1. Director of Income Tax-II
(International Taxation), New Delhi and Ors. vs. Samsung Heavy Industries Co.
Ltd. Civil Appeal No.
12183 of 2016 Date of order: 22nd July, 2020
DTAA between India and Republic of Korea – Permanent Establishment –
Taxability of income attributable to a ‘permanent establishment’ set up in a
fixed place in India – Profits earned by the Korean GE on supplies of
fabricated platforms could not be made attributable to its Indian PE as the
installation PE came into existence only after the transaction stood
materialised – No taxability could arise in a case where the sales are directly
billed to the Indian customer and the price at which billing is done for the
supplies does not include any element for services rendered by the PE – When it
comes to ‘fixed place’ permanent establishments under double taxation avoidance
treaties, the condition precedent for applicability of Article 5(1) of the double
taxation treaty and the ascertainment of a ‘permanent establishment’ is that it
should be an establishment ‘through which the business of an enterprise’ is
wholly or partly carried on – The maintenance of a fixed place of business
which is of a preparatory or auxiliary character in the trade or business of
the enterprise would not be considered to be a permanent establishment under
Article 5 – It is only so much of the profits of the enterprise that may be
taxed in the other state as is attributable to that permanent establishment –
The onus is on the Department to first show that the project office in India is
a permanent establishment
The Oil and Natural
Gas Corporation (ONGC) on 28th February, 2006 awarded a ‘turnkey’
contract to a consortium comprising of the respondent / assessee, Samsung Heavy Industries
Co. Ltd. (a company incorporated in South Korea), and Larsen & Toubro
Limited, being a contract for carrying out the ‘work’ inter alia, of
surveys, design, engineering, procurement, fabrication, installation and
modification at existing facilities and start-up and commissioning of entire
facilities covered under the ‘Vasai East Development Project’ (Project).
On 24th
May, 2006 the assessee set up a Project Office in Mumbai which, as per the
assessee, was to act as ‘a communication channel’ between the assessee and ONGC
in respect of the project. Pre-engineering, survey, engineering, procurement
and fabrication activities which took place abroad, all took place in the year
2006. Commencing from November, 2007, these platforms were then brought outside
Mumbai to be installed at the Vasai East Development Project. The project was
to be completed by 26th July, 2009.
With regard to A.Y.
2007-2008 the assessee filed a return of income on 21st August, 2007
showing Nil profit, as a loss of Rs. 23.5 lakhs had allegedly been incurred in
relation to the activities carried out by it in India.
On 29th
August, 2008, a show cause notice was issued to the assessee by the Income-tax
Authorities requiring it to show cause as to why the return of income had been
filed only at Nil; the assessee replied to it in detail on 2nd
February, 2009.
But dissatisfied
with the reply, a draft assessment order was passed on 31st
December, 2009 (Draft Order) by the Assistant Director of Income
Tax-International Transactions at Dehradun (Assessing Officer). This draft
order went into the terms of the agreement in great detail and concluded that
the project in question was a single indivisible ‘turnkey’ project, whereby ONGC
was to take over a project that was to be completed only in India. As a result,
profits arising from the successful commissioning of the project would also
arise only in India. Having so held, the draft order then went on to attribute
25% of the revenues allegedly earned outside India (which totalled Rs.
113,43,78,960) as being the income of the assessee exigible to tax, which came
to Rs. 28,35,94,740.
The Dispute
Resolution Panel, by its order dated 30th September, 2010, after
considering objections to the draft order by the assessee, confirmed the
finding contained in the said order that the agreement was a ‘turnkey’ project
which could not be split up, as a result of which the entire profit earned from
the project would be earned within India. Basing itself on data obtained from
the database ‘Capital Line’, the Panel picked up four similar projects executed
by companies outside India and found the average profit margin to be 24.7%,
which, according to the Panel, would therefore justify the figure of 25%
arrived at in the draft order. The Panel having dismissed the assessee’s
objections, the draft order was made final by the A.O. on 25th
October, 2010.
The assessee then
filed an appeal against the assessment order before the Income Tax Appellate
Tribunal (ITAT).
The ITAT confirmed
the decisions of the A.O. and the DRP that the contract was indivisible. It
then went on to deal with the argument on behalf of the assessee that the
Project Office was only an auxiliary office and did not involve itself in any
core activity of business, as the accounts that were produced would show that
there was no expenditure which related to execution of the project. The ITAT
held that the arguments put forward in this respect were only by inference such
as the accounts were maintained by the assessee in India but the maintenance of
accounts was in the hands of the assessee and the mere mode of maintaining the
accounts alone could not determine the character of the PE as the role of the
PE would only be relevant to determine what kind of activities it had to carry
on. Having held thus, the ITAT found that there was a lack of material to
ascertain as to the extent to which the activities of the business were carried
on by the assessee through the Mumbai project office; and therefore it was
considered just and proper to set aside the attribution of 25% of gross revenue
earned outside India – which was attributed as income earned from the Mumbai
project office – the matter being sent back to the A.O. to ascertain profits
attributable to the Mumbai project office after examining the necessary facts.
An appeal from the
ITAT was filed in the High Court in Uttarakhand by the assessee. While
admitting the appeal, the High Court framed five substantial questions of law
as follows:
(i) Whether, on the facts and in the
circumstances of the case, the Tribunal erred in law in holding that the
appellant had a fixed place ‘Permanent Establishment’ (PE) in India under
Article 5(1)/(2) of the Double Taxation Avoidance Agreement between India and
Korea (the Treaty), in the form of a project office in Mumbai?
(ii) Whether, on the facts and circumstances of the
case and in law, the finding of the Tribunal that the project office was opened
for coordination and execution of the VED project and all activities to be
carried out in relation to the said project were routed through the project
office only, is perverse inasmuch as the same is based on selective and / or
incomplete reference to the material on record, irrelevant considerations and
incorrect appreciation of the role of the project office?
(iii) Without prejudice, whether, on the facts and
the circumstances of the case and in law, the Tribunal erred in not holding that even if the appellant had a fixed place PE in India, no
income on account of offshore activities, i.e., the operations carried out
outside India (viz., designing, engineering, material procurement, fabrication,
transportation activities) was attributable to the said PE, instead, in setting
the issue to the file of the A.O.?
(iv) Without prejudice, whether, on the facts and
circumstances of the case and in law, the Tribunal erred in not holding that
even if the appellant had fixed place PE in India, no income could be brought
to tax in India since the appellant had incurred overall losses in respect of
the VED project?
(v) Whether, on the facts and circumstances of the
case, the contract was divisible / distinguishable pertaining to the activities
associated with designing, fabrication and installation of platforms and, if so,
whether the activities pertaining to designing and fabrication took place in
any part of India?
By the impugned
judgment dated 27th December, 2013, the High Court found that the
order of the A.O. had been confirmed by the ITAT and concerned itself only with
the following question:
‘Can it be said
that the agreement permitted the India Taxing Authority to arbitrarily fix a
part of the revenue to the permanent establishment of the appellant in India?’
The High Court held
that the question as to whether the project office opened in Mumbai cannot be
said to be a ‘permanent establishment’ within the meaning of Article 5 of the
DTAA would be of no consequence. The High Court then held that there was no finding
that 25% of the gross revenue of the assessee outside India was attributable to
the business carried out by the project office of the assessee. According to
the Court, neither the A.O. nor the ITAT made any effort to bring on record any
evidence to justify this figure. That being the position, the appeal of the
assessee was allowed.
According to the
Supreme Court, the question as to the taxability of income attributable to a
‘permanent establishment’ set up in a fixed place in India, arising from the ‘Agreement
for avoidance of double taxation of income and the prevention of fiscal
evasion’ with the Republic of Korea (DTAA) had been raised by the Department in
the present appeal.
The Supreme Court
noted the relevant provisions of the DTAA and some of its own judgments which
had dealt with similar double taxation avoidance treaty provisions, namely, (i)
DIT vs. Morgan Stanley & Co. Inc. (2006) 284 ITR 260 (SC), and
(ii) CIT vs. Hyundai Heavy Industries Co. Ltd. (2007) 291 ITR 482 (SC).
Applying the tests
laid down in the aforesaid judgments to the facts of the present case, the
Supreme Court held that profits earned by the Korean GE on supplies of
fabricated platforms could not be made attributable to its Indian PE as the
installation PE came into existence only after the transaction stood
materialised. It emerged only after the fabricated platform was delivered in
Korea to the agents of ONGC. Therefore, the profits on such supplies of
fabricated platforms could not be said to be attributable to the PE.
According to the
Supreme Court there was one more reason for coming to the aforesaid conclusion.
In terms of Paragraph (1) of Article 7, the profits to be taxed in the source
country were not the real profits but hypothetical profits which the PE would have
earned if it was wholly independent of the GE. Therefore, even if it was
assumed that the supplies were necessary for the purposes of installation
(activity of the PE in India) and even if it was assumed that the supplies were
an integral part, still no part of the profits on such supplies could be
attributed to the independent PE unless it was established by the Department
that the supplies were not at arm’s length price. No such taxability could
arise in the present case as the sales were directly billed to the Indian
customer (ONGC) and also as there was no allegation made by the Department that
the price at which billing was done for the supplies included any element for
services rendered by the PE.
The Supreme Court
therefore concluded that the profits that accrued to the Korean GE for the
Korean operations were not taxable in India.
The Court referred
to its decisions in Ishikawajma-Harima Heavy Industries Ltd. vs. Director
of Income Tax, Mumbai (2007) 3 SCC 481, and E-Funds IT Solution
Inc. (2017) 399 ITR 34 (SC), where a similar double taxation treaty
agreement entered into between Japan and India and India and the USA were
considered. The Court observed that a reading of the aforesaid judgments made
it clear that when it comes to ‘fixed place’ permanent establishments under
double taxation avoidance treaties, the condition precedent for applicability
of Article 5(1) of the double taxation treaty and the ascertainment of a
‘permanent establishment’ is that it should be an establishment ‘through which
the business of an enterprise’ is wholly or partly carried on. Further, the
profits of the foreign enterprise are taxable only where the said enterprise
carries on its core business through a permanent establishment. Besides, the
maintenance of a fixed place of business which is of a preparatory or auxiliary
character in the trade or business of the enterprise would not be considered to
be a permanent establishment under Article 5. Further, it is only so much of
the profits of the enterprise that may be taxed in the other State as is
attributable to that permanent establishment.
The Supreme Court
referred to the application submitted by the assessee to the RBI dated 24th
April, 2006, the Board Resolution dated 3rd April, 2006 and the RBI
approval dated 24th May, 2006 and observed that a reading of the
Board Resolution would show that the project office was established to
coordinate and execute ‘delivery documents in connection with construction of
offshore platform modification of existing facilities for ONGC’. Unfortunately,
the ITAT relied upon only the first paragraph of the Board Resolution and then
jumped to the conclusion that the Mumbai office was for coordination and
execution of the project itself. The finding, therefore, that the Mumbai office
was not a mere liaison office but was involved in the core activity of
execution of the project itself was therefore clearly perverse. Equally, when
it was pointed out that the accounts of the Mumbai office showed that no
expenditure relating to the execution of the contract was incurred, the ITAT
rejected the argument stating that as the accounts are in the hands of the
assessee and the mere mode of maintaining accounts alone cannot determine the
character of permanent establishment. This was another perverse finding which
is set aside.
Equally, the
finding that the onus is on the assessee and not on the Tax Authorities to
first show that the project office at Mumbai is a permanent establishment was
also incorrect. The Supreme Court further observed that though it was pointed
out to the ITAT that there were only two persons working in the Mumbai office,
neither of whom was qualified to perform any core activity of the assessee, the
ITAT chose to ignore the same. That being the case, it was clear that no
permanent establishment had been set up within the meaning of Article 5(1) of
the DTAA as the Mumbai project office could not be said to be a fixed place of
business through which the core business of the assessee was wholly or partly
carried on. The Mumbai project office, on the facts of the present case, would
fall within Article 5(4)(e) of the DTAA, inasmuch as the office was solely an
auxiliary office meant to act as a liaison office between the assessee and
ONGC.
The appeal against
the impugned High Court judgment was therefore dismissed by the Supreme Court.
2. Shiv Raj Gupta vs. Commissioner of Income Tax,
Delhi-IV Civil Appeal No.
12044 of 2016 Date of order: 22nd
July, 2020
Appeal u/s 260-A – Substantial questions of
law – It is only the substantial question of law that is framed that can be
answered and no other – If some other question is to be answered, the Court
must first give notice of the same to both sides, hear them, pronounce a reasoned
order and thereafter frame another substantial question of law, which it may
then answer
Reasonableness of the amount paid –
Commercial expediency has to be adjudged from the point of view of the assessee
and that the Income-tax Department cannot enter into the thicket of
reasonableness of amounts paid by the assessee
Non-compete fees – Payment under an
agreement not to compete (negative covenant agreement) was a capital receipt
not exigible to tax till A.Y. 2003-2004 – It was only vide the Finance
Act, 2002 with effect from 1st April, 2003 that the said capital
receipt was now made taxable [see section 28(v-a)]
A Memorandum of
Understanding (MoU) dated 13th April, 1994 was made between the
appellant Mr. Shiv Raj Gupta, who was the Chairman and Managing Director of M/s
Central Distillery and Breweries Ltd. (CDBL), which had a unit in Meerut
manufacturing beer and Indian-Made Foreign Liquor (IMFL) and three group
companies of M/s Shaw Wallace Company Group (SWC group). The appellant, his
wife, son, daughter-in-law and two daughters were the registered holders of
1,86,109 equity shares of Rs. 10 each constituting 57.29% of the paid-up equity
share capital of CDBL listed on the Bombay and Delhi Stock Exchanges.
The MoU referred to
a direction of the Supreme Court which was made by an order dated 11th
March, 1994 that made it clear that the company’s manufacturing activity at the
Meerut plant was suspended until a secondary effluent treatment plant is
installed and made operative by the company. This led to the sale of this
controlling block of shares, which was sold at the price of Rs. 30 per share
(when the listed market price of the share was only Rs. 3 per share). It was
stated in the said MoU that the entire sale consideration of Rs. 55,83,270 had
since been paid by the SWC group to Mr. Gupta as a result of which he has
irrevocably handed over physical possession, management and control of the said
brewery and distillery of CDBL to a representative of the SWC group on 10th
February, 1994.
By a Deed of
Covenant dated 13th April, 1994, Mr. Gupta gave a restrictive
covenant to and in favour of the SWC group for not carrying on directly or
indirectly any manufacturing or marketing activities whatsoever relating to
IMFL or beer for a period of ten years from the date of the agreement for the
consideration of a non-competition fee to be paid to him by SWC.
But the A.O. held,
by an order dated 31st March, 1998, that despite the fact that the
appellant owned a concern, namely, M/s Maltings Ltd., which also manufactured
IMFL, being a loss-making concern, no real competition could be envisaged
between a giant, namely, the SWC group and this loss-making dwarf, as a result of
which the huge amount paid under the Deed of Covenant could not be said to be
an amount paid in respect of a restrictive covenant as to non-competition. It
was further held that the son of the appellant was not paid any such
non-compete fee or amount despite the fact that he also resigned from his
position as Joint Managing Director. It was also held that this was a lump sum
payment with no reason as to why such a huge amount of Rs. 6.6 crores was being
paid. It was also found that there was no penalty clause to enforce the
performance of obligations under the aforesaid Deed of Covenant, as a result of
which, applying the judgment in McDowell & Co. Ltd. vs. CTO (1985) 3
SCC 230, the Deed of Covenant was held to be a colourable device to
evade tax payable u/s 28(ii)(a) of the Income-tax Act, 1961. As a result
thereof, this amount was then brought to tax under the aforesaid provision.
An appeal to the
Commissioner of Income Tax (Appeals) was dismissed. When it came before the
Appellate Tribunal, the Learned Accountant Member (A.M.) differed with the
learned Judicial Member (J.M.). The A.M. held that the two deeds would have to
be read separately and that Revenue cannot challenge the business perception of
the assessee. Further, it was held that there was no colourable device involved
and that, as a result, the non-compete fee payable under the Deed of Covenant
was not taxable u/s 28(ii)(a) or any other provision of the Act. The J.M., on
the other hand, substantially agreed with the A.O., as a result of which he
decided in favour of the Revenue.
A reference was
then made to a third member, who was also a Judicial Member. This Member
emphasised the fact that a share worth Rs. 3 was sold for Rs. 30 under the MoU
as a result of transfer of control of the CDBL. It cannot be said that these
shares have been undervalued, neither can it be said that there was any
collusion or other sham transaction, as a result of which the amount of Rs. 6.6
crores has escaped income tax. He pointed out that by a letter dated 2nd
April, 1994, a ‘penalty clause’ was provided for, in that, out of the amount
received by the assessee, a sum of Rs. 3 crores was to be deposited with the
SWC group for two years under a public deposit scheme, it being made clear that
in case there is any breach of the terms of the MoU resulting in loss, the
amount of such loss will be deducted from this deposit. The result, therefore,
was that the appeal stood allowed by a majority of 2:1 in the Appellate
Tribunal.
The Revenue
preferred an appeal u/s 260-A to the High Court. In its grounds of appeal, the
Revenue framed the substantial questions of law that arose in the matter as
follows:
A) Whether the ITAT has correctly interpreted the
provisions of section 28(ii) of the Income-tax Act, 1961?
B) Whether the ITAT was correct in holding that
the receipt of Rs. 6.6 crores by the respondent / assessee as non-compete fee
was a capital receipt u/s 28(iv) of the Act and not a revenue receipt as
envisaged in section 28(ii)?
C) Whether the ITAT failed to distinguish between
the nature of capital and the nature of benefit in the commercial sense in
respect of the amount of Rs. 6.6 crores received in view of the restrictive
Deed of Covenant dated 13th April, 1994?
D) Whether the Judicial Member of the ITAT was
correct in recording his difference of opinion that the receipt of Rs. 6.6
crores by the respondent / assessee was actually a colourable exercise to evade
tax and the same was held to be taxable u/s 28(ii)?
By the impugned
judgment of the Division Bench of the Delhi High Court dated 22nd
December, 2014, the Division Bench framed the following substantial question of
law:
‘Whether, on the
facts and in the circumstances of the case, the amount of Rs. 6.6 crores
received by the assessee from SWC is on account of handing over management and
control of CDBL (which were earlier under the management and control of the
assessee) to SWC as terminal benefit and is taxable u/s 28(ii) or the same is
exempt as capital receipt being non-competition fee by executing Deed of
Covenant?’
After going through
the MoU and the Deed of Covenant, both dated 13th April, 1994, and
extensively referring to the order of the A.O. dated 31st March,
1998, the High Court agreed with the A.O. and the first J.M. of the Appellate
Tribunal, stating that the Deed of Covenant could not be read as a separate
document and was not in its real avatar a non-compete fee at all. However, in
its ultimate conclusion, disagreeing with the A.O. and the minority judgment of
the Tribunal, the High Court went on to state that the said sum of Rs. 6.6
crores could not be brought to tax u/s 28(ii)(a), but would have to be treated
as a taxable capital gain in the hands of the appellant, being part of the full
value of the sale consideration paid for transfer of shares.
On an appeal by the
appellant, the Supreme Court observed that the bone of contention was whether
the said Deed of Covenant could be said to contain a restrictive covenant as a
result of which payment was made to the appellant, or whether it was in fact
part of a sham transaction which, in the guise of being a separate Deed of
Covenant, was really in the nature of payment received by the appellant as
compensation for terminating his management of CDBL, in which case it would be
taxable u/s 28(ii)(a) of the Act.
The learned counsel
appearing on behalf of the appellant inter alia raised as a preliminary
submission the fact that u/s 260-A it is only the substantial question of law
that is framed that can be answered and no other. If some other question is to
be answered, the Court must first give notice of the same to both sides, hear
them, pronounce a reasoned order and thereafter frame another substantial
question of law, which it may then answer. This procedure had not been followed
in the present case as it was clear that the substantial question of law framed
did not contain within it the question as to whether the assessee could be
taxed outside the provisions of section 28(ii)(a). The entire judgment was,
therefore, vitiated and must be set aside on this ground alone.
After hearing both
the sides, the Supreme Court was of the view that the appeal had to succeed
first on the preliminary ground raised by the counsel for the appellant.
The Supreme Court
after noting the provisions of Section 260A observed that the said provision,
being modelled on a similar provision that is contained in section 100 of the
Code of Civil Procedure, makes it clear that the High Court’s jurisdiction
depends upon a substantial question of law being involved in the appeal before
it. First and foremost, it shall formulate that question and on the question so
formulated, the High Court may then pronounce judgment, either by answering the
question in the affirmative or negative or by stating that the case at hand
does not involve any such question. If the High Court wishes to hear the appeal
on any other substantial question of law not formulated by it, it may, for
reasons to be recorded, formulate and hear such questions if it is satisfied
that the case involves such question [Section 260-A(4)]. Under sub-section (6),
the High Court may also determine any issue which, though raised, has not been
determined by the Appellate Tribunal or has been wrongly determined by the
Appellate Tribunal by reason of a decision on a substantial question of law
raised.
The Court referred
to its judgments in Kshitish Chandra Purkait vs. Santosh Kumar Purkait
(1997) 5 SCC 438, Dnyanoba Bhaurao Shemade vs. Maroti Bhaurao Marnor (1999) 2
SCC 471 (see paragraph 10) and Biswanath Ghosh vs. Gobinda Ghosh
(2014) 11 SCC 605 (paragraph 16) in the context of the provisions of
section 100 of the Code and, noting its provisions, observed that the
substantial question of law that was raised by the High Court did not contain
any question as to whether the non-compete fee could be taxed under any
provision other than section 28(ii)(a). Without giving an opportunity to the
parties followed by reasons for framing any other substantial question of law
as to the taxability of such amount as a capital receipt in the hands of the
assessee, the High Court answered the substantial question of law treating Rs.
6.60 crores as consideration paid for sale of shares, rather than a payment u/s
28(ii)(a) of the Act.
According to the
Supreme Court, without any recorded reasons and without framing any substantial
question of law on whether the said amount could be taxed under any other
provision of the Act, the High Court had gone ahead and held that the amount of
Rs. 6.6 crores received by the assessee was part of the full value of sale
consideration paid for the transfer of shares – and not for handing over
management and control of CDBL, and was consequently not taxable u/s 28(ii)(a).
Nor was it exempt as a capital receipt being non-compete fee, as it was taxable
as a capital gain in the hands of the respondent-assessee as part of the full
value of sale consideration paid for transfer of shares. The Court held that
this finding was contrary to the provisions of section 260-A(4), requiring the
judgment to be set aside on this score.
The Supreme Court
thereafter also dealt with the merits of the findings given by the High Court.
In paragraph 22, the High Court had found as under:
‘22. …No doubt,
market price of each share was only Rs. 3 per share and the purchase price
under the MOU was Rs. 30, but the total consideration received was merely about
Rs. 56 lakhs. What was allegedly paid as non-compete fee was ten times more,
i.e., Rs. 6.60 crores. The figure per se does not appear to be a
realistic payment made on account of non-compete fee, de hors and
without reference to sale of shares, loss of management and control of CDBL.
The assessee had attributed an astronomical sum as payment toward non-compete
fee, unconnected with the sale of shares and hence not taxable. Noticeably, the
price received for sale of shares it is accepted was taxable as capital gain.
The contention that quoted price of each share was mere Rs. 3 only, viz., price
as declared of Rs. 30 is fallacious and off-beam. The argument of the assessee
suffers from a basic and fundamental flaw which is conspicuous and evident.’
The Supreme Court
held that the aforesaid finding was contrary to the settled law. A catena of
judgments has held that commercial expediency has to be adjudged from the point
of view of the assessee and that the Income-tax Department cannot enter into the
thicket of reasonableness of amounts paid by the assessee. The Court referred
to its judgments in CIT vs. Walchand & Co. (1967) 3 SCR 214, J.K.
Woollen Manufacturers vs. CIT (1969) 1 SCR 525, CIT vs. Panipat Woollen &
General Mills Co. Ltd. (1976) 2 SCC 5, Shahzada Nand & Sons vs. CIT (1977)
3 SCC 432, and S.A. Builders Ltd. vs. CIT (2007) 1 SCC 781.
It affirmed the
view taken by the Delhi High Court in CIT vs. Dalmia Cement (B) Ltd.
(2002) 254 ITR 377 (Del)] that once it is established that there was
nexus between the expenditure and the purpose of the business (which need not
necessarily be the business of the assessee itself), the Revenue cannot
justifiably claim to put itself in the armchair of the businessman or in the
position of the Board of Directors and assume the role of deciding how much is
reasonable expenditure having regard to the circumstances of the case. No
businessman can be compelled to maximise his profit. The Income Tax Authorities
must put themselves in the shoes of the assessee and see how a prudent
businessman would act. They must not look at the matter from their own
viewpoint but that of a prudent businessman. As already stated above, we have
to see the transfer of the borrowed funds to a sister concern from the point of
view of commercial expediency and not from the point of view whether the amount
was advanced for earning profits.
The Court noted
that the same principle had also been cited with approval by its judgment in Hero
Cycles (P) Ltd. vs. CIT (2015) 16 SCC 359.
According to the
Supreme Court, the High Court’s next finding in paragraph 56 was based on the
judgment in Vodafone International Holdings B.V. vs. Union of India (UOI)
and Ors., which was as follows:
‘56. In view of the
aforesaid discussion and our findings on the true and real nature of the
transaction camouflaged as “non-compete fee”, we have no hesitation and
reservation that the respondent-assessee had indulged in abusive tax
avoidance.’
To this, the
Supreme Court reiterated that the majority judgment of the Appellate Tribunal
had correctly found that:
(i) A share of the face value of Rs. 10 and market
value of Rs. 3 was sold for Rs. 30 as a result of control premium having to be
paid.
(ii) It is important to note that each member of the
family was paid for his / her shares in the company, the lion’s share being
paid to the assessee’s son and wife as they held the most number of shares
within the said family.
(iii) The non-compete fee of Rs. 6.6 crores was paid
only to the assessee. This was for the reason stated in the Deed of Covenant,
namely, that Mr. Shiv Raj Gupta had acquired considerable knowledge, skill,
expertise and specialisation in the liquor business. There is no doubt that on
facts he has been Chairman and Managing Director of CDBL for a period of about
35 years; that he also owned a concern, namely, M/s Maltings Ltd., which
manufactured and sold IMFL and beer and that he was the President of the
All-India Distilleries Association and the H.P. Distilleries Association.
(iv) It is further recorded in the judgment of the
A.M. that the amount of Rs. 6.6 crores was arrived at as a result of
negotiations between the SWC group and the appellant.
(v) That the restrictive covenant for a period of
ten years resulted in the payment of Rs. 66 lakhs per year so that the
appellant ‘…will not start or engage himself, directly or indirectly, or
provide any service, assistance or support of any nature, whatsoever, to or in
relation to the manufacturing, dealing and supplying or marketing of IMFL and /
or beer.’ Given the personal expertise of the assessee, the perception of the
SWC group was that he could either start a rival business or engage himself in
a rival business, which would include manufacturing and marketing of IMFL and
beer at which he was an old hand, having experience of 35 years.
(vi) As was correctly held by the
second J.M., it was also clear that the withholding of Rs. 3 crores out of Rs.
6.6 crores for a period of two years by way of a public deposit with the SWC
group for the purpose of deduction of any loss on account of any breach of the
MoU, was akin to a penalty clause, making it clear thereby that there was no
colourable device involved in having two separate agreements for two entirely
separate and distinct purposes.
According to the Supreme
Court, the reasons given by the A.O. and the minority judgment of the Appellate
Tribunal were all reasons which transgressed the lines drawn by the judgments
cited, which state that the Revenue has no business to second-guess commercial
or business expediency of what parties at arm’s length decide for each other.
For example, stating that there was no rationale behind the payment of Rs. 6.6
crores and that the assessee was not a probable or perceptible threat or
competitor to the SWC group, was the perception of the A.O., which could not
take the place of business reality from the point of view of the assessee. The
fact that M/s Maltings Ltd. had incurred a loss in the previous year was again
neither here nor there. It may in future be a direct threat to the SWC group
and may turn around and make profits in future years.
Besides, M/s
Maltings Ltd. was only one concern of the assessee – it was the assessee’s
expertise in this field on all counts that was the threat perception of the SWC
group which cannot be second-guessed by the Revenue. Equally, the fact that
there was no penalty clause for violation of the Deed of Covenant had been
found to be incorrect given the letter dated 2nd April, 1994. The
fact that the respondent-assessee in his letter dated 26th March,
1998 in reply to the show cause notice had stated that the SWC group had gained
substantial commercial advantage by the purchase of shares in CDBL as the
turnover increased from Rs. 9.79 crores in the accounting period ending 31st
March, 1991 to Rs. 45.17 crores in the accounting period ending 31st March,
1997, was again neither here nor there. As a matter of fact, the SWC group, due
to its own advertisement and marketing efforts, may well have reached this
figure after a period of six years (the date 30th September, 1995
was wrongly recorded by the High Court in paragraph 19 – the correct date as per the letter dated 26th
March, 1998 was 31st March, 1991).
Lastly, the Supreme
Court referred to its judgment in Guffic Chem (P) Ltd. vs. CIT (2011) 4
SCC 254 wherein it was held that a payment under an agreement not to
compete (negative covenant agreement) was a capital receipt not exigible to tax
till A.Y. 2003-2004. It was only vide the Finance Act, 2002 with effect from 1st
April, 2003 that the said capital receipt was made taxable [see section
28(v-a)]. The Finance Act, 2002 itself indicated that during the relevant
assessment year compensation received by the assessee under non-competition
agreement was a capital receipt, not taxable under the 1961 Act. It became
taxable only with effect from 1st April, 2003.
The Supreme Court,
following its aforesaid decision, therefore allowed the appeal and set aside
the impugned judgment of the High Court.
