By TIOL News Service

MUMBAI, MAR 19, 2019: THE ISSUE BEFORE THE DIVISION BENCH IS - Whether mere reference of term 'agency' in an agreement, by itself would not be conclusive of relationship between the parties and hence Section 28(ii)(c) would not apply automatically to compensation received in case of termination of agreement. YES IS THE VERDICT.

Facts of the case:

The assessee company had entered into an agreement with US based company Sealand Service Inc., during the year under consideration. Under such agreement, the assessee was to solicit business on behalf of the said Sealand Service Inc. After some disputes between the parties, this contract was terminated pursuant to which, the assessee received a compensation of Rs.2.25 crores during the period relevant year in question. The assessee claimed that the receipt was capital in nature and therefore not assessable to tax. The AO however rejected such contention and held that it would be chargeable to tax in terms of section 28(ii)(c).

On appeal, the CIT(A) held that there was no principal agent relationship between the parties and the contract was on principal to principal basis and therefore section 28(ii)(c) would not apply. On further appeal, the Tribunal confirmed the view of the CIT(A), interalia holding that the entire source of income was terminated by virtue of the said agreement and that in view of the fact that there was no principal to agent relationship, section 28(ii)(c) would not apply.

High Court held:

++ it is not disputed that upon termination of the contract, the assessee's entire business of soliciting freight on behalf of the US based company came to be terminated. It may be that assessee had, other business. Insofar as the question of taxing the receipts arising out of the contract terminating the very source of the business, the same would not be relevant. The real question is, was the relationship between the assessee and the US based company one in the nature of the agency. Section 28(ii)(c) makes any compensation or other payment due, the receipt of a person holding an agency in connection with the termination of the agency or the modification of the terms and conditions relating thereto, chargeable as profits and gains of business and profession. The essential requirement for application of section would therefore be that there was a corelation of agency principal between the assessee and the US based company;

++ in the present case the CIT(A) and the Tribunal have concurrently held that the relationship was one of principal to principal and not one of agency. The counsel for Revenue however submitted that the agreement itself described the relationship between the parties as one of the agency. Hence, any such reference or the expression in the agreement, by itself would not be conclusive or determinative of relationship between the parties. The true character of the relationship from the agreement would have to be gathered from reading the document as a whole. In such circumstances, there is no error in view of the Tribunal.

(See 2019-TIOL-643-HC-MUM-IT)