2024 (11) TMI 972 - HC - Income Tax

Nature and Character of receipt - sum received under the co-marketing agreement - capital receipt or revenue receipt - HELD THAT - It is well settled that contract or an agreement between the parties must be construed having regard to the intention of the parties and such an intention has to be gathered from the language employed in the agreement. It is equally well settled proposition that an agreement has to be read as a whole. The Supreme Court in Kettlewell Bullen and Company Limited 1964 (5) TMI 4 - SUPREME COURT 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. 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 in Gillanders Arbuthnot and Company Limited 1964 (5) TMI 5 - SUPREME COURT - as held that the compensation received by the assessee for loss of agency was revenue receipt, whereas compensation received for restraining from carrying on the competitive business was capital receipt. The nature and character of a receipt whether the same is a capital receipt or a revenue receipt has to be ascertained in the facts and circumstances of the case. The payment of the amount under the agreement has been made to the assessee as it has surrendered its rights in a capital asset, namely patent and trademark. The agreement in question is a negative/ restrictive covenant and the amount has been paid to the assessee in lieu of the rights which it has surrendered under the agreement. The surrender of the rights results in impairment of profit making apparatus of the company and therefore, is a capital receipt. The finding recorded by the Tribunal that the amount received under the agreement is a capital receipt, which has been recorded on the basis of meticulous appreciation of evidence on record. The aforesaid finding cannot be termed as perverse. It is well settled in law that this Court in exercise of powers under Section 260A of the Act cannot interfere with the finding of fact until and unless the same is demonstrated to be perverse. (see Syeda Rahimunnisa vs. Malan Bi 2016 (10) TMI 1233 - SUPREME COURT and Softbrands India Private Limited 2018 (6) TMI 1327 - KARNATAKA HIGH COURT ). Decided in favour of the assessee.

Summary

Issues Involved:

1. Whether the amount of Rs.6 crores received by the assessee under an agreement with PFIZER Company is a capital receipt not liable to tax, or a revenue receipt exigible to tax.

Detailed Analysis:

Issue 1: Nature of the Receipt (Capital vs. Revenue):

The central issue in this case is whether the amount of Rs.6 crores received by the assessee under a co-marketing agreement with PFIZER Ltd. should be classified as a capital receipt or a revenue receipt. The assessee argued that this amount was a capital receipt, as it was received in exchange for the transfer of technical know-how and the waiver of certain rights, including entering into a non-compete agreement. The Revenue, however, contended that the amount was a revenue receipt, arguing that the agreement did not affect the trading rights or structure of the assessee and was entered into in the ordinary course of business.

The Tribunal had previously determined that the sum was not a revenue receipt, as it was not received from the transfer of stock in trade but rather for the waiver of certain rights in enduring nature and the acceptance of restrictive covenants. The Tribunal's decision was based on the premise that the payment impaired the trading structure of the assessee, thus classifying it as a capital receipt.

The High Court examined the agreement's clauses, noting that the assessee had granted PFIZER exclusive co-marketing rights and had relinquished rights in future products and technical know-how, which are considered capital assets. The court emphasized that the agreement contained restrictive covenants affecting the assessee's ability to market new products independently, thereby impairing its profit-making apparatus.

The High Court referred to established legal principles, including the Supreme Court's rulings in Kettlewell Bullen and Company Limited vs. Commissioner of Income Tax and Gillanders Arbuthnot and Company Limited vs. The Commissioner of Income-Tax, which distinguish between capital and revenue receipts based on the impact on the trading structure and source of income. The court concluded that since the agreement resulted in the surrender of rights in a capital asset, the payment constituted a capital receipt.

The court further noted that the Tribunal's finding was based on a meticulous appreciation of evidence and was not perverse. It reiterated that under Section 260A of the Income Tax Act, the High Court cannot interfere with factual findings unless they are demonstrated to be perverse.

Conclusion:

The High Court affirmed the Tribunal's decision, ruling that the amount received by the assessee was a capital receipt and not subject to tax as a revenue receipt. The court answered the substantial question of law in favor of the assessee, leading to the dismissal of the Revenue's appeal.