The main legal point established in the judgment is that the amount received by the Assessee upon termination of the Joint-Venture Agreement was a capital receipt but could not be brought to capital gains tax due to the absence of a provision for determining the cost of acquisition of the intangible assets at the relevant time.

S. Muralidhar, J.

1. This is an appeal by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’) against the impugned order dated 3rd October 2002 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 1280/Del/2002 for the Assessment Year (‘AY’) 1998-99.

Question of law

2. While admitting this appeal on 1st February 2006 the Court framed the following question of law for determination:

“Whether the ITAT was correct in holding that receipt of Rs. 6080.95 lakhs by the Assessee as compensation on termination of joint-venture agreement was not taxable as income under the Head ‘Capital Gains’?

Background Facts

3. The facts leading to the filing of the present appeal are that the Assessee, HCL Infosystems Limited (‘HIL’), which was initially incorporated as HCL Limited under the Companies Act, 1956 on 17th April 1986, was engaged in the manufacture, distribution and sale of computers and services in India. At that stage most of the computer products being manufactured by it were designed in-house.

4. Hewlett Packard Inc (HP), a company incorporated in the United States of America (USA), is engaged in the design, engineering, manufacture, assembly and sale of certain types of computers, along with their components and peripherals. It has substantial experience, expertise and reputation in its area of operations. Hewlett-Packard India Pvt. Ltd. (‘HPI’) is the subsidiary of HP in India and is engaged in the manufacture of computers in India under licences from HP.

The JVA

5. On 2nd April 1991 HCL Limited, HP, HPI and a majority of its shareholders which included, Mr. Shiv Nadar, Ms. Kiran Nadar, Roshini Nadar, S.S. Nadar, Shiv Nadar Investments Pvt Ltd. and certain other individuals, viz., Ajai Chowdhry, D.S. Puri, Arjun Malhotra, Y.C. Vaidya and Subhash Arora and the companies and individuals named in Exhibit ‘A’ attached to the Agreement (hereinafter referred to collectively as ‘the Control Group’) entered into a ‘Joint Venture Agreement (‘JVA). The agreement was described as 'An Agreement Regarding HCL HEWLETT-PACKARD LTD’. This JVA was further amended on 27th May 1991. In terms of the JVA, the parties agreed to combine their respective computer manufacturing, marketing, servicing and sales activities in India of both HCL Limited (subsequently renamed as HIL, the Assessee) and HPI. 26% equity in the JVA was held by HP, through its wholly-owned subsidiary, Hewlett-Packard Delaware Capital Inc. (‘HPDC’). HIL was permitted to use the name ‘Hewlett Packard’ under the JVA. The joint venture company was accordingly renamed as HCL Hewlett-Packard Ltd (‘HCL HP Ltd.’)

6. The basic idea behind the JVA was indicated in the preamble to the JVA. It was that "HCL had been and continues to be recipient of workstation computer technology from HP pursuant to an agreement entered into with Apollo Computers Domain GMBH, a subsidiary of Apollo Computer Inc. (Apollo) which was subsequently assumed by HP when it acquired Apollo." Further, HCL was, pursuant to a certain Representation Agreement dated 24th October 1990, the exclusive representative of HP’s computer products in India. The idea was that instead of both HCL and HPI separately representing HP's interests, it was decided to combine their respective activities into one operation to be conducted by a company in India owned jointly by HP and the shareholders of HCL.

7. Para 14.3 of the JVA dated 2nd April 1991 contained a ‘non-compete clause’. The parties to the JVA agreed “not to enter, either directly or indirectly, into any business in India which would be in competition with” HCL HP Ltd. For purposes of para 14.3, the manufacture, marketing, sale or support of laptop computers by HCL or its successor in India “shall not be considered a breach of this provision so long as such activities occur prior to any similar activities undertaken by the company.” In terms of the JVA, the following rights were available to HCL HP Ltd:

(a) the right to use the name HP;

(b) the license to