2008 P T D (Trib.) 1192
[Income-tax Appellate Tribunal Pakistan]
Before Rasheed Ahmed Sheikh, Chairperson
I.T.As. Nos.4122/LB and 4123/LB of 2003, decided on 04/03/2008.
(a) Income Tax Ordinance (XXXI of 1979)---
----S.27---Capital gains---Fee for non-competition---Amount received by the assessee on account of fee for "non-competition" was found to be revenue in its nature by the Assessing Officer---Validity---Sole selling agency and exclusive distribution rights for the specified cities were terminated by the principal coupled with it not only the assessee was refrained but also his affiliates, directly or indirectly, were stopped not to carry on business of producing, distribution and selling of soft drinks in Pakistan for period of five years---Compensation was paid for agreeing to refrain from carrying on competitive business in the commodities in respect of agency terminated---Agency rights were an income yielding asset and a' capital asset and compensation received for loss of a capital asset was prima facie of the nature of a capital receipt---No evidence was on record to suggest that the assessee was acting as a sole distributor or selling agent of the products of other numerous concerns as well, or that the termination of agency in question did not affect the trading structure of assessee's business by depriving its source of income---Amount received by the assessee on account of termination of agency/franchise rights under the nomenclature of "non-competition agreement" was a `capital receipt' and it had been taxed erroneously as a `revenue receipt'---Addition made was deleted by the Appellate Tribunal.
(1964) 53 ITR 283 (SC India); (1983) 140 ITR 159 and PLD 1978 Kar. 1047 = 1978 PTD 328 ref.
(2001) 83 Tax 75 and Gillandes Arbuthnot & Co., Ltd. v. C.I.T., Calcutta 1979-ITR-Volume-Z III-283 (S.C.) of India) distinguished
1978 PTD 328 and C.I.T. Bombay v. Automobile Products of India Ltd. 1983 ITR 140 page (H.C. Bombay) rel.
(b) Income tax---
----Payment for cancellation of agency-'Capital' or `Revenue receipts'--Principles---Where as a result of cancellation of the agreement or the agency the trading structure of assessee was impaired or such cancellation resulted in loss of what may be regarded as the sources of the assessee's income, the payment made to compensate for cancellation of the agreement is normally the `capital receipt'.
(c) Income tax---
----Capital receipt---If the compensation was paid for agreeing not to compete with the principal's business, it would prima facie be a `capital receipt'.
1978 PTD 328 rel.
(d) Precedent---
----Norm of judicial discipline---If the cases of Pakistani jurisdiction are available, then support cannot be had from the cases of foreign jurisdiction because those have merely the persuasive value.
Ahmad Nauman Sh., I.T.P. for Appellant.
Nemo for Respondent.
ORDER
RASHEED AHMED SHEIKH (CHAIRPERSON).---This order is intended to-dispose of above title two appeals which are directed against the consolidated order passed by C.I.T. (A) Zone-III, Lahore, dated 1-8-2003.
2. Common grievance of the assessee-appellant is that the learned Assessing Officer was grossly erred in treating the sum received under a "non-competition agreement" to be the taxable receipts and confirmation thereof by the first appellate authority was unwarranted on the facts and in the circumstances of the case.
3. Facts in brief are that the assessee-appellant is a Director of a private limited company namely New Khan Transport Company (Pvt.) Ltd., who filed his tax return declaring salary income. However, on receipt of an information that a sum of Rs.25,00,000 was paid to the assessee by Coca Cola Beverage (Pvt.) Limited under a "non-competition agreement" executed between the assessee-appellant and the said company on 8-1-1998. Since, the amount in question was not appearing in the tax return. Therefore, the assessee was confronted as to why a sum of Rs.25,00,000 may not be taxed being the amount was received in advance for a period of five years. It was responded by the assessee appellant that since the amount in question was in the nature of capital receipts, as such, that was not declared in the Income Tax Return. However, the said amount is appearing in the reconciliation statement annexed with the return of income. To support the contention that the amount received was a capital receipt, strength was acquired from the case law in re: (1964) 53 ITR 283 (SC India), (1983) 140 ITR 159 and PLD 1978 Kar. 1047 = 1978 PTD 328. Further added that since Coca Cola Pakistan Limited had capitalized the said payment to be the "deferred cost" in its balance sheet instead of claiming as an expense of revenue in nature in its books of account and to strengthen this contention copy of balance sheet of the said company was also placed on record. Besides, the Assessing Officer who was holding jurisdiction of Coca Cola Pakistan Limited, which fell in company circle. Karachi, also confirmed this fact that the amount in question has been declared under the head "long term prepayment". So, when the payer has not claimed the payment in its books of account as a revenue expense, how come such amount can be treated to be the revenue receipts in the hand of the recipient. The reply furnished could not convince the Assessing Officer and he, after hearing to section 27 of the Income Tax Ordinance, 1979, which defines the term "capital gains" as well as after distinguishing the case law relied upon by the assessee held that the amount received by the assessee-appellant, on account of "fee for non-competition" was revenue in its nature. The explanation tendered could not convince the Assessing Officer.
4. Three reasons were advanced to distinguish the cases relied upon by the learned counsel for the assessee. Firstly, that the assessee was neither the sole felling agent nor was one of the agency holder or distributor in his individual capacity whereas in all those cases, the assessee was the sole selling agent. Secondly, by discontinuing the beverage business, the assessee's other source of income remained uninterrupted being salary income, agricultural income and meeting fee was also enjoyed by him while in the said cases the business was affected by termination of agreements. Thirdly, that the assessee's company was not the sole franchise holder but was amongst one of the other holders of the franchise rights whereas assets in such cases were sold under the free will and without any compulsion or coercion. From all this it was concluded by the Assessing Officer that neither any loss of income nor any loss of capital asset or asset of enduring nature was suffered by the assessee. Further concluded that according to the "non-competition agreement" the assessee was paid annual fee of Rs.5,00,000 as a consideration and not as a compensation. So, the sum paid to the assessee was not to compensate him for any loss of business, capital asset, asset of enduring nature or loss of any source of income, therefore, the amount so received was in the nature of revenue receipts. To strengthen his point of view, reliance was placed on a case law decided by the Tribunal in re: (2001) 83 Tax 75 which according to the Assessing Officer was squarely attracted to the facts of the case of the present assessee. In that case, according to the Assessing Officer, it was held that the amount paid under a "no competition agreement" to secure a competition free market was a revenue receipt. So, the revenue expenditure incurred by one is the revenue receipts in the hands of the other. Relevant para of that judgment was also reproduced in the assessment order. Accordingly, a sum of Rs.5,00,000 was taxed in the assessee's hand to be the receipts of revenue in nature.
5. Felt aggrieved by the order of the Assessing Officer, the appeal was filed before the first appellate authority but endorse the reasonings and findings recorded by the Assessing Officer in the assessment order in its entirety. This has compelled the assessee-appellant to come up in appeal before the Tribunal.
6. I have given anxious thought to the divergent views expressed by the two parties in appeal and have also perused the impugned orders as well as the case law and the documents furnished at the bar. There is no denying the fact that not a single or any infallible test which can be applied in order to resolve the question as to whether the amount received by the assessee-appellant as compensation for loss of agency is of the nature of capital receipts or is a taxable income. Neither the form of the transaction giving rise to the payment nor the name, which is given to it, is relevant in determining nature of the transaction. In each case the question has to be determined in the light of attendering circumstances. However, the time honoured test to determine whether the amount received was compensation for loss of capital assets or represented loss of future profit in a trading transaction is that where as a result of cancellation of the agreement or the agency the trading structure of the assessee is impaired, or such cancellation, results in loss of what may be regarded as the sources of the assessee's income, the payment made to compensate for cancellation of the agreement is normally the capital receipt. This principle and ratio is clearly laid down in the cases cited at the bar.
7. When viewed in the perspective of "non-competition agreement" executed between the parties, we find that the agency was terminated by the Coca Coal Beverage Pakistan Limited with the condition that the assessee-appellant, since have unique knowledge, experience in the business of producing, distributing and selling soft drinks in Pakistan, shall not compete with C.C.B.P.L and its affiliates, directly or indirectly for a period of five years. The term "direct or indirect competition" has been explained in the said agreement as under:---
(i) Any involvement as an agent, representative or consultant of any entity.
(ii) Beneficial or other ownership interest in any enterprise.
(iii) Possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity or enterprise, whether through the ownership of voting securities, by contract, or otherwise, and
(iv) Communicating to any entity or person the names or addresses or any other information concerning any past, present or identified prospective client or customers of the business.
Meaning thereby that the compensation paid to the assessee-appellant was for loss of sale of sole selling agency/franchise rights of the specified territory. Undoubtly, this was an asset which was yielding income and was transferred to the C.C.B.P.L. This is a settled principle that if the compensation was paid for agreeing not to compete with the principal's business, it would prima facie to be a capital receipt. This has been observed by the High Court Karachi in a case 1978 PTD 328. Actually, this is the case which forcefully applies to the facts of the instant case. Whereas, the Assessing Officer, after referring to a case of the Tribunal, held that the payment received by the assessee on account of "non-competition agreement" was a revenue receipt ignoring the case of the High Court. This judgment of the High Court is very elaborative and exhaustive reason being all the relevant case law in which it was held that such receipts were in the nature of capital have been discussed at a great length.
8. In this case the High Court has gone to the extent to hold that if there was no categoric agreement available but the consideration was paid refraining from carrying on competitive business in the commodities in respect of the terminated contract is the capital asset. Such consideration is a receipt of a capital in nature and not the revenue. This view point has the support of a case law of the Pakistani jurisdiction. It is settled norm of judicial discipline that if the cases of Pakistani jurisdiction are available, then support cannot be lent from the cases of foreign jurisdiction because those have merely the persuasive value.
9. I have also noted that the case law referred before the Assessing Officer were distinguished by him on the facts without deducing the ratio and the principle enunciated therefrom. This observation of the Assessing Officer does not have any legs to stand upon that only in the case of termination of agency, the amount received is a capital loss. Whereas in the case of C.I.T. Bombay v. Automobile Products of India Ltd., reported as 1983 ITR 140 Page (H.C. Bombay), it was observed that in the agreement between the assessee company and the PAL, there was an express provision that for the remaining period of the licence granted by the foreign company to the assessee company under the agreement, dated March, 16, 1956, the assessee company shall not engage themselves in the manufacturing, assembling or selling of automotive diesel engine or industrial engines or both of horse power. It was accordingly held that the termination of the activity was not a necessary incident of the business of the assessee and that the extinction and surrender of the industrial licence and the collaboration agreement impaired the profit making structure of the assessee. Therefore the amount of Rs.25,00,000 paid by PAL to the assessee company as compensation was a capital receipt.
10. Similarly in the case of a Pakistani jurisdiction in re: PLD 1978 Kar. 1047 = 1978 PTD 328 it was observed as under:---
(9) "The next submission of Mr. Mansoor Ahmad Khan, is that the payment of the amount of Rs.60,000 the respondent being a voluntary payment, to which the respondent had no legal right under the agreement could not be treated as a capital receipt. This submission has not impressed us. It is also not supported by case law. In Commissioner of Income Tax Bengal v. Shaw Wallace & Co. [AIR 1932 PC 138] there was no formal agreement of agency but the respondent acted as distributing agent in India of Products of two principals for several years. The agency was terminated and the principals paid sums of money to the agent voluntarily as compensation for loss of office and for cessation of the agency. The Privy Council held that the sums received by the agent were by way of voluntary solatium and were capital receipts. To the same effect is the decision in the Commissioner of Income Tax Hyderabad Deccan v. Wazir Sultan & Sons [(1959) 36 ITR 175]. In that case also there was no written agreement of agency which was terminable at will. The respondent agent was dealer in cigarettes of the principal for the Hyderabad State, but later on the territory was extended to include territory outside that State. Some years later, the parties reverted to the original arrangement confining the distributorship to the Hyderabad State only and the respondent agent was paid a sum of money by way of compensation for loss of the agency rights for the territory outside the Hyderabad State. It was held by the Supreme Court of India that it was immaterial that the agency agreement was terminable at will and that the agent had no legal right to compensation. The sum received was held to be a capital receipt and not income."
11. Further observed by the Honourable High Court at para 10 of this judgment as under:---
"That last submission of Mr. Mansoor Ahmad Khan was that the Appellate Tribunal erred in holding that the amount of Rs.60,000 was paid to the respondent as consideration for agreeing not to compete with the principal in business. Counsel submitted that there was no categorical agreement to that effect and such agreement cannot be implied. It is not disputed that if the compensation was paid for agreeing not to compete with the principal's business, it would prima facie be a capital receipt. It is true that the letter of 17th November, 1962, setting out the terms of the new arrangement did not categorically provide for compensation for refraining from competing with the principal. But, the sum of Rs.60,000 was offered to the respondent on condition that it accepted the offer to become a main dealer. The letter also provided that each main dealer was to be exclusive dealer of "Exide" batteries within his own territory. Reading the two provisions, together, there is no difficulty in holding that by agreeing to become one of the main and exclusive dealers, the respondent had agreed not to compete with the business of the principal. In the Gillanders Arbuthnot case, 1979 ITR Volume III 283 (S.C. of India), it has been held that compensation paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated is, prima facie, of the nature of a capital asset."
12. I have also come across a case law in re:- Gillandess Arbuthnot & Co., Ltd., v. C.I.T., Calcutta cited as 1979-ITR-Volume-Z III-283 (S.C. of India) in which different view viz., the above catagoric observation was adopted. Nevertheless, this case is distinguishable because in this case, there was a finding of fact that a quite number of agencies were held by that company, out of which one was terminated. In this backdrop it was held that acquisition of agencies was in the normal course of business and termination of individual agency was a normal incident not affecting or impairing the trading structure of the appellant. In such circumstances it was held that the amount received by the appellant in that case for termination of the agency did not, represent the price paid for loss of a 'capital asset and, therefore, it was in the nature of income.
13. But on the facts found in the present case are that the sole selling agency and exclusive distribution rights for the specified cities were terminated by the principal coupled with it not only the assessee was refrained but also his affiliates, directly or indirectly, were stopped not to carry on business of producing, distribution and selling of soft drinks in Pakistan for a period of five years. Evidently, compensation was paid for agreeing to refrain from carrying on competitive business in the commodities in respect of the agency terminated. So, agency rights was an income yielding asset and a capital asset and compensation received for loss of a capital asset is prima facie of the nature of a capital receipt.
13-A. There was also no evidence on record to suggest that the assessee was acting as a sole distributor or selling agent of the products of other numerous concerns as well, or that the termination of the agency in question did not affect the trading structure of the assessee's business or deprive of it of its source of income. Thus, in view of the foregoing discussion as well as the ratio and the principle laid down in the cited case, we have come to an inescapable conclusion in holding that the amount received by the assessee-appellant on account of termination of agency/franchise rights under the nomenclature of "non-competition agreement" amounting to Rs.25,00,000 was a capital receipt and has been taxed erroneously as a revenue receipt. Accordingly, the impugned addition of Rs.5,00,000 made in each assessment year under appeal is hereby deleted.
14. In the result, both the appeals of the assessee-appellant succeed to the extent indicated above.
C.M.A./38/Tax(Trib.)Order accordingly.