrying out any activity in relation to the business'. Sub-clause (b) of section 28(va) taxes any sum received by the assessee for `not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or info....
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....e assessee transferred shares and did not receive any separate consideration for the negative covenants, no amount could be brought to tax under section 28(va). We are unable to accord our imprimatur for the obvious reason that this provision simply provides that any sum received or receivable under an agreement for the negative covenants is chargeable to tax as business income. The term 'agreement' has been defined quite widely in Explanation to section 28(va) to include any arrangement or understanding or action in concert, whether or not such arrangement, understanding or action is formal or in writing; or whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings. The sum and substance of section 28(va) is that when an assessee accepts a negative covenant under an agreement, the quid pro quo for that should be taxed as business income u/s 28(va). No further stipulation has been set up in the provision that the agreement providing for the negative covenants should be exclusively for this purpose de hors the transfer of any shares. 20. To bolster his submission that no part of the consideration should be attributed to anything oth....
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....The dispute is only about the head under which such profits should be charged to tax, that is, whether 'Capital gains' or 'Business income.' Apart from the distinction in the factual panorama of the two cases, the decision in Vodafone International (supra) has been statutorily negated through the amendments discussed supra. 21. The crux is that so long as the agreement talks of some specified negative covenants, the consideration - whether shown inclusively or exclusively, will be hit by the mandate of section 28(va). The contention of the ld. AR, being, sans merit is repelled. 22. The reliance of the ld. AR on Premier Automobile Ltd.(supra) again does not lend any strength. That was a case dealing with the assessment year 1995-96 relating to slump sale of the business as a going concern. The Hon'ble High Court remanded the matter to the AO to compute the quantum of capital gains under ss. 45 to 50. Right now, we are examining a case in which the business of Indian company continued with the company itself. There was no transfer of business in slump sale. The assessee, being a shareholder, simply transferred his holding of 51% of the shares in the Indian company to the foreign co....
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.... prejudice contention of the ld. AR, invoking proviso to section 28(va), for buttressing his argument that no separate income should be determined as business income and the entire consideration, even relating to negative covenants, should be considered under the head `capital gains', therefore, does not hold water. Proviso to section 28(va) gets attracted only when the right to manufacture etc. or carry on business is transferred along with the assessee agreeing for non-compete [not the other negative covenants as mentioned in sub-clause (b) to section 28(va)]. In that case, no part of the total consideration on account of non-compete is separately charged to tax as business income under section 28(va), if the total consideration is chargeable under section 45. The proviso rather gives a clear clue that in all other cases where right to manufacture etc. or to carry on business is not transferred and there is a non-compete clause in the agreement, then the portion of the total consideration relatable to non-compete should be segregated and charged to tax as business income. 24. Reverting to the facts, it is seen that the assessee never claimed that Rs. 85.79 crore was for transfer....
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....of shares between the shareholders post the JV agreement, as is instantly prevailing. The Valuer did not value the shares under the Net asset value method, leave aside the determination of the value under this method. The AO treated full sale consideration of Rs. 85.79 crore as attributable to the transfer of business, leaving no scope for finding out separate consideration towards the transfer of shares for the computation of capital gains. The ld. CIT(A) also did not go deep into the part of the consideration relatable to transfer of shares. He simply applied the magic wand and held that 10% of the consideration was towards non-compete and termination of role of the assessee in management. No reason or rationale has been given for the ad hoc figure of 10%. Under these circumstances, we are satisfied that the exercise of attributing sale consideration to the shares and the negative covenants is required to be done afresh by the AO. We order accordingly and direct him to segregate the consideration relatable to sale of shares and then accordingly compute the capital gains on transfer of such shares; and the remaining amount towards negative covenants should be taxed as business inc....