By CA Sombir Singh The Telangana High Court has held that the payment made under the agreement to the assessee was in consideration of surrendering its rights in a capital asset, namely patents and trademarks. These rights, when surrendered, resulted in the loss of a source of income for the company and, therefore, constituted a capital receipt and were not taxable.
The Revenue filed the appeal under Section 260A of the Income Tax Act, 1961 against the order of tribunal, contending that the amount received under co-marketing agreement of Rs. 6 crore was a revenue receipt arising from the normal course of business of the assessee. It argued that the co-marketing agreement did not involve the transfer of any capital asset or lead to the loss of a source of income. Instead, the payment was for the bulk supply of vaccines to Pfizer, which was a routine business activity. The Revenue relied on decision of Gillanders Arbuthnot & Co. Ltd. v. CIT, Kolkata High Court (AIR 1965 SC 452), to support its claim.
On the other hand, the assessee argued that the payment was made as compensation for surrendering its knowledge and technical know-how, which constituted a capital asset. It contended that any compensation received in lieu of such surrender is a capital receipt. Furthermore, the assessee pointed out that entering into a non-compete agreement led to a loss of a source of income and had an adverse impact on its brand and market share due to the co-marketing agreement. The consideration under the agreement was separately defined for the purchase of vaccines (stock in trade) and for the transfer of specific rights under restrictive covenants. The assessee placed reliance on Oberoi Hotel Pvt. Ltd. v. CIT, AIR (1999) SC 1110and other cases to support its position.
The court, after examining the agreement and relied on the decision of Hon’ble Supreme Court in case of Kettlewell Bullen and Co. Ltd. v. CIT [1964] 53 ITR 261, which laid down the test for distinguishing capital receipts from revenue receipts. It was held that where payment is made under a covenant to compensate a person without affecting their trading structure, business operations, or source of income, such payment constitutes a revenue receipt. However, if the covenant impairs the trading structure or results in the loss of a source of income, the payment is to be treated as a capital receipt.
Case Title: CIT-III Hyderabad v. Satiofi Healthcare India Pvt Ltd.
Date of order: 18.11.2024