$~14-18
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 23.08.2016
+ ITA 247/2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
versus
NITREX CHEMICALS INDIA LTD. ..... Respondent
Through: Mr. Ved Jain, Advocate along with
Mr. Pranjal Srivastava, Advocate.
And
+ ITA 248/2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
versus
NITREX CHEMICALS INDIA LTD. ..... Respondent
Through: Mr. Ved Jain, Advocate along with
Mr. Pranjal Srivastava, Advocate.
And
+ ITA 249/2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
versus
NITREX CHEMICALS INDIA LTD. ..... Respondent
Through: Mr. Ved Jain, Advocate along
with Mr. Pranjal Srivastava,
Advocate.
And
+ ITA 318/2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
versus
NITREX CHEMICALS INDIA LTD. ..... Respondent
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 1
Through: Mr. Ved Jain, Advocate along with
Mr. Pranjal Srivastava, Advocate.
And
+ ITA 319/2016
PR. COMMISSIONER OF INCOME TAX-06 ..... Appellant
Through: Mr. Rahul Chaudhary, Advocate.
versus
NITREX CHEMICALS INDIA LTD. ..... Respondent
Through: Mr. Ved Jain, Advocate along with
Mr. Pranjal Srivastava, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MS. JUSTICE DEEPA SHARMA
MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
1. The revenue is aggrieved by a common order of the
Income Tax Appellate Tribunal (ITAT) pertaining to five
assessment years i.e. 2005-2006, 2006-2007, 2007-2008, 2008-
2009 and 2009-2010.
2. It is urged that several questions of law arose, chiefly on
the following issues:-
1. Whether payments made by the assessee to its
holding company Nitrex Chemicals India Ltd
for the use of its trademark and for the purpose
of obtaining expertise in commerce, finance,
manufacturing etc. amounted to revenue
expenditure instead of capital expenditure?
2. Whether the finding with respect to additions
being disallowances of excessive commission on
exports in the circumstances of the case is
tenable?
3. Whether the computation of capital gains in
respect of slump sale of trading businesses on
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 2
account of purchase of shares by ESOP Trust,
could be deducted from capital gain under
Section 48 of Income Tax Act?
4. Is the finding on disallowance under Section
14A sound in law? And
5. Whether in the circumstances of the case,
foreign exchange fluctuation in respect of
amounts held by the assessee, could be treated
as capital losses rather than as revenue
expenditure?
3. Re: Question No. 1: Whether the payment towards trade
mark and use of expertise in the field of commerce, finance etc
amounted to capital or revenue expenditure?
4. The assessee acquired an undertaking/ unit of ICI Ltd.
The assessee in 2006-2007 had debited amounts under the head
"Techno Commercial Agreement" and a further sum was paid
towards Brand Licensing Agreement, executed on 14.03.2005.
The Assessing Officer "AO" was of the opinion that these
expenditures were of an enduring kind and held that they were
capital in nature. The assessee, on the other hand, contended
that these were revenue expenditure. The CIT (A) accepted the
assessee's contention; the ITAT affirmed the order.
5. The revenue's counsel argues that the findings of the CIT
(A) and ITAT are erroneous having regard to the nature of the
agreement. It was highlighted that even though the agreement
was entered into on 14.03.2005, it was sought to be made
effective from 01.04.2004. The agreement itself was cancelled
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 3
on 30.04.2005. It was therefore submitted that the real nature of
the transaction was transfer of ownership rights vested in the
"Nitrex" brand as well as technology and commercial
information, to the assessee. As to whether the expenditure
under the circumstances of the case could have led to creation
of an asset of enduring nature or not would have assumed some
importance if it had considerable impact. In the present case,
there is no dispute that the undertaking itself was sold
subsequently in 2005. So far as the use of the trade mark is
concerned, the ITAT's reasoning is as follows:-
"After considering the submission of both
the parties and perusing the material on record, it
is noticed that the AO did not doubt the
genuineness of the expenses. He only doubted the
nature of expenses which were claimed by the
assessee as revnue in nature but the AO was of
the view that it was capital in nature. In the
present case, by incurring the impugned expenses,
the assesse had not acquires any
tangible/intangible asset which had any lasting
and enduring benefit to the assesee's business.
The payments were made for using the trade mark
of Mis Nitrex Mauritius and to obtain expertise in
the field of commerce, finance and manufacturing
etc. which were needed for smooth running of the
business as the assessee was new in this business
and the expenses were paid only for one year.
Therefore, we are of the view that the ld. CIT (A)
was fully justified in directing the AO to treat
those expenses as revnue in nature, we do not see
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 4
any infirmity in order of the ld. CIT(A) on this
issue."
6. This court is of the opinion that the finding with respect
to tangible or non-tangible asset vesting in the assesee and
whether it had or not any lasting or enduring advantage to it is
more in the nature of a finding of fact. The findings are also
that to use the Nitrex brand, payments were made and it was
essential for the assessee to make such payments on account of
nature of its business and on account of procuring knowledge
for setting up the systems as well as other procedures. In the
circumstances, we are of the opinion that no question of law
arises on this aspect.
7. Re Question No.2: The issue of excessive commission,
was consistently ruled against the assessee, for all the five
years. However, in both the CIT (A) and the ITAT, the
revenue's contentions were not accepted. Here, the assessee's
argument was that the commission could not be characterised as
excessive because they were more customary in nature having
regard to the historic relationship with M/S Asha export, its
export agent. This court is of the opinion that such decisions as
to the nature and quantum of commission may differ having
regard to the uniqueness of each business and the relationship
that it may possess with those associated with it. Unless, the
revenue is able to pinpoint extraordinary features, it cannot
scrutinize the commercial terms that a business takes into
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 5
account in making a decision and contend that certain
percentage or quantum of commission is "excessive".
Therefore, we are of the opinion that no question of law arises.
8. Re Question No. 3: The revenue's contention here is that
sum of ` 1,39,76,352/- spent by the assessee at the time of
transfer of its business undertaking to fund the ESOP Trust,
cannot be characterized as permissible expenditure but rather
has to be added back for the purposes of income calculations.
The assessee's contention, on the other hand, is that this
expenditure was essential and integral part of the sale
transaction itself.
9. The necessary facts for appreciation of the question are
that the assessee sold a part of its unit as a going concern. In
the process the transferee took over the undertaking with the
management and employees. The assessee had created and
subsequently modified at two different stages, an ESOP
(Employees Stock Option Plan) Trust Fund. Apparently, the
transferee expressed its inclination to continue the fund and
insisted that as a pre-condition for the transfer, the assessee
ought to fund it to the extent of the value of the shares that were
to be allotted to the employees. According to the revenue, this
expenditure was not integrally connected with the transfer and
therefore not adjustable from the capital loss as reported in that
regard.
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 6
The findings of the ITAT on this aspect are as follows:-
"72. The Id. CIT(A) after considering the
submissions of the assessee deleted the
addition by observing as under:
"1 have gone through the observations of the
Assessing Officer as contained in the
Assessment Order, submissions of the
appellant filed during the course of appellate
proceedings and various judicial
pronouncements relied upon by the appellant
on the issue. I have also examined the
contents of Business Transfer Agreement
(BTA) entered between Nitrex Chemicals
India Ltd. and EAC, Industrial Ingredients Pte
Ltd., the Employees Transfer Agreement(ETA)
and the Employees Stock Option Plan, 2004
(ESOP,2004). It is seen that the appellant
company entered into an agreement to sell the
Trading Division of the company which was
engaged in the business of whole sales trading
in chemicals and whole sale trading business
with M/s EAC Industrial Ingredients Pte. Ltd.
on 14.10.2005 for a consideration of Rs.
22,15,00,0001- subject to the adjustment
regarding net liquid assets and movable assets
which are given in Schedule 'J' of BTA. On the
same date, the appellant signed an ETA
Agreement with M/s EAC also for employees
transfer. As per clause 2 of this agreement, it
was decided that-
"2. Pre-completion matter-
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 7
Prior to completion, the employees shall be
jointly approached by EAC and or Newco and
Nitrex for the purpose of obtaining their
acceptance to becoming employees than their
current terms and conditions but which shall
not include any stock holding and share
holding option in Nitrex India Ltd.
3. Condition precedent
It shall be a condition precedent to completion
of the transaction contemplated by the BTA
that the management staff shall have
confirmed that subject to the completion they
will accept to be employee by Newco instead
of Nitrex India Ltd.
4.4 EAC and/or Newco shall employ the
employees from the completion date on terms
and conditions of service which are no less
favorable than those which the employees
enjoyed immediately prior to the completion
date with Nitrex India without any
interruption and break in service (but
excluding employees stock share holding
option).
l. As per the terms and conditions listed
above, it was the condition precedent to the
completion transaction contemplated in the
BTA that the management staff shall have
confirmed to accept the employment in the
new company instead of the appellant
company. It was also a condition that on
acceptance of employment, the new company
shall employ the employees on terms and
conditions of service which are no less
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 8
favourable than those which the employees
were enjoying immediately prior to
completion date of business transfer without
any interruption or break up of service.
However, in the agreement it is clearly
mentioned that in the new company they will
not be given any employee stock or share
holding options. It is seen that the
management employee of the Nitrex were
having ESOP which was allowed to them by
the appellant company in 2004 as per ESOP
2004 Scheme. As per this, 5.5% of the shares
of the company were subscribed by the
management team. The company has also
entered into ESOP Scheme under which
further shares to be allotted to the employees
and an ESOP Trust was created on 20th June,
2005 as a custodian of the employees shares.
As per the BTA and ETA, certain employees of
management team were working with the
trading division of the appellant company and
in the event of their joining new company, the
employees had to divest with their share
holding in the company which was in the
custody of Trust. As per the ESOP-2004 in the
vest of separation of employees for reason
other than retirement, the employee had to
exercise the option vested on them within
three months of the date of resignation. On the
joining of the new company, the employee
would have lost the benefit of ESOP which
would have effected them financially.
However, as per the terms and conditions of
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 9
BTA, the management team has to agree to
join the new company which was a
precondition for business transfer agreement.
In such a situation, it became necessary for
the appellant company to ensure that the
management staff accepts to part with their
employment with the appellant company and
accept the employment of new company.
Accordingly, management of team submitted
acceptance letter on 09.12.2005 with the
agreement of Nitrex Chemicals Stock Option
Trust, thereby, the employees agreed to offer
the shares held by them to the trust of
NITSOP, 2004 and the consideration for such
shares was to be determined by applying a
price earnings multiple of five to the
company's profit after tax for the Financial
year 2004-05. However, the management
team requested the appellant company to
calculate the price of share by suing the profit
after tax of the company for F. Y 2005-06
adjusted for EAC warranty claim. As a result
of acceptance letter from the management
team, the appellant company was able to
transfer its trading business to M/s EAC
without any hindrance. For buy backing, the
management shares by the Trust, the
appellant company provided the money to
Trust. It is claimed by the appellant that said
money is not recoverable from the Trust.
However, the company has paid said money in
pursuance to the BTA and ETA which was a
contractual liability of the company. Without
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 10
buy back of the shares from the employees, the
business transfer of the trading division would
not have been possible. It is claimed by the
appellant that the amount spent on buy back
of shares by the Trust has been incurred
wholly and exclusively in connection with the
transfer of the capital assets as contemplated
in Section 48 of the IT Act. Hence, the same
has to be allowed as deduction while
computing the capital gain in respect of the
slump sale of trading business.
10. Section 48 of the Act to the extent it is relevant reads as
follows:-
The income chargeable under the head
"Capital gains" shall be computed, by deducting
from the full value of the consideration received or
accruing as a result of the transfer of the capital
asset the following amounts, namely :--
(i) expenditure incurred wholly and
exclusively in connection with such transfer
(ii) the cost of acquisition of the asset and
the cost of any improvement thereto:
11. As is evident, the expression "expenditure incurred
wholly and exclusively in connection with such transfers" is in
plain terms sufficient to encompass the kind of expenditure
with which this Court has to deal with in respect of determining
the issue in question. ESOP was an essential term of
employment for the assessee's workforce; an ESOP Trust Fund
had been created for this specific purpose. Upon the transfer of
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 11
the assessee's undertaking, the transferee disclaimed any
responsibility to honor the ESOP conditions. As consequence,
the funding of the ESOP became an integral part of the transfer
itself.
12. In these circumstances, the court is of the opinion that the
mode of computation of capital gains had to necessarily take
into consideration the ESOP funding through the trust fund by
the Assessee at the stage of transfer.
13. Therefore, the court holds that there is no infirmity in the
findings of the ITAT. No question of law arises.
14. Re: Question of disallowance under Section 14A: On
this aspect the revenue's grievance is confined to three years i.e.
2007-2008, 2008-2009 and 2009-2010. We notice that the
decision in the case of Maxopp Investment Ltd.Vs CIT, New
Delhi (2012) 347 ITR 172 (Del) would apply in the
circumstances. Equally for the last year i.e. year 2009-2010, the
AO's omission to record his satisfaction as to the permissibility
of the deduction, which is the pre-condition for exercise of the
power, persuaded us to hold that no question of law arise.
Re Question No. 5, regarding the treatment of foreign
exchange fluctuation- (arising only for AY 2009-2010).
15. The AO had held that loss on account of foreign
exchange fluctuation to the tune of ` 2,77,72,900/- could not
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 12
be claimed as revenue loss and rather had to be disallowed.
This was on the basis of his understanding of the authority in
CIT Vs Woodward Governor India (P) Ltd. 312 ITR 254
SC. The CIT(A) was of the opinion that the assessing officer's
reasoning was flawed. He held that Section 43A was applicable
in the circumstances of the case and AS-11 (Accounting
Standard) was relied upon to indicate that exchange fluctuation
gains or losses would have to be shown in the profit and loss
account.
16. The revenue urges that both the CIT (A) and ITAT fell
into error, it is pointed out, in support of its contention, that
foreign exchange fluctuation, particularly, the loss reported
during the relevant year, was on account of the ECB loan which
the assessee had obtained. We notice that this aspect was
considered by the ITAT which observed that the ECB
loan/advance was an old one and the treatment of the foreign
exchange fluctuation especially in case of increase for all the
previous years was taken to be on the revenue side. It is
necessarily implied that the revenue accepted that the foreign
exchange amounts amounted to income and proceeded to deal
with it as such.
17. This court is of the opinion that in view of the past
revenue treatment, the revenue's submissions by the appellant
are unmerited. No question of law arises.
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 13
In view of the above findings, the questions of law are
answered against the revenue and in favour of the assessee.
The appeal is consequently dismissed as unmerited.
S. RAVINDRA BHAT, J
DEEPA SHARMA, J
AUGUST 23, 2016
sapna
ITA 247/2016, ITA No. 248/2016, ITA No. 249/2016, ITA No. 318/2016, ITA No. 319/2016 Page 14
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