2006 (3) TMI 532 - AT - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 6 crores received by the appellant-company from PFIZER Limited is a capital receipt or a revenue receipt.
2. Whether the co-marketing agreement between the appellant and PFIZER Ltd. constitutes a distributorship or a more complex transaction affecting the appellant's trading structure.
3. Whether the compensation received by the appellant for granting exclusive co-marketing rights and other commercial rights is taxable.

Detailed Analysis:

Issue 1: Nature of Receipt - Capital or Revenue
The primary issue revolves around whether the Rs. 6 crores received by the appellant from PFIZER Ltd. should be treated as a capital receipt or a revenue receipt. The appellant contended that the amount was a capital receipt, arguing that the co-marketing agreement with PFIZER impaired its trading structure and resulted in the loss of a source of revenue. The appellant maintained that the compensation was for the expected loss of market share and brand value.

The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) (CIT (A)) held that the amount was a revenue receipt, arguing that the agreement allowed PFIZER to market the vaccine under its brand name, and the appellant continued to manufacture and sell the vaccine under its brand name. The AO concluded that the receipt was for transfer of stock-in-trade and thus a trading receipt.

Issue 2: Co-marketing Agreement - Distributorship or Complex Transaction
The appellant entered into a co-marketing agreement with PFIZER Ltd., appointing PFIZER as an exclusive co-marketer for the Hepatitis-B vaccine. The agreement included various clauses granting PFIZER exclusive marketing rights, options for future products, and restrictive covenants on the appellant. The appellant argued that this agreement was not a simple distributorship but a complex transaction that affected its trading structure and market share.

The CIT (A) observed that the agreement indicated PFIZER as a distributor of the product obtained from the appellant under PFIZER's brand name. The CIT (A) held that the consideration of Rs. 6 crores was paid for granting exclusive co-marketing rights and other commercial rights, and not as a non-compete fee.

Issue 3: Taxability of Compensation
The appellant argued that the compensation received was for the loss of source of revenue and thus a capital receipt. The AO and CIT (A) held that the amount was received during the course of business and was thus a revenue receipt. The AO cited various case laws to support the contention that the compensation was for relinquishing a right in a venture, which would be a revenue receipt.

The Tribunal examined the terms of the co-marketing agreement and the nature of the compensation. It was observed that the agreement involved transfer of certain commercial rights, restrictive covenants, and future rights. The Tribunal concluded that the amount was not for transfer of stock-in-trade but for transfer and surrender of certain rights, making it a capital receipt.

Conclusion:
The Tribunal held that the Rs. 6 crores received by the appellant from PFIZER Ltd. was a capital receipt. The compensation was for granting exclusive co-marketing rights, options for future products, and restrictive covenants, which impaired the appellant's trading structure and market share. The receipt was not for transfer of stock-in-trade or circulating capital but for partial impairment of the profit-making apparatus of the company. The appeal was allowed, and the amount was treated as a capital receipt, not liable to tax.