Tax appeal by an assessee claiming Rs.2.75 crores received under a share sale agreement was non-compete fee not liable to tax for AY 2002-03. The High Court held the amount was consideration for loss of profits and permission to exploit the airport catering licence, answering all questions in favour of the revenue.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
2025:MHC:1096
T.C.A. No. 852 of 2010
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 11.11.2024
CORAM :
THE HONOURABLE DR.JUSTICE ANITA SUMANTH and THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.A.No. 852 of 2010
M/s. Oriental Hotels Limited 37, M.G.Road, Nungambakkam Chennai – 600 034.
.. Appellant
vs
The Assistant Commissioner of Income Tax Company Circle – V, Chennai.
.. Respondent
Prayer: Appeal filed under Section 260A of the Income Tax Act, 1961 against order of the Income Tax Appellate Tribunal, Madras D Bench, dated 15.07.2009 in ITA No.417/Mds/2006 for assessment year 2002.03.
For Appellant :: Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar Padmanabhan
For Respondent :: Ms.V. Pushpa Senior Standing Counsel
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JUDGMENT (Delivered by Dr. ANITA SUMANTH.,J)
This Tax Case (Appeal) relates to assessment year (AY) 2002-03. The
appellant/assessee, Oriental Hotels Limited (OHL), is in the business of hoteliering and catering. It had entered into a Share Sale Agreement (SSA) on 01.10.2001 with Indian Hotels Company Limited (IHCL), Singapore Airport Terminal Services Limited (SATSL), Taj Air Caterers Limited
(TACL/purchaser) and Taj Madras Flight Kitchen Limited (TMFKL), the purpose of which was to enable IHCL and SATSL to form a joint venture to engage in the business of catering to airlines and to establish and operate
restaurants and lounges in airports.
‘Business’ means the following areas of activity:
(a) the business of catering to airlines at various locations in the Territory; and
(b) the business of establishing and/or operating restaurants and lounges at various airports in the Territory;
entities, i.e., SATSL and OHL, covenanted to transfer to the purchaser, i.e.,
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TACL, their shares free from all encumbrances, claims, charges and liens at
closing rate. For the said purpose, OHL was to be paid a cash of an amount of Rs.2.75 crores, which the parties refer to as non-compete fee.
conditions of the agreement, OHL agreed that it shall not perform any of the obligations created by, or arising under a Long Term Supply of Food Contract (LTSFC) that it had entered into with OHL. It also undertook to ensure that
its affiliates shall not engage in a competing business in the demarcated territory for a period of 7 years.
2.3 Subject to the terms and conditions of this Agreement, and in consideration for the payment of the OHL Non-compete Consideration, OHL hereby agrees and undertakes that it shall not, save and except as may be required to carry out, perform and discharge all obligations created by or arising under the OHL Long Term Supply Contract, and shall procure that each of its Affiliates shall not, for a period of seven (7) years from the expiry of the OHL Long Term Supply contract:
(a) directly or indirectly engage in a Competing Business anywhere in the Territory;
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(i) solicit, entice away or attempt to solicit or entice away from the Purchaser, any customer, client, representative or agent of the Business, or any employees of the Purchaser, whether or not such employee would commit a breach of contract by reason of leaving such employment; or
(ii) enter into negotiation or finalisation of a contract in relation to the Business or matters connected therewith; and
(c) divulge or disclose to any person any information (other than information available to the public or disclosed or divulged pursuant to an order of a court of competent jurisdiction) relating to the Business, the identity of its suppliers, its products, finance, contractual arrangements, business or methods.
01.10.2001, effective from that date, and has been executed between OHL as Purchaser and TMFKL as Supplier. The LTSFC states, at Clause (C) of the Recitals that the object is to enable the Purchaser to source food/meals,
beverages and other items from the Supplier on the terms contained therein.
reading thus:
3. CONSIDERATION
3.1 In consideration for the Supplier providing the Supply Items for the Term, the Purchaser shall, on the basis of invoices to be raised for this purpose in the
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manner provided in Clause 3.2, pay the Supplier the aggregate of:
(a) the Actual Cost of each of the Supply Items supplied by the Supplier to the Purchaser in the month preceding the invoice; and
(b) 28% of the Gross Margin, or such other percentage (x%) as may be agreed between the Parties from time to time in accordance with Clauso 3.3 (the "Deferred Consideration").
Provided that until the release of the Second Tranche (as defined in the subscription cum shareholders agreement dated September 25th, 2001 entered into between TACL. SATS and IHCL) shall be accrued for the benefit of the Supplier but shall not be paid till the release, of the said Second Tranche. For the avoidance of doubt, the Actual Cost referred to in Clause 3.1(a) shall be paid in accordance with Clause 3.2 from the date of this Agreement.
3.2 The invoices for the Supply Items shall be raised before the 8th (eighth) of every month for the Supply Items provided to the Purchaser in the preceding month. The Purchaser shall pay each invoice in full within 30 (thirty) days of the date of receipt thereof. Payment shall be made to the Supplier in the form of immediately available funds to a bank account designated by the Supplier or in such other manner as may be mutually agreed to by the Parties. In the event that the Purchaser fails to pay any invoice in full within the period specified herein, on or before its due date, the Purchaser shall pay interest at 9% per annum on the outstanding amount from such due date up to the date of payment in full of such outstanding amount to the Supplier. For the avoidance of any doubt, such late payment interest shall not in any way be taken into account in the calculation of the payment due to the Supplier by the Purchaser under Clause 3.1.
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3.3 The Parties shall, by mutual agreement, on the basis of the costs incurred by the Purchaser in relation to the Restaurant in accordance with the books of the Purchaser, review every 3 (three) months during the Term, and revise, as necessary, the percentage (x%) of the Gross Margin payable to the Supplier under Clause 3.1 (b).
3.4 The Supplier may upon serving reasonable notice on the Purchaser examine/audit the books of the Purchaser in relation to the Restaurant to verify the Purchaser's computation of the Gross Margin. The Purchaser shall make available such books to the Supplier for its inspection and respond to all of the Supplier’s reasonable queries and requests for clarification in relation thereto to the Supplier’s reasonable satisfaction.
the Purchaser shall procure the Supply items exclusively from the Supplier for the term of the contract or upto early termination of the contract whichever is earlier.
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Singapore Airport Terminal Services Limited SATS Inflight Catering Centre 1, 20 Airport Boulevard, Singapore Changi Airport, Singapore 819659.
October 1, 2001 Dear Sirs,
Re: Arrangements in relation to the Long Term Supply of Food Contract in relation to the Chennai Restaurant
1. Oriental Hotels Limited (OHL) is a part of the Taj group of of hotels. Taj Madras Flight Kitchen Limited ("TMFK") carries on the business of air catering in Chennai and is a joint venture company between OHL, The Indian Hotels Company Limited ("IHCL"), Singapore Airport Terminal Services Limited ("SATS') and Malaysian Airline System Berhad.
2. IHCL and SATS have agreed to transfer the Taj Group's business of airline catering in India together with the entire profits from the airport lounge restaurant operations in India to a new joint venture company, Taj Air Caterers Limited ("TACL"). It is intended that SATS and IHCL will own 49% and 51% of the equity share capital respectively. As part of the joint venture arrangements, TACL proposes to purchase the shares of OHL, IHCL and SATS in TMFK such that TMFK becomes a subsidiary of TACL. Further, OHL, as part of the agreement for the sale of its shares in TMFK to TACL ( "Share Sale Agreement" ) has agreed to give a non-competition undertaking to TACL in the areas of airline catering and operating airport restaurants and lounges in India on the terms and conditions specified in the said agreement.
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3. OHL manages a business center and operates the snack bar and restaurant at Kamraj Domestic Terminal, Chennai Airport, Chennai (the business center, snack bar and restaurant hereinafter collectively referred to as the "Chennai Restaurant" ) pursuant to an agreement entered into between OHL and Airports Authority of India dated June 15, 2001 (the " AAI License "). As part of the arrangements for the transfer of the business/ profits by the Taj group to TACL and the Share Sale Agreement and the non-compete undertaking by OHL thereunder, it is agreed between the parties that where possible or practicable, the AAI License will be novated in favour of TACL or TMFK. Pending such novation, OHL has entered into a Long Term Supply of Food Contract in relation to the Chennai Restaurant (the " Chennai Supply Agreement ") pursuant to which TMFK will supply food, beverages and other items to the Chennai Restaurant.
4. Under the Chennai Supply Agreement, TMFK shall, in consideration for the supply of the Supply Items (as defined in the Chennai Supply Agreement) be paid the Actual Cost (as defined in the Chennai Supply Agreement) of the Supply Items and 28% of the Gross Margin (as defined in the Chennai Supply Agreement), or such other percentage as may be agreed by OHL and TMFK from time to time. OHL agrees that, to comply with the principle that the net profits from the operation of the air catering business of the Taj group including the Chennai Restaurant should accrue to TACL, the net profits of thé Chennai Restaurant will be paid to and will accrue to the benefit of TMFK, and therefore to its holding company, TACL (the " Principle "). Therefore, OHL will pay to TMFK, for the food and other items supplied under the Chennai Supply Agreement, an amount equivalent to their cost of procurement and production by TMFK of such items plus x% of their Gross Margin (as defined in the Chennai Supply
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Agreement), where x% is determined such that the Principle is achieved.
5. OHL further agrees that as and when the AAI License expires or is terminated, it will not renew the AÂI License or tender for the new operating licences that may be granted for the Chennai Restaurant by the Airports Authority of India, and it will assist TAÇL or TMFK to secure the same.
6. OHL further agrees that notwithstanding anything contained in this letter or any other agreement in the Chennai Supply Agreement or elsewhere to the contrary, the Principle will continue to be maintained and payments will contmue to be made by OHL to TMFK, even if for whatever reason, TMFK does not continue to supply any or all food or other items under the Chennai Supply Agreement or where the Chennai Supply Agreement is terminated. In such a case, where appropriate, the Parlies will come to a mutual agreement to restructure their relationship to such other appropriate relationship for this purpose, and, if necessary, OHL shall enter into agreements with alternative suppliers.
7. The Chennai Supply Agreement shall be read in conjunction with this letter.
Sd/OHL Name: Zubin Dubash Designation: Director
Sd/TMFK Name: Zubin Dubash Designation: Chairman
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of that license agreement provided that the licence shall not be sub-contracted
without the written consent of the AAI. We have not been provided with a copy of that Agreement which however, finds mention in order of assessment at paragraph 5 (j) thereof despite specifically seeking the same. In any event, learned counsel for the for the Appellant confirms that there is no dispute on this factual position.
Heard.
2. The appellant will produce a copy of the agreement with Airports Authority of India (AAI). They will also produce evidence, if any, having sought novation of the contract with AAI and whether such request has been accepted. A copy of the order in the case of Chemech Laboratories will be produced.
3. List on 11.11.2024.
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accepted as being a non-compete fee, it would operate only post 2008 when
the licence itself would have expired.
m) From the above discussion, the following conclusions are made:
Commissioner of Income Tax (Appeals), further confirmed in second appeal
by the Income Tax Appellate Tribunal (Tribunal) vide order dated
15.07.2009, assailing which, the present appeal has been filed.
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have been admitted:
2. Whether on the facts and in the circumstances of the case the amount received by the assessee is chargeable to tax though the provision treating the réceipt of compensation for restraining one's business as revenue receipt has been brought only with effect from 1.4.2003 vide amendment to Section 28 by the Finance Act, 2002?
3. Whether on the facts and in the circumstances of the case, the Tribunal was right in law holding that interest income earned on deposits, loans advanced to subsidiary companies and inter corporate dividends which were in the course of and for the purpose of business should be assessed as income from 'other sources' and not under the head profits and gains of the business?
4. Whether on the facts and in the circumstances of the case, the Tribunal was right in law holding that the amount received from British Airlines towards settlement of the bills of stay of their crew should not be included in the foreign exchange receipts of the appellant for the purpose of computation of deduction u/s.80HHD?
5. Whether the appellate Tribunal was right in law in holding that the appellant is not entitled to deduction under Section 35D and hotel industry cannot be regarded as an industrial undertaking without appreciating that hotel falls within the definition of "industry"?
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6. Whether the appellate Tribunal was right in law in denying deduction under Section 35D when the same has been allowed in the initial assessment year 1995-96?
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gratis, as such a submission does not resonate with accepted commercial practice.
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to sale of the in-flight catering business, the question of attribution does not arise. Reliance by the Appellant upon the decision in Commissioner of Income Tax V. Chemech Laboratories Ltd. (T.C.(A)No.1492 of 2007 dated 23.12.2016) is thus also of no avail.
[A.S.M., J] [G.A.M., J] 11.11.2024
sl Index:Yes Neutral Citation:Yes speaking order
To
The Assistant Commissioner of Income Tax Company Circle – V, Chennai.
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Dr.ANITA SUMANTH,J. AND G.ARUL MURUGAN,J.
Sl
T.C.A.No. 852 of 2010
11.11.2024
18
3 issues framed by the court
Whether Rs.2.75 crores received under the Share Sale Agreement was taxable non-compete fee or compensation for loss of profits from the air catering business.
Whether interest income, inter-corporate dividends and British Airlines settlement receipts were assessable as business income and eligible for deduction u/s 80HHD.
Whether the assessee was entitled to deduction under Section 35D.
Colour shows how this judgement treated each authority
Chemplant Engineers (P) Ltd. V. Commissioner of Income-taxDistinguished¶24
(1998) 234 ITR 23
Commissioner of Income Tax V. Chemech Laboratories Ltd.Distinguished¶25
T.C.(A)No.1492 of 2007 dated 23.12.2016
2 provisions across 1 enactments
M/s. Oriental Hotels Limited
The Assistant Commissioner of Income Tax Company Circle - V, Chennai
Anita Sumanth
G. Arul Murugan
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
