ACIT-2(2)(1), MUMBAI, AAYKAR BHAWAN MUMBAI vs. LYKA LABS LTD., GROUND FLOOR, SPENCER BLDG.

The solitary grounds of appeal raised by the assessee is pertaining to the receipt of non compete fees of Rs.10 crores which has been treated as ‘capital receipt’ by the ld. CIT(A) as against the view taken by the ld. Assessing Officer ('A.O.' for short) to be a ‘revenue receipt’.

The assessee was in appeal before the first appellate authority, challenging the additions made by the ld. A.O. and the ld. CIT(A) vide order dated 30.03.2004 had partly allowed the assessee’s appeal by deleting the disallowance made u/s. 14A of the Act and also towards the interest disallowance and thereby computing the total income at Rs. Nil after allowing set off of brought forward business loss and unabsorbed depreciation at Rs.11,80,51,110/- and book profit u/s. 115JB of the Act at Rs.3,01,69,094/-, thereby confirming the addition on receipt for non compete, scientific and technical information amounting to Rs.17,40,00,000/-.

The assessee and the Revenue were in appeal before the Tribunal, challenging the order of the ld. CIT(A) where the Tribunal vide order dated 05.11.2014 set aside the issue of receipt on non compete fee amounting to Rs.10 crores and upholding the addition of Rs.7.40 crores on transfer of scientific knowhow and technical information in ITA Nos.

The first appellate authority in an appeal filed by the assessee deleted the impugned addition by holding the same to be a ‘capital receipt’ and the such receipt was vide Finance Act, 2002 w.e.f. 01.04.2003.

Aggrieved the Revenue is in appeal before us, challenging the order of the ld. CIT(A).

The learned Departmental Representative (ld. DR for short) for the Revenue contended that the assessee has not given up its source of income by way of the agreement signed by the assessee with LHHCL and has not proved that it had given up marketing and sale of other products other than those mentioned in the agreement. The ld. DR further contended that the non compete fee of Rs.10 crores was a ‘revenue receipt’ liable to be taxed in the hands of the assessee. The ld. DR relied on the order of the ld. A.O.

The learned Authorised Representative (ld. AR for short) for the assessee, on the other hand, contended that the non compete fee was liable to be taxed as ‘revenue receipt’ only after A.Y. 2003-04 as per the Finance Act, 2002 and was not liable to tax prior to A.Y. 2003-04. The ld. AR further stated that for A.Y. 1998-99 and 2001-02, the coordinate bench held the non compete fee to be a ‘capital receipt’ not taxable in the hands of the assessee. The ld. AR relied on a catena of decisions in support of the said proposition.

We have heard the rival submissions and perused the materials available on record. It is observed that the assessee has received a total sum of Rs.49,80,00,000/- from as under:

It is observed that the non compete fees of Rs.10 crores was claimed as ‘exempt income’ by the assessee vide agreement dated 12.03.2002 as per which the assessee company had entered into an agreement with LHHCL that the assessee will not engage in marketing, distribution and sale of 20 registered and 36 unregistered Allopathic Pharmaceutical Formulations (hereinafter referred to as ‘products’) till the time the assessee holds 26% of the total issued and paid up capital of LHHCL as per clause (1) of the said agreement. The ld. A.O. observed that the assessee was holding 51% in LHHCL and that the non compete agreement was merely a self imposed restriction which is not absolute and where the assessee can bring down its holding in LHHCL any time to less than 26% and compete with LHHCL in the business of marketing, distribution and sale of products. The ld. A.O. further held that the assessee was not confined to carrying on business of marketing, distribution and sale of other products which are not mentioned in the agreement, thereby holding that the source of income of the assessee is not in anyway affected by the said agreement. The ld. A.O. relied on the proposition laid down by the Hon'ble Apex Court in the case of CIT vs. Rai Bahadur Jairam Valji and others [1959] 35 ITR 148 (SC) along with other catena of decisions on this proposition and held the said receipt to be a ‘revenue receipt.

In the above factual matrix of the case, it is pertinent to point out that vide an agreement dated 12.03.2002 the assessee has entered into a negative covenant between LHHCL for not competing with LHHCL in the marketing, distribution and selling activities of certain formulations for the trade mark which has been registered or used by the assessee, which also includes brand/trademark extensions, product packet sizes for which the assessee has received a consideration of Rs.10 crores upon execution of the said agreement. This includes a list of 20 products for which the assessee is the registered trade mark owner and around 38 products for which the trademarks are pending for registration with the assessee. It is observed that the lower authorities have not disputed the genuinety of this agreement neither in the assessment order nor during the first appellate proceeding. Be that as it may, the Hon'ble Apex Court in the case of Shivraj Gupta vs. CIT (in Civil Appeal No. 12044 of 2016) has held that the Revenue has no authority to question the commercial expediency of the tax payer and cannot enter into the thicket of reasonableness of the amount paid. The assessee as well as the ld. CIT(A) have relied on the decision of Hon'ble Apex Court in the case of Guffic Chem (P.) Ltd. (supra) which has categorically held that the amendment to section 28(va) of the Finance a retrospective effect for taxing the non compete fee received prior to the said period. The Hon'ble Apex Court has held that section 28(va) of the Act is amendatory in nature and not clarificatory thereby negating the retrospective effect of the said provision. The said decision has also distinguished the compensation received for termination/loss of agency and a loss of source of business as per a negative covenant where the former would be a ‘revenue receipt’ and the latter a ‘capital receipt’ in the hands of the assessee. There is no iota of doubt that the agreement entered into by the assessee and LHHCL was a negative covenant restraining the assessee from carrying out the activities of marketing, distribution and selling of certain formulations which was exclusive to the assessee and not to public at large, which nevertheless is a loss of source of business to the assessee though not wholly but to the extent of the terms of the agreement. This by no stretch of imagination could be loss of agency where there is involvement of principal and agent.

We, therefore, find no infirmity in the order of the ld. CIT(A) in holding the non compete fee to be in the nature of a ‘capital receipt’ for the year under consideration. The that the assessee would be liable to tax on non compete fee as ‘revenue receipt’ from A.Y. 2004 – 2005 as per section 28(va) of the Act. On the above observation, we hold that the appeal filed by the Revenue warrants no merit and is to be dismissed.

In the result, the appeal filed by the Revenue is dismissed.