2015-VIL-562-KAR-DT

KARNATAKA HIGH COURT

Income tax Appeal No. 358/2009

Date: 18.12.2015

THE COMMISSIONER OF INCOME-TAX, THE DEPUTY COMMISSIONER OF INCOME-TAX

Vs

M/s ASSOCIATED ELECTRONICS AND ELECTRICAL INDUSTRIES (BANGALORE) PVT LTD

For the Appellant : Sri K V Aravind, Adv
For the Respondent : Sri A Shankar, Adv. and M Lava, Adv

BENCH

Vineet Saran And S. Sujatha, JJ.

JUDGMENT

This appeal is filed by the Revenue under section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act', for short) challenging the Order passed by the Income Tax Appellate Tribunal, Bangalore Bench [B] dated 6.2.2009 for the Assessment Year 1996-97.

2. The facts in brief are that the Assessee was carrying on the business of manufacture and marketing of electrical appliances and the search was conducted in the premises of the Managing Director of the Company. During the search and survey proceedings, it was noticed that Rs. 3,99,75,400/- had been paid by M/s. Sharp Corporation, Japan to the Assessee-Company for the transfer of trademark 'SHARP' and the common law rights and goodwill accompanying it. In respect of Block Assessment 1988-89 to 1998-99, the entire amount of Rs. 3,99,75,400/- was brought to tax on substantive basis under the head 'capital gains'. The Assessing Officer brought to tax the entire amount of Rs. 3,99,75,400/- holding that under the Settlement Agreement, the registered trademark 'SHARP' along with its goodwill and all other benefits accompanying it came to be transferred in favour of M/s. Sharp Corporation, Japan. The Appellate Commissioner confirmed the additions made under the head 'capital gains' in the hands of the Assessee in Block Assessment though the same was deleted in regular assessments. On further appeal before the Tribunal by the Assessee, the Tribunal proceeded to hold that in the case of transfer of good will, the cost of acquisition attributed to 'capital gains' could be taken at Rs. 'Nil'. So far as trade mark is concerned, it is liable to tax under section 55(2)(a) of the Act with effect from 01.04.2002. It is held, what was transferred by the Assessee-Company to M/s. Sharp Corporation, Japan, was only the trademark and not the goodwill of the business. This order is impugned in this appeal raising the following substantial questions of law:

"Whether the Appellate Authorities were correct in holding that a sum of Rs. 3,99,75,400/- paid by "Sharp Corporation, Japan" to the assessee for transfer of the right to use the trade mark "SHARP" which consisted of both goodwill as well as the right to use associated with 14 items out of 21 items did not attract capital gains tax without taking into account the agreement and assignment deed in the proper prospective and consequently recorded a perverse finding by holding that the same cannot be brought to tax both in the Block Assessment as well as regular assessment?"

3. Learned Counsel Sri. K.V. Aravind, appearing for the Revenue, would contend that section 48 of the Act would contemplate mode of computation for the income chargeable under the head 'capital gains'. The same is computed by deducting from the full value of consideration:

[a] cost incurred in connection with transfer of the capital asset

[b] cost of acquisition of the asset and cost of improvement.

The meaning of 'cost of acquisition' is provided under section 55[2] of the Act. As per the said provision in relation to 'capital asset', being goodwill of a business, the cost of acquisition shall be taken to be 'Nil'.

4. The learned Counsel would vehemently contend that the Tribunal wrongly interpreting the relevant provisions of the Act, reversed the findings of the Authorities while determining the assessment of income to capital gains. It is further contended that, no doubt, sub-section [2] of section 55 of the Act was amended with effect from 1.4.2002 by inserting the words 'or a trademark or brand name associated with a business', the transaction involving transfer of goodwill is liable to tax under Section 55(2) of the Act during the relevant assessment year. The Assessee had only a limited licence to manufacture the six items as a licence holder in view of the Assignment Deed. The agreement entered into between the parties, prima facie, discloses that what is transferred by the Assessee to M/s. Sharp Corporation, is goodwill of the business. It is submitted that the entire business except the plant and machinery along with the trademark was transferred as per the Assignment Deed. By virtue of the said Assignment Deed, the Assessee is entitled to manufacture 6 products out of 21 products relating to which trademarks and goodwill were transferred for a consideration of Rs. 3,99,75,400/-.

5. Learned counsel has placed reliance on the clauses of the Deed of Assignment and the relevant clauses are excerpted hereunder:

3. The Assignee is desirous of acquiring the said trade marks along with the goodwill and the said copyrights and the Assignor has agreed to assign unto the Assignee the said trade marks together with the goodwill of the Assignor's business in the goods to which the said trade marks relate and the said copyrights.

Now this deed witnesseth as follows:

2(c) The goodwill of the business relating to the goods in respect of which the said trade marks have been used.

3(i) The Assignor will not hereinafter use the said trademarks either as a trademark or as part of its business or corporate name in any manner whatsoever or, do any other thing, as may lead to the infringement of said trademarks or passing off except under a valid licence from the Assignee nor will the Assignor hereinafter challenge the validity of the trademarks or copyrights or the title of or use by the Assignee hereto.

6. Learned Counsel places reliance on the following Judgments, to contend that goodwill of the business is also transferred along with trademark from the assessee to M/s. Sharp Corporation and as such, the income of 'capital gains' is assessable to levy of tax under the Act.

[a] 'S.C. CAMBATTA & CO., [P] LTD., v. COMMISSIONER OF INCOME TAX' [(1961) 41 ITR 500 [SC]]

[b] 'GUZDAR KAJORA COAL MINES LTD., v. COMMISSIONER OF INCOME TAX' [(1972) 85 ITR 0599]

7. Per contra, learned Counsel appearing for the Assessee - Respondent, would contend that there is a clear distinction between goodwill of a business and a trademark. What is transferred in the present case is only the trademark and not the goodwill of a business. It is contended that the Assessee is continuing its business and manufacturing the six products as a licence holder. This would be suffice to hold that the Assessee has transferred only the trademark 'SHARP' to M/s. Sharp Corporation, which is clearly placed on record by the Tribunal in its Judgment. According to the learned Counsel, profit is Sine qua non to the goodwill. Thus, he pointed out the average profit/loss of the Assessee- Company in the assessment year in question as well as the three previous years which would indicate that the Assessee-Company was under loss. The accepted cannon of law would indicate that there should be an element of profit in the goodwill of a business and the same is discernible from the Judgments of the Apex Court.

8. Learned Counsel would invite our attention to the Assessment Order, to point out that the Assessee has suffered loss of Rs. 19,25,020/-. It is also well settled that a prudent businessman would be interested in buying the running business with profit and not the business of a company under loss. Thus, the transfer made by the assessee to the Sharp Corporation is only trade mark not the good will of the business. The goodwill of a business is nothing but a reputation related to the business as a whole, whereas the trademark is associated only with the products. To emphasize on this point, learned Counsel also invites our attention to various clauses of the Settlement Agreement, the relevant clauses are excerpted hereunder:

b) AEEI has used the said trade mark SHARP in India in relation to a few products and has obtained trade mark registrations for the said mark for some products.

c) Certain disputes and differences had arisen between the parties hereto leading to a multiplicity of proceedings in various courts and tribunals in India as set out in Annexure 'A' (the 'proceedings').

2.(ii) AEEI represents and confirms to SC that Annexure B hereto is a complete list of all of its registrations of and in regard to the trade mark SHARP of copyrights and of all pending Trade Mark and copy rights applications and of trade marks similar to or resembling or in association with the mark SHARP.

(iii) ASSIGN AEEI's common law rights and goodwill relating to and in trade mark SHARP and other trade marks similar to the trade mark Sharp in favour of SC as set out in the said draft Deed of Assignment.

[iv] a) AEEI discontinues the use of the trade mark SHARP or any similar mark other than and strictly in accordance with the license agreement. The "License agreement" referred to in this Agreement is the license agreement to be signed by SC in favour of AEEI for the goods identified in Annexure "C" hereto, interalia, containing the terms provided in Articles 4,5 and 12 of this agreement The draft of the license agreement will be submitted by SC to AEEI by July 15, 1995 and will be finalized by July 30.1995.

3. PAYMENTS

a) SC agrees to remit from Japan to AEEI Rs. 35.000,000 (Rupees Thirty five Million) in an account to the designated by AEEI for the assignment of registered trademarks, pending trademark and copyright applications, common law rights and goodwill and copyrights as contemplated in Article 2(i),(ii) and (iii) and for the covenant and undertaking from AEEI to cease the use of SHARP trade mark in respect of goods under registered trademarks and all other goods (Some of which are presently being manufactured by AEEI and others are not being manufactured by AEEI for diverse business and other reasons) except in accordance with the license form SC as hereinafter provided AEII also assures SC the absolute unfettered and free use of the trade mark SHARP in India and for the purpose guarantees to extend all cooperation. 4(a) SC agrees and undertakes to grant a Non-assignable, non-transferable royaltyfree and sole license (excepting licenses granted or that may be granted to SC's wholly owned subsidiaries) to AEEI to use the trademark SHARP with the character and typeface as approved by SC, in India upon and in respect of the goods identified in Annexure "C" (hereinafter referred to as "the said goods") and manufactured by AEEI.

5.1 AEEI declares and warrants that it will take such steps and means as may be necessary or desirable to prevent confusion or deception between the goods of SC and AEEI declares and warrants that:-

(a) AEEI shall prominently display its Corporate name on "the said goods" and on cartons, packets, containers, labels, leaflets, pamphlets instruction booklets, warranty cards, advertising materials and the like of "the said goods" and such display shall appear on the same side as the SHARP trade mark wherever possible; and

b) AEEI shall clearly display on" the said goods" and on the cartons packets, containers, labels, leaflets, pamphlets, instruction booklets, warranty cards, advertising materials and the like of "the said goods" that "the said goods' have been manufactured and marketed by AEEI."

9. Thus, it is contended that the Tribunal after elaborately considering the clauses in the Settlement Agreement entered into between the parties, has rightly come to the conclusion that the 'capital gains' income is only towards the transfer of trademarks associated with the product 'SHARP' and not to the business of the assessee as a whole. The transfer of trademark is liable to tax only from 1.4.2002 and not to the relevant assessment year in question. Accordingly, he seeks for dismissal of the appeal filed by the Revenue.

10. We have heard Sri. K.V. Aravind, learned Counsel appearing for the Revenue as well as Sri. A. Shankar, learned Counsel appearing for the Assessee and perused the material on record.

11. Section 45 of the Act is the charging section for 'capital gains'. Section 45[1] of the Act reads as under:

"45. Capital Gains:

(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which the transfer took place."

12. Section 48 of the Act reads thus:

"48. Mode of Computation

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;"

13. Section 55[2] of the Act reads thus:

"55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'

(1) xxx xxx xxx

(2) For the purposes of sections 48 and 49, "cost of acquisition" -

(a) in relation to a capital asset, being goodwill of a business [or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours,-

(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and

(ii) in any other case [not being a case falling under sub-clauses(i) to (iv) of sub-section(1) of section 49, shall be taken to be nil;"

14. A reading of these provisions would make it clear that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head 'capital gains'. The income chargeable under the head 'capital gains' shall be computed as per the provisions of Section 48 of the Act. In the present case, the said computation shall be, deducting the cost of acquisition of the asset from the full value of consideration. The cost of acquisition in relation to a 'capital asset' in case of goodwill of a business, shall be taken to be 'Nil', as the question involved is relating to the transfer of goodwill of a business.

15. Section 55[2] of the Act is amended by Finance Act, 2001 inserting the words 'or a trademark or brand name associated with a business'. Thus, it is clear that the cost of acquisition in relation to a trademark or brand name associated with the business comes within the tax net subsequent to 1.4.2002. Admittedly, the said amendment is not applicable to the present case. Hence, the assessment to capital gains can be sustained only if the capital asset transferred was the 'goodwill of the business' of the company.

16. The expression 'goodwill' has been considered and explained by the Apex Court in 'S.C. CAMBATTA & CO., [P] LTD.,'s case [supra], wherein their Lordships having considered the Judgments of various Courts, have held as under:

"6. It will thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time, locality is not everything. The power to attract custom depends on one or more of the other factors as well. In the case of a theatre or restaurant, what is catered, how the service is run and what the competition is, contribute also to the goodwill."

17. The Hon'ble Apex Court in GUZDAR KAJORA COAL MINES LTD.,'s case [supra], was dealing with the case of the purchases made by the Assessee therein by Deed of Conveyance executed by the liquidators of Guzdar Kajora Colliery Co., Ltd., all the colliery lands, hereditaments and premises, mines, minerals, powers and privileges and all other hereditaments together with the machinery thereon belonging to the latter company. It is held that even if it is not expressly mentioned that goodwill has been sold, it can be shown and ascertained by evidence whether the same has been purchased or not by the Assessee.

18. In the case of R.C.COOPER vs UNION OF INDIA (AIR 1970 SC 564), the Apex Court has held that goodwill of a business is an intangible asset representing the whole advantage of reputation and connection formed with the customers together with the circumstances making the connection durable.

19. In Corpus Juris Secondum, it has been observed that "goodwill" has no existence except in connection with the continuing business.

20. In the case reported in IRC vs MULLER & CO.'S MARGARINE LTD. (1901 AC 217) Lord Machnaghten has observed thus:

"What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start….. if there is one attribute common to all cases of goodwill it is the attribute of locality.

For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and be revived again".

21. Section 37 of the Trade and Merchandise Marks Act, 1958 provides for assignability and transmissibility of registered trade marks which is as under:

"Notwithstanding anything in any other law to the contrary, a registered trade mark shall subject to the provisions of this chapter, be assignable and transmissible, whether with or without the goodwill of the business concerned and in respect either of all the goods in respect of which the trade mark is registered or of only some of those goods".

22. The meaning of the expression "goodwill" as explained in these judgments referred to above vis-à-vis the provision of Trade and Merchandise Marks Act, 1958 makes it clear that the 'trade mark' and 'goodwill' are two distinct separate concepts. Section 55(2)(b) of the Act prior to the amendment provided for the levy of tax on capital gains in relation to a capital asset, being goodwill of a business. Insertion of the words, "registered trade marks or brand name associated with the business" by the Finance Act, 2001 depicts the intention of the Legislature to levy tax in relation to capital asset, being a trade mark or brand name associated with the business, which was not exigible to tax during the relevant assessment year.

23. It can be ascertained from the terms of the settlement deed that the assessee company being a company dealing with products under the brand name "sharp" situated in Bengaluru has assigned/transferred the trade mark "sharp" to an international company, M/s Sharp Corporation, Japan for a consideration. This transaction very well fits into the latter part of Section 55(2)(a) of the Act i.e., relating to trade mark or brand name associated with the business leviable to tax with effect from 01.04.2002.

24. Goodwill of a business as considered by the Apex Court in S.C.Cambatta & Co.(supra) subsequently followed in Guzdar Kajora Coal Mines case (supra) enunciates that the goodwill of a business depends upon the variety of circumstances or a combination of them, locality, service, standing of the business, honesty of the person/persons who are engaged in competition/lack of competition, such factors contribute to the goodwill of a business. The different clauses of the settlement deed entered into between the parties, wherein the draft of the assignment deed relied on by the revenue is a part of the settlement deed enumerates that the assessee company has not lost its right to manufacture the products to which licence is granted by M/s Sharp Corporation, Japan. Thus, the business activity of the assessee is continued. The assessee company still subsists. It is engaged in the manufacturing activity of certain products thus, continuing its business. Running company with its business as a whole is not transferred to M/s. Sharp Corporation. The clauses of assignment deed relied on by the revenue refers to 'goodwill relating to trade marks' which is different from 'goodwill of a business'.

25. The locality, competency/expertise, service remains the same so far as the assessee is concerned. The reputation of the assessee company with its customers is not altered or changed. The international company M/s Sharp Corporation was interested only in the purchase of trade marks associated with the business and not the business itself as envisaged in the settlement deed.

26. We have noticed that the assessee has suffered a loss during the relevant assessment year as reflected in the assessment order and it is also submitted by the learned counsel appearing for the assessee that in the previous three assessment years also, the assessee had suffered loss. In such an event, it can be observed that the goodwill of a business of a company running under loss, may not have a potential value, profit would be sine qua non for the goodwill of a business. This factor also adds to hold that the goodwill of a business is not transferred. The goodwill of a trade mark associated with the business cannot be construed as a goodwill of a business, as already held, these are two distinct separate intangible assets, both cannot be intermixed.

27. We have perused the relevant clauses of the settlement deed entered into between the parties extracted supra, which clearly indicates, the assignment made by the assessee company to M/s Sharp Corporation, is only transfer of trademarks and the goodwill associated with the trade marks. It cannot be misconstrued to that of goodwill of a business. It is observed in the judgment of the ITAT, "it is common ground before us that the assessee did not sell its entire business undertaking to Sharp Corporation". This admitted fact itself proves that the assessee has transferred only the trade marks and not the goodwill of a business. Even assuming the goodwill related to the trade mark is transferred, it cannot be construed as the goodwill of a business. If the arguments of the revenue that the transfer of trade mark itself is goodwill of a business is accepted, then there was no necessity for the Legislature to amend Section 55(2)(a) of the Act inserting the words "trade mark" or "brand name" associated with the business by Finance Act, 2001.

28. In such view of the matter, we are of the considered opinion that the ITAT, after elaborately examining the terms of the settlement deed, has arrived at a right conclusion and the same does not warrant any interference by this Court.

29. For the foregoing reasons, we answer the substantial question of law in favour of the assessee and against the revenue. The appeal stands dismissed.

 

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