By Ajay R. Singh
Advocate
5. Pr.
CIT-2 vs. RST India Ltd. [Income tax appeal No. 1798 of 2016, Dated 12th
March, 2019 (Bombay High Court)]
[ITO-2(3)(1)
vs. RST India Ltd., dated 03/02/2016; ITA. No. 1608/Mum/2009, A.Y. 2005-06;
Bench: D, Mum. ITAT]
Section
28(ii)(c) – Business income – Compensation – the agreement between assessee and
foreign company was not agreement of agency but principal-to-principal –
compensation received for terminated contract could not be taxed u/s. 28(ii)(c)
The assessee had entered
into an agreement with US-based company Sealand Service Inc. Under the
agreement the assessee was to solicit business on behalf of the said Sealand
Service Inc. After some disputes between the parties, this contract was
terminated pursuant to which the assessee received a compensation of Rs. 2.25
crore during the period relevant to the A.Y. in question. The assessee claimed
that the receipt was capital in nature and therefore not assessable to tax. The
AO, however, rejected the contention and held that it would be chargeable to
tax in terms of section 28(ii)(c) of the Act.
The CIT (A) allowed the
assessee’s appeal holding that there was no principal agent relationship
between the parties and the contract was on principal-to-principal basis and
therefore section 28(ii)(c) would not apply.
In further appeal by the
Revenue, the Tribunal confirmed the view of the CIT Appeals, inter alia
holding that the entire source of the income was terminated by virtue of the
said agreement and that in view of the fact that there was no
principal-to-agent relationship, section 28(ii)(c) will not apply.
Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
it is not disputed that upon termination of the contract the assessee’s entire
business of soliciting freight on behalf of the US-based company came to be
terminated. It may be that the assessee had some other business. Insofar as the
question of taxing the receipts arising out of the contract terminating the
very source of the business, the same would not be relevant. The real question
is, was the relationship between the assessee and the US-based company one in
the nature of an agency?
Section 28(ii)(c) of the
Act makes any compensation or other payment due, i.e, the receipt by a person
holding an agency in connection with the termination of the agency or the
modification of the terms and conditions relating thereto, chargeable as profits
and gains of business and profession. The essential requirement for application
of the section would therefore be that there was a co-relation of agency
principal between the assessee and the US- based company. In the present case,
the CIT (A) and the tribunal have concurrently held that the relationship was
one of principal-to-principal and not one of agency.
The Court further observed
that the true character of the relationship from the agreement would have to be
gathered from reading the document as a whole. This Court in the case of Daruvala
Bros. (P). Ltd. vs. Commissioner of Income Tax (Central), Bombay, reported in
(1971) 80 ITR 213 had found that the agreement made between the parties was
of sole distribution and the agent was acting on his behalf and not on behalf
of the principal. In that background, it was held that the agreement in
question was not one of agency, though the document may have used such term to
describe the relationship between the two sides. In such circumstances the Revenue’s
appeal was dismissed.
