2021 (2) TMI 463 - AT - Income Tax

Reopening of assessment u/s 147 - AO has made addition towards compensation received for termination of manufacturing agreement u/s.28(va)(a), on the ground that any sum whether received or receivable in cash or kind under agreement for not carrying out any activity in relation to any business shall be chargeable to Income Tax under the head profits and gains of business or profession for not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services - HELD THAT - In this case, on perusal of assessment order passed u/s.143(3) of the Act on 15.12.2009, we find that there is no discussion of whatsoever in the assessment order regarding the issue of compensation received for termination of contract. Further, the assessee has also failed to file any evidence to prove that it has furnished necessary details about receipt of compensation to the AO. In absence of any evidence to prove that all materials necessary for completion of assessment were placed before the AO, it cannot be said that the AO has considered the issue and formed an opinion on the issue. Unless, the AO has formed an opinion on the issue on the basis of materials furnished by the assessee, then it cannot be said that the assessment has been reopened on mere change of opinion. There is no merit in the arguments taken by the assessee challenging reopening of assessment. In so far as, various case laws cited by the assessee including the decision of Hon ble Supreme Court in the case of CIT vs. Kelvinator India Ltd 2010 (1) TMI 11 - SUPREME COURT we find that those case laws are not applicable to facts of present case and hence, are not considered. Hence, we reject the ground taken by the assessee challenging reopening of assessment. Addition towards compensation received for termination of manufacturing agreement u/s.28(va)(a) - assessee is not owning any know-how, patent and trade-mark required for manufacturing of goods. Consequently, compensation paid for pre-closure of manufacture agreement cannot be brought to tax u/s.28(va)(a) of the Act, because the same is not in the nature of compensation or any sum paid for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trade-mark, license or any other business or commercial right, which is evident from the fact that even after the termination of agreement with Dr.Reddy s Laboratories Ltd., the assessee continue to manufacture and distribute pharmaceutical products. Compensation received for pre-closure of contract manufacturing agreement with Dr.Reddy s Laboratories Ltd., is in the nature of capital receipt paid for loss of profit from business / loss of investment, but not in the nature of any compensation or other sum paid for not using any know-how, patent, copyright, trade-mark, license, etc., which can be brought to tax u/s.28(va)(a) of the Act. The AO as well as the CIT(A) without appreciating the facts, had simply made addition towards compensation received from Dr.Reddy s Laboratories Ltd., u/s.28(va)(a) of the Act. Hence, we direct the AO to delete addition made towards compensation received for termination of contract manufacturing agreement. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act.
2. Taxability of compensation received for termination of a manufacturing agreement under Section 28(va) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment:
The assessee argued that the reopening of the assessment was invalid since it was based on the same materials available during the original assessment, thus constituting a mere change of opinion. The assessee cited various case laws including the decision of the Supreme Court in CIT vs. Kelvinator India Ltd. to support this claim. However, the Tribunal upheld the reopening, noting that there was no discussion or reference to the compensation received in the original assessment order. The Tribunal emphasized that the assessment was reopened within four years from the end of the relevant assessment year, and the AO had formed a reasonable belief of escapement of income based on tangible materials available within the assessment records. Therefore, the reopening was deemed valid.

2. Taxability of Compensation Received:
The main contention was whether the compensation received for the termination of the manufacturing agreement with Dr. Reddy’s Laboratories Ltd. should be taxed as revenue receipts under Section 28(va) of the Income Tax Act. The AO and CIT(A) treated the compensation as a non-compete fee, taxable under Section 28(va)(a). The assessee argued that the compensation was for the loss of investments and profits due to the premature termination of the agreement, thus constituting a capital receipt, not taxable under Section 28(va)(a). The Tribunal examined the agreements and found that the assessee was a contract manufacturer without possessing the technical know-how, which was provided by Dr. Reddy’s Laboratories Ltd. The Tribunal concluded that the compensation was for the loss of source of income and not for not carrying out any business activity or sharing any know-how, as specified under Section 28(va)(a). The Tribunal also noted that the amendment to Section 28(ii)(e), which would tax such compensation, was effective from AY 2019-20 and not applicable to the relevant assessment year. Citing the decision of the Bombay High Court in CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., the Tribunal held that the compensation was a capital receipt and directed the AO to delete the addition.

Conclusion:
The Tribunal allowed the appeal, holding that the reopening of the assessment was valid, but the compensation received for the termination of the manufacturing agreement was a capital receipt and not taxable under Section 28(va)(a). The addition made by the AO was directed to be deleted.