THE issue before the Bench is - Whether a gratuitous one-time
settlement amount paid by licensor to the licensee out of goodwill gesture, at
the time of termination of the agreement, but not under any contractual
obligation can be treated as revenue receipts. And the answer goes in favour of
the assessee.
Facts of the case
The assessee
had entered into an agreement in 1995 with Beiersdorf
AG., (BDF) a German
concern, wherein the German Concern had agreed to grant a
license to use
the Trade Marks, the Know-How and the Copyrights in the Territory for a certain
period and on agreed terms and conditions. The agreement was for a
period of five years with a renewal clause for another period of five years. The
Agreement was terminable by the Licensor with a prior notice of 12 months
although not to be effective before December 31, 2000. The contract between the
assessee and BDF continued for another term of five
years after expiry of the initial five years and was thus to come to an end on
31st December, 2005. However, before that, an agreement dated 22nd March, 2005
was entered into between the assessee and BDF whereunder BDF agreed to pay a sum of Rs.18 crores for agreeing to BDF establishing a
wholly owned subsidiary (WOS) in India (BDF India) for the purpose of carrying
on the business of manufacturing, marketing and sale, importing and exporting of
various products, in particular cosmetics and toiletries and other Beiersdorf consumer products. The assessee agreed to provide all necessary support and
assistance that may be required by BDF to set up its subsidiary in India and to
carry out its operation in India. The assessee also
agreed to provide BDF with a No-objection certificate for facilitating the
setting up of a WOS. In consideration, BDF agreed to pay assessee INR 100 million which shall be payable within 21
days after BDF has obtained the FIPB approval. In addition BDF has agreed to pay
assessee INR 80 million to termination of the
Agreements within 31st of December, 2005. It was agreed that the above-mentioned
amounts are being paid by BDF on its own free will and BDF has agreed to pay JLM
as a one-time settlement towards termination of the Said Agreements and also
providing a NOC to BDF to facilitate the setting up of WOS.
The said amounts have
been treated as capital receipts and confirmed by the AO. However, the CIT found
this assessment as erroneous and prejudicial to the interests of the Revenue.
The CIT was of the opinion that since the receipt has been considered as
voluntary payment on a goodwill gesture, the said receipt should have been
considered as income in the ambit of either Section 28 or 56 instead, the same
has been transferred to capital reserve account. However, on appeal, the
Tribunal quashed the order passed by the CIT u/s 263 by disregarding that the
assessment order passed by the AO. The Tribunal held that the AO had taken one
of the two possible views and therefore, it cannot be said that the order was
passed without application of mind, making it erroneous and prejudicial to the
interests of the Revenue.
Aggrieved, the CIT has
filed this appeal before the High Court.
Having heard the parties, the High Court
held that,
++ we are, at this stage only
concerned with the question as to whether the Assessing Officer in allowing the
claim of the assessee with respect to the four
questions raised by the CIT including the receipt of sum of Rs.18 crores from the German Concern took a possible view of the
matter. There was absolutely no attempt on the part of Mr. Nizamuddin to demonstrate that the Assessing Officer did not
take a possible view in accepting the contention of the assessee. The parent contract dated 14th September, 1995 did
not provide for payment of any compensation or any sum on any account
whatsoever. Upon expiry of the contract, the assessee
was liable to surrender the technical know-how and to cease to manufacture the
goods. The assessee was not entitled in any event,
upon expiry of the contract, to prevent the German Concern from setting up its
100% subsidiary for the purpose of manufacturing and marketing its goods. In
case the German Concern paid the aforesaid sum for the purpose of securing an
NOC from the assessee, even if it is assumed that by
agreeing to issue the same the assessee agreed to have
his manufacturing and trading structure impaired resulting in loss of his source
of income, the receipt in that case according to the views of the Apex Court in
the case of Kettlewell Bullen & Co. would be a capital receipt. If on the other
hand it was a gratuitous payment as indicated in the agreement dated 22nd March,
2005 “amounts are being paid by BDF on its own free will” the receipt would
still be a capital receipt following the judgment in the case of Divecha (P.H.) vs. CIT.
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