COMNR.OF I.TAX vs. SRIKANTA MISHRA

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD MONDAY,THE EIGHTEENTH DAY OF NOVEMBER TWO THOUSAND AND TWENTY FOUR PRESENT THE HON'BLE THE CHIEF JUSTICE ALOK ARADHE THE HON'BLE SRI JUSTICE J. SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL NO: 138 OF 2OO7 lncome tax Tribunal Appeal under Section 260-A of the lncorne tax Act, 1961, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench B, Hyderabad dated 31-03-2006 in ITA No. 1163 I Hydl 2004 for Assessment Year 2OOO-2O01 preferred against the order of the Commissioner of lncome Tax (Appeals) lV , Hyderabad daled 21-10-2004 in Appeal No. 127 /ACIT-3 (1yClT (A)- lV/04-05 preferred against the order of the Asst. Commissioner of lncome Tax 3 (1) Hyderabad dated 31-03-2004 in PAN/GIR No. AABCS6982Q Between: The Commissio r of lncome Tax-lll, Hyderabad ...APPELLANT M/s. Sanofi Hea Floor, Plot No Serilingampally Amended Vide ClO. daled 13-12-2O23 in l.A.No. 1 of 2023. Counsel for the Appellant: SRl. J. V. PRASAD (Sr. SC FOR INCOME TAX) Counsel for the Respondent: SRI ROHAN ALOOR , REPRESENTING SRI CH.PUSHYAM KIRAN , The Court delivered the following Judgment: lihcare lndia Private Limited, having its office at Divyasree Trinity, Bth . 5, Hitech City Layout, Sy. No. 6a(Part), Madhapur Village' Mandal, Ranga Fieddy-District,'Hyderabad. - RESfuNDENT

THE HON'BLE THE CHIEF JUSTTCE ALOK ARADHE THE HON'BLE SRI JUSTICE J.SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL No.138 of2OO7 JUDGMENT; (Per the Hon'ble the Chief Justice Alok Aradhe) Mr. J.V.Prasad, learned Senior Standing Counsel lor Income Tax Department for the appellant. Mr. Rohan Aloor, learned counsel representing Mr. Ch.Push),arn Kiran, learned counsel for the respondent. 2. This appeal under Section 260A of the Income Tax Act, 196 1 (hereinafter referred to as .the Act,) has been preferred by the Revenue. The subject matter of the appeal pertains to assessment year 2OOO_O1. The appeal was admitted on following substantial question of law: "Whether the finding of the Income Tax Appeilate Tribunal that the amount of Rs.6 crores received by the Assessee under al Agreement with pFIZER Company is a capital receipt not liable to tax as the same ./

rS not a revenu not erroneous i the relevalt fact Officer and Authorities?,, e receipt exigible to tax, is n Iaw for non_considering s decided by the Assessing confirmed by the Appellate 3. The factual background in which the aforesaid substantial question of law arises for our consideration need mention. 4. The assessee is engaged in the business of manufacture and sa-le of Hepatitis_B Vaccine under the trade name ..Sharrvac_8,,. The assessee is equipped with in-house Research and Development team and claims to be the first company in India to deveiop the Hepatitis-B Vaccine. The assesr co-marketin "o.";: :;::_::;;. ffi ,; "*; co-marketing agreement, the assessee has agreed to manufacture the Vaccine in buik quantities for pFIZER Limited and supply the same to it. The said Vaccine was to be promoted, marketed and sold by the PFIZER Limited. The assessee under the co-marketing agreement received a sum of Rs.6 crores. aa

receipt. It was therefore herd that the assessee has received the aforesaid amount by way of a capital receipt. Hence, this appeal. 7 . l,earned Senior Standing Counsel for the Revenue has taken various clauses of the co_marketing agreement and has submitted that none of the clauses of the co-marketing agreement affect the trading rights of the assessee. It is further submitted that under the aforesaid agreement, no capital asset has been transferred in favour of PFIZER Limited and there is no sale of the brand under the co-marketing agreement but oniy a sale of vaccines. It is contended that the said agreement neither alfects the trading structure of the assessee in any manner nor the assessee is deprived of its source of .income. It is pointed out that under the co-marketing agreement, the assessee is required to supply the vaccine in bulk quantity to pFIZER Limited and agreement has been entered into in usual course of business. It is also urged that the assessee is at liberty to carry on the trade. It is contended that the Tribunal erred in law in reversing the well-reasoned orders

passed by the Assessing Officer as well asi the Commissioner of Income Tax (Appeals). In support of his submission, reliarce has been placed on the decisions in Gillanders Arbuthnot and Company Limited vs. The Commissioner of Income-Tax, Calcuttar, Commissioner of Income-Tax, Punjab, Haryana, Jammu & Kashmir and Himachal Pradesh vs. prabhu Dayal2, patiala Biscuit Manufacturers private Limited vs. Commissioner of Income-Tax, punjaba, Ansal properties and Industries Ltd. vs. Commissioner of Income_Taxa, Commissioner of Income-Tax vs. Dr. R. L. Bhargavas, Gujco Carriers vs. Commissioner of Income_Taxo. and Commissioner of Income-Tax vs. Manoranjan pictures Corporation (Priavate) LimitedT. 8. On the other hand, learned counsel for the assessee has submitted that the assessee has receil,.ed a sum of Rs.6 crores for transfer of technical know_how and r AIR 1965 SC 452 2 AIR 7972 SC 386 3 (197 L) 82 ITR 8 12 (SC) 4 (2o 12l, 347 ITR 6a7 (Delhi) s 1zoo2) 174 CTR (DEL) 50 6 (2OO2) 2s6 ITR 50 (cuJ) 7 ILR 1998 DELHI 197

for giving up the rights in any new vaccine which may be developed by it in relation to Hepatitis-B. It is also pointed out that under the co-marketing agreement, the assessee has surre4dered its knowledge and technical know_how, which is a capital asset. It is therefore contended that any compensation received in lieu of such surrender is a capital receipt. It is contended that since the assessee has entered into a non-compete agreement, the same results in loss of source of income to the assessee, which has an adverse impact on the brand ald market share on account of co-marketing agreement. It is pointed out that the consideration is separately defined in the agreement for purchase of vaccine i.e., stock in trade and tralsfer of certain rights in receipt of covenants. Therefore, the amount received under Clause 7 'of the co-marketing agreement cannot be treated as revenue receipt. In support of aforesaid submission, reliance has been placed on the decisions in Oberoi Hotel Private Limited vs. The Commissioner of Incomq Tai8, Commissioner of Income Tax, Punjab, Haryana, Jammu & Kashmir and 8 ArR (1999) SC 1110

Himachal Pradesh vs. prabhu Dayal (supra), Additional Commissioner of Income Tax vs. K.p. Karanths, V.C. Nannapaneni vs, Commissioner of Income Tax, Hyderabad-2ro and Shiv Raj Gupta vs. Commissioner of Income Tax, Delhi-Ivlr. We have considered the riva_l submissions made on both sides. 10. The solitary issue which arises for consider.ation in this appeal is whether the payment of the amount made to the assessee under the agreement is a capital recerpt or a revenue receipt. It is well settled that contract c,r an agreement betu,een the parties must be construed having regard to the intention of the parties and such an intention has to be gathered from the Ianguage empioyed in the :greement. It is equally well settled proposition that an agreement has to be read as a whole. The Supreme C:ourt in Kettlewell Bullen and Company Limited vs. , (1983) 139 rTR 479 (AP) 10 (2018) 407 rTR soS (AP) tt (2o2r) 11 SCC 58

Commissioner of Income Taxr2 has laid down the test to distinguish the capital receipt from the revenue receipt. It has been held that where payment is made under a covenant to compensate a person which does not affect his trading structure or his business or deprive him of his source of income, such a covenant being a normal incident of business, which leaves him free to carry on his trade shall be treated as revenue receipt. However, if the covenant impairs the trading structure of the assessee or results in loss of income to the source of income of the assessee, the payment made under such a covenant shall be treated as capital receipt. 11. The issue whether an amount received by the assessee on the condition not to _carry on a competitive business was in the nature of capital receipt was considered by the Supreme court in Gillanders Arbuthnot and Company Limited (supra). It was held that the compensation received by the assesse€ for loss of agency was revenue receipt, whc\reas compensation received for " ltss+153 fiR z6t

/^l restraining from carrying on the competitive business was capital receipt. 12. The principles laid down in Kettlewell Bullen and Company Limited (supra) were referred to with approval in Prabhu Dayal (supra). 13. In Guffic Chem private Limited (supra), the Supreme Court reiterated the principles laid do.,vn in Gillanders Arbuthnot and Company Limited (supra) and held that in case an amount is received under a negative covenant by the assessee, it is in the nature of a c;rpital receipt. 14. A three-Judge Bench of the Supreme Cotrrt in Shiv Raj Gupta vs, Commissioner of Income Tax, Delhi_ fVls followed the decision in Guflic Chem private Limited (supra). 15. The nature and character of a receipt whether the same is a capital receipt or a revenue receipt has 1:o be ascertained in the facts ald circumstances of the r:ase. 'r lzot t; 11 scc s8

:: l0:: Therefore, it is necessary for us to advert to the relevant clauses of the co-marketing agreement, which are extracted below for the facility of reference: "2.1 Appointment: SHANTHA hereby appoints Pfizer as the Exclusivc Co-marketer for the product in the Territory. 7. Payment for Appointment, Options and other Rights: 7.1 Instalments: In consideration of SHANTHA's granting the right to compete by appointment of PFIZER as the Exclusive Co-marketer under Section 2.1 and the options gralted in Section 17.1 and the exclusive negotiation rights and rights of first refusal gralted in Section 17.2, 9FIZE,R each of the following payments to SHANTHA, agrees to make unless this Agreement is terminated ald the effective date of termination precedes the due date of pa5rment. (a) 20 miltion rupees due and payable on the execution and delivery of this agreement; (b) 20 million rupees, due aird payable on t}te later of (i) the date which is two months after the execution of this Agreement arld (ii) the date on which SHANTHA obtains written confirmalion of a manufacturing license au thorizing it to manufacture the PFIZER Brald for sale under pfizer,s Trademark; ard (c) 2O million rupees, due and payable on ttre date which is two months after th€ later of the dates referred to in Section 7. I (b). \ \

::ll:: 7.2 Payment procedure: Each such payment shali be made in accordance with Section 9.3. 8. Prices for the Product: 8.1 Prices of Commercial Product: Subjec:t to the other provisions of this Section 8 and the provisions of Section 13, the prices to be paid by PFIZER for the PFIZER Brand purchased for commercial sa-Ie shall be those listed in Schedule Ei. Such prices do not include the costs of shipment:, transit insurance or sa.les tax, which shall be borne b-y PFIZER 8.2, Supply of Bonus Goods: If during arr.l period SHANTHA supplies units of the SHANTHI\ Brand as bonus goods free of charge to its customers or as physicians samples, SHANTHA shall suppl.r PFIZER free of charge with quantity ol the same unitr; of the PFIZER Brand as will permit PFIZER ro distribute bonus goods free ol charge to its customer:i or as physicials samples (as the case may be) in thr: same proportion as SHANTHA for the same period o[ time. 17. Rights to new products within the territory: 17.1.Option for new Hepatitis-B products in the territory: If at any time during the term of this Agreement, SHANTHA develops, manulactures and / ot acquires the right to market any new Hepatitis-B vaccine or any vaccine that contains a combination with another Hepatitis-B PRIZER shall have the

.:12.: exclusive option to become the Exclusive Co_ marketeer in the Territory for the vaccine. (a) keep PFIZER reasonably informed of SHANTHA,s progress in deveioping any such vaccine, {b) give pFIZER access to all registrations and technical information relating to the vaccine, and (c) hle an application for a separate manufacturing license for a brand of tl e vaccine that could be co-marketed by pFIZER, in addition to and simultareously with the application for a malufacturing license hted by SHANTHA for its own brald. PFIZER may exercise the option for any such vaccine at any time within six months after SHANTHA obtains the manufacturing license for the vaccine. If PFIZER exercises its option for any such vaccine, unless the parties agree otherwise, the terms of this Agreement (as supplemented by an agreement on the prices at which SHANTHA supplies the vaccine to PFIZER) shall apply to the new vaccine except that no paJments sha-ll be required under Section 7 other than those already provided for and paid for by PFIZER. 17.2 Rights to other new products in the territory: If at arry time during the term of this Agreement, SHANTHA develops, manufacrures arrd/or acquires the right to market zrny n€w product other than those to whom Section 17.1 applies, the following provision shall apply: (a) SHANTHA will keep PFIZER reasonably SHANTHA's progress in developing aly such product, informed of

:: l3:: (b) SHANTHA will give PFIZER access to all registrations and technical information relaLing to the product. (.) UnLiI the end of the six-month period beginning on the date SHANTHA obtains ttre malufacturing license for the product, SHANTHA will negotiate exclusively with PFIZER concerning commercialization of the product, and will not negotrate with any third parties concerning the product or offer any rights to the product to third parties. (d) If the parties have not entered into an agreement appointing PFIZER the Exclusive Co- marketer (or some other mutually acceptable agreement) for the product by the end of the six month period referred to in Clause (c), PFIZER shall have a right of first refusal to become the Exclusive Co-marketer (or acquire such other rights as SHANTHA offers a third party) for the new product. As a consequence, SHANTHA shall not grant to a third party the right to promote, market, distribute or sell the new product in the Territory without hrst offering to grant such rights to PRIZER on terms and conditions no less favourable than those offered to the third party. Within one month following receipt of SHANTHA's offer, PFIZER may accept the offer. If PFIZER accepts the offer, the two parties will finalise, execute ald exchange the necessar;r documents as soon as possible ald in any event within two months after the date of PFIZER's acceptance.,,

(ii) In case assessee invents, develops, manufactures or acquire the right to market any new Hepatitis vaccine or any combination of vaccines, the PFIZER shall have the option of becoming the exclusive co_ marketer of the future product.

(iii) The assessee's right to grant any right to promote, market, distribute or seil new product to a third party is taken away. (i") Under the agreement, if the assessee develops or manufacturers any new product, the pFIZER by virtue of payment made under the agreement, acquires certain rights in such products which includes exclusive co- marketer right as well as right of first refusal. lvl Af the end of the agreement, i.e., after fifteen years, PFIZER shall have the right to manufacture the

;: 15:: product or a competitive product or source the prod.uct or competitive product from a third party. (vi) Clauses 1.74, 2.2, 3.2, 13.2, 17.l anct t7.2 contain restrictive covenants. (vii) The amount under the agreement has nol been paid by PFIZER to assessee for purchase of stock in tieu of certain commercial rights. (viii) The patents and trademark which have not been obtained by the assessee for the vaccine have been given up for a consideration. (ix) Thus, rights in capital asset of the ass;essee have been rehnquished by entering into the agreement which is a restrictive covenant. (x) The assessee has given up the riglrt to appointment exclusively to co-marketer for all {uture products including combination of vaccine or any other vaccine or any other product. (xi) The assessee is also required to share all technical information, registration, progress of development etc., of new products with the PFIZER.

::17 ii Commissioner of Income Tax, Bangalore vs. Softbrands India Private Limitedrs). 19. Therefore, the substantial question of law framed by this Court is alswered in the negative and in favour of the assessee.

In the result, the appeal fails and is accordingly dismissed. Miscellaneous petitions, if any, shall stand dismissed //TRUE COPYII 'o'.BrEtYfEFts?HIA t)' SECTION OFFICER To KT) 1. The rncome TaxAppeilate Tribunar, Hyderabad Bench B, Hyderabad 2. The Commissioner of lncome Tax (Appeals) lV , Hyderabad 3. The Asst. Commissione 4 one cc to sRr , " rJ:H":J"r'."::X]#ff*"' 5. one cc to sRr cH. pusHyAM KTRAN, oor"*,"tt"'.1; Advocare lopuc] 6. Two CD Copies kul/gh 's 120t8; +06 ITR st:

HIGH COURT DATEO:1811112024 ORDER lTTA.No.138 ot 20Q7 DISMISSING TFIE ITTA ? 76 urrl ml II t l I ;l IHE s14 ( \ii.".",. -_\:__ bty \P\ L I. oU