2018 (3) TMI 311 - HC - Income Tax

Non-competition agreement with Ranbaxy Laboratories Ltd. - nature of receipt - capital receipt or a revenue receipt - Held that - Undoubtedly the right to manufacture the products was with the company when the non-competition agreement was entered into, in the absence of any material showing that a similar non-competition agreement was entered between the company and the appellant, it cannot be inferred that merely because the company was at the relevant time using the technical know-how possessed by the appellant, the latter was barred from using the same in future. Indubitably knowledge and technical know-how are intellectual properties and they undoubtedly constitute capital. When an individual is deprived of using such property in future, the same amounts to capital loss and the income derived from such capital loss constitutes capital receipt. In our opinion, the Tribunal has fallen into error in holding that the appellant has failed to prove that the specialized knowledge was treated as a capital asset. On its own finding the Tribunal held that it is the appellant who pioneered the Time Release Technology and promoted the company. This by itself would show that the technical know-how constituted a part of the capital. As observed hereinbefore, unless any specific material existed showing that the appellant has once and for all transferred the technical know-how in favour of the company and that there was no possibility for him to use the same in future without the permission of the company, it would be highly presumptuous for the Tribunal to hold that the appellant had no right to use the technology. Though a vague finding was rendered that the amount which was otherwise receivable by the company was diverted by the appellant, the same was not substantiated by the Tribunal. This finding, in our opinion, is based on a mere surmise or conjecture in the absence of a finding that the two agreements entered with RLL and SPIL are sham and nominal. - Decided in favour of assessee

Summary

Issues Involved:
1. Whether the consideration received by the appellant under the non-competition agreements is a capital receipt or a revenue receipt.
2. Whether the Tribunal's decision is perverse due to reliance on a Supreme Court decision related to Section 2(24)(ix) of the Income Tax Act.
3. Whether the Tribunal's decision is perverse in treating the receipt by the company as capital receipt and the receipt by the appellant as revenue receipt.
4. Whether the Tribunal's finding that the sum received by the appellant is revenue receipt is perverse.
5. Whether the Tribunal's interpretation of the agreement is correct.
6. Whether the amount is assessable under the head "income from other sources."

Issue-wise Detailed Analysis:

1. Capital Receipt vs. Revenue Receipt:
The appellant argued that the sums received under the non-competition agreements with Ranbaxy Laboratories Ltd. (RLL) and Sun Pharmaceuticals Industries Limited (SPIL) should be treated as capital receipts. The Tribunal, however, treated these sums as revenue receipts for the appellant but as capital receipts for Natco Pharma Ltd. The High Court examined the terms of the non-competition agreements, which restricted the appellant and Natco Pharma from competing with RLL and SPIL in specified territories. The court concluded that the amounts received were for the loss of a capital asset, i.e., the technical know-how and potential business opportunities, thus constituting capital receipts.

2. Perverse Decision due to Reliance on Supreme Court Decision:
The appellant contended that the Tribunal's decision was perverse as it relied on a Supreme Court decision related to Section 2(24)(ix) of the Income Tax Act, which was not applicable to their case. The High Court agreed with the appellant, noting that the Tribunal's reliance on the said decision was misplaced as the facts of the present case involved non-competition agreements and not the provisions of Section 2(24)(ix).

3. Perverse Decision in Treating Receipts Differently:
The appellant argued that the Tribunal's decision was inconsistent as it treated the receipt by Natco Pharma as a capital receipt but the receipt by the appellant as a revenue receipt. The High Court found this differentiation unjustified, as both the company and the appellant were part of the same non-competition agreement and received payments for the same reason. Hence, the amounts should be treated uniformly as capital receipts.

4. Perverse Finding on Revenue Receipt:
The Tribunal's finding that the sum received by the appellant was a revenue receipt was challenged as being perverse. The High Court noted that the Tribunal failed to consider that the appellant's technical know-how and potential to compete were capital assets. The court emphasized that the appellant's knowledge and expertise were intellectual properties constituting capital, and the non-competition payments were for the loss of this capital asset, thus qualifying as capital receipts.

5. Interpretation of the Agreement:
The Tribunal's interpretation of the non-competition agreement was questioned. The High Court scrutinized the agreement and concluded that the payments were made to prevent the appellant and Natco Pharma from competing with RLL and SPIL, which amounted to a loss of capital. The court found the Tribunal's interpretation flawed as it did not adequately consider the nature of the technical know-how and the future potential of the appellant to use it independently.

6. Assessable under "Income from Other Sources":
The Tribunal had assessed the amounts received by the appellant under the head "income from other sources." The High Court disagreed, stating that the amounts were received for the loss of a capital asset and should not be treated as income from other sources. The court highlighted that the technical know-how and future potential to use it were capital assets, and the non-competition payments were for the loss of these assets.

Conclusion:
The High Court set aside the Tribunal's order to the extent it pertained to the appellant, concluding that the amounts received under the non-competition agreements were capital receipts and not revenue receipts. The appeals were allowed in favor of the appellant.