By TIOL News Service

MUMBAI, NOV 20, 2017: THE ISSUE BEFORE THE COURT IS - Whether when there was a breach of contract giving rise to a claim relating to the right of first refusal, the damages received are to be treated as revenue receipt. NO is the verdict

Facts of the case

The Assessee-company was engaged in the business of manufacturing, bottling and distribution of soft drinks and beverages under several popular brands. The Assessee had filed its return for the relevant AY. During the assessment proceeding, the AO found that the Assessee had received a sum of amount as compensation of a settlement for loss of its bottling rights with Coca Cola Company, USA (TCCC), which was claimed to be exempt from tax on account of it being a capital receipt and was declared in the accounts as a capital reserve after deducting an amount for professional fees paid. It was also noted by the AO that a reference was made to the master agreement signed with Coca Cola for transfer of intellectual property rights with regard to several brands of beverages owned by the Parle Group. In the said agreement, a draft of right of first refusal regarding bottling rights was elaborated. However, TCCC took a strategic policy decision to set up its own bottling plant at Bangalore which led to dispute between the Parle Group and TCCC. Thereafter, the dispute was settled with TCCC agreeing to pay Rs.16,05,82,500/-. The AO disallowed Rs.16,05,82,500/- on protective basis and also made an addition of Rs.42,33,833/- on account of 100% depreciation on bottles and hence, assesseed the total income at Rs.14,87,82,130/-. On Assessee's appeal, the CIT(A) held that the right of first refusal would be the date when the subsidiary company was formed for developing this new line of business or profit and therefore, the said receipt was taxable as long term capital gain. The CIT(A) also held that since, the sale related to capital assets, it was reduced from the block assets.

Aggrieved Revenue preferred an appeal before the Tribunal. The Tribunal stated that the formation of Bangalore subsidiary and their bottling rights were claerly mentioned in the master agreement. Further, the Tribunal held that the Assessee was entitled to receive compensation for breach of first refusal's rights from the TCCC. It was also noticed that there was no transfer for extinguishment of any rights between the two companies. Finally, the Tribunal dismissed the appeal and held that since the compensation received was a capital receipt and was not taxable, there was no question of capital gain.

the High Court held that,

++ all the tests that were evolved by the Supreme Court in the decisions made in the case of Kettlewell Bullen and Co. Ltd., Vazir Sultan and Sons and Shantilal (P.) Ltd. have been applied and to arrive at the correct conclusion. We do not think that the view of the Tribunal is any way erroneous or illegal. Thus, it is not vitiated by any error of law apparent on the face of the record of perversity;

++ according to the Assessee, the AO, solely relied upon the observations and findings in the assessment order dated 30th March, 2001 in the case of Aqua Bisslery Limited, wherein, the receipt was taxed under the head "long term capital gains". Once the factual basis was laid before the CIT(A) and it was found that the same was identical to the case of Parle Soft Drinks Private Limited except for the fact that in the present case, the Assessee was in the bottling business for Parle Group of Companies, there was a right of first refusal and the Assessee was to carry on the business of bottling for the Coca Cola Company. A detailed business plan was submitted. However, the Coca Cola Company, without any specific reason, rejected the business plan. Thus, there was a breach of the right of first refusal, there was after negotiation received compensation in a sum, which was shown as non-taxable capital receipt. The argument was identical that the Coca Cola Company has deprived the Assessee of all potential right and that was to set up a bottling plant for Pune territory. There was a breach of contract giving rise to a claim for damages and same was paid on account of failure to honour the commitment. That is capital in nature. That source of income, by way of setting up of a bottling plant at Pune territory was lost forever. Hence, relying upon the judgment in the case of Oberoi Hotel Pvt. Ltd., the argument that such a receipt cannot be taxed as revenue receipt or casual income, was accepted. The Tribunal, noted the arguments of the Revenue and particularly the summary of the same. Thereafter, the Tribunal dealt with the main dispute;

++ we do not see any merit in the argument of the Revenue on the point that the net compensation amount received by the Assessee from the Coca Cola company is a long term capital gain and therefore added to book profit computed u/s 115JA. The Tribunal, in dealing with this argument has held that the amount received by the Assessee is not a capital gain, but a capital receipt, which is not taxable. Hence, the ground becomes purely academic;

++ the AO allowed the depreciation on the block of assets comprising of bottles and crates of Rs 42,38,833/- and the balance was added. On these facts and findings of the AO, the Tribunal proceeded to then note the conclusions of the CIT(A) deleting the addition. Thus, the conclusions are reproduced under appeal. The Tribunal concluded that the CIT(A) was right that sale proceeds on a capital assets cannot be held to be a revenue receipt and after the sale, the block of assets have been reduced and accordingly whatever is there in the block of assets, deprecation has to be allowed in accordance with the provisions of law. Thus, the finding of fact recorded by the CIT(A) has been endorsed and confirmed by the Tribunal. We do not think that this finding of fact is perverse or vitiated by an error of law apparent on the face of the record.

(See 2017-TIOL-2438-HC-MUM-IT)