9911796707
TMI Blog2006 (3) TMI 532X X X X Extracts X X X X X X X X Extracts X X X X ..... means a distributorship of the product obtained from the appellant-company and that the amount of Rs. 6 crores was paid for granting such rights. 3. The learned CIT (Appeals) ought to have appreciated the submission of the appellant that the amount of Rs. 6 crores received from PFIZER Ltd. is a capital receipt in nature not liable to tax. 4. The learned CIT (Appeals) ought to have appreciated the contention of the appellant that reading of various clauses of the agreement makes it clear that the amount of Rs. 6 crores under consideration is received by the appellant not for supply of vaccines, nor for transfer of any capital asset including any intangible rights. 5. The learned CIT (Appeals) ought to have appreciated that the nature of receipt of Rs. 6 crores under consideration is a non-competition fee and has also the effect of loss of source of revenue and hence is not liable to tax." 3. Facts of the case in brief are as follows-- 3.1 Assessee is an undertaking engaged in manufacture and sale of Hepatitis-B vaccine under the trade name Shanvac-B. The assessee has its own in-house R & D facility and was the first in India to manufacture the vaccine right from basic stage. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying on existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt - CIT v. Manoranjan Pictures Corpn. Pvt. Ltd. [1997] 228 ITR 202 (Delhi). (3)There was no sale of any capital asset or goodwill, hence the amount of Rs. 6 crores received by the assessee cannot be termed as a capital receipt. (4)Agreement with PFIZER Ltd. is conscious decision taken by the assessee keeping in view the business expediencies hence the assessee cannot contend that it willingly allowed PFIZER Ltd. to compete with itself in the territory of India. (5)Loss of source of income occurs only when a livelihood is taken away or when the assessee is prevented entirely from production of Hepatitis-B. As long as the assessee is able to produce the vaccine and market it freely, along with other competitors, it cannot be said that there is a loss of income. In fact, the assessee is getting benefited by selling the vaccine in bulk to PFIZER Ltd., which is acting as a wholesale purchaser. (6)By selling the Hepatitis-B vaccine in bulk to PFIZER Ltd., assessee can concentrate on markets (domestic and foreign) un-traversed by PFIZER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht for any new vaccine developed/ manufactured by the appellant-company (3) PFIZER has right for being appointed exclusive co-marketer for any new product developed by the appellant company or right of first refusal. The consideration paid the appellant-company is in view of these conditions. (2)Non-compete fee is a compensation payment received by a person for agreeing not to compete in business. The amount received by PFIZER is a compensation for the loss of income of the appellant as the sale foregone by entering into the co-marketing agreement. In para 7 it is stated that the consideration is received for granting the right to compete. (3)It is not a payment in the nature of a non-compete fee paid to the appellant-company. (4)In the agreement entered into, there is on restrictive covenant placed on the appellant-company from marketing its products. The appellant-company is free to market its vaccine under its brand name Shanvac-B." 3.5 Hence, the assessee preferred this second appeal before us. 4. The learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the amount of Rs. 6 crores received by the assessee from M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NTHA. (h)If the agreement with PFIZER is terminated on account of any default on the part of SHANTHA, then the amount of Rs. 6 crores is repayable to PFIZER. The amount of repayment shall be, 66.67 per cent if the termination is within two years, 33.33 per cent if the termination is during the 3rd year and "nil" if the termination is thereafter. (i)The agreement is valid only for Indian territory. (j)The agreement can be terminated by PFIZER without assigning any cause. However SHANTHA can terminate the agreement only for breach of terms or default by PFIZER. The agreement can be terminated by either party if the aggregate purchases by PFIZER Ltd. during the first three years is less than 4.5 million doses. Further in such an event SHANTHA shall pay Rs. 2.5 crores to PFIZER. (k)The various terms and conditions of the agreement survive the till termination of the agreement." Our specific attention is also invited to the preamble of the agreement and paras 1.14, 1.16, 2.1, 2.2, 3.1, 3.2, 5.1, 5.2, 5.3, 7.1, 7.2, 8.1, 8.2, 13.1, 13.2, 13.4, 13.6, 17.1, 17.2, 20.1 to 20.5, which according to him are relevant for determining the nature of the receipt in question. 4.2 It is submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the co-marketing agreement in question assessee merely allowed M/s. PFIZER Ltd. to market the vaccine produced by it under the latter's brand name, and as such it was not surrendering of the assessee's right either to manufacture the vaccine or to market the same by itself, in the territory of India, and consequently, it cannot be said to be a compensation for loss of source of revenue, it is submitted that the above findings of the Assessing Officer are erroneous. It is submitted that in the present case the source of revenue is not the right to manufacture, but it is the right to sell. In this regard, he also invited our attention to para 2.1 of the agreement which grants exclusive co-marketing rights to PFIZER. The right granted therein, according to him, is the right to promote, market, distribute and sell the products. Therefore the assessee's right to exploit markets is impaired. The trade structure under consideration is the right to exploit the market which is definitely affected as is demonstrated by various statistics furnished by the assessee during the course of assessment proceedings itself. It is also submitted that the independent studies carried out by reputed ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .7 Further, referring to paragraph 4.3 of the Assessment Order, wherein the Assessing Officer observed that the price realization from PFIZER is more than the price realized by the assessee from its customers, and in such circumstances if PFIZER is paying more per unit of vaccine the co-marketing agreement is beneficial to the assessee and consequently, it cannot be said that the agreement is detrimental to the trade structure of the assessee, learned counsel submitted that this observation on the Assessing Officer is misdirected and misleading. He submitted that even though it is a fact that the goods manufactured and sold by the assessee to PFIZER have resulted in higher price realization, at the same time the assessee has also lost a substantial share in the market. The compensation received by the assessee is relatable to such loss of market. Therefore, he submitted, there is absolutely no relationship between the higher price realization for the goods sold and the compensation received for loss of source of revenue. These two are two different and independent streams of receipt and one cannot be mixed up with the other. Further, he submitted that the fact that price realized f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for tax purposes. Therefore, he pleaded that the accounting treatment made by PFIZER has no relevance to decide the issue under consideration. In fact, he submitted that the treatment given by PFIZER in the books of account supports the contention of the assessee, as it has to be noted that PFIZER has not debited the payment as cost of goods in which case it would have meant receipts for transfer of stock in trade by the assessee, which is the main contention of the department. PFIZER has accounted the payment as deferred revenue expenditure, which is normally done in the case of cost of acquiring intangible rights as in the present case. The learned counsel for the assessee also disputed the correctness of the observation of the Assessing Officer that PFIZER is not differentiating between the payment of Rs. 6 crores and payment on account of purchase of vaccine from the assessee is totally incorrect and contrary to the facts of the case noted by the Assessing Officer himself. 4.10 With reference to para 4.4 of the Assessment Order, wherein the Assessing Officer observed that the marketing survey details only indicate that after entering into agreement the assessee's share got red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee, which is a general phenomena in the general market on account of entry of national and international players into Hepatitis-B vaccine market, could also be reason for reduction in turnover, and nevertheless assessee is free to take steps to increase its sales both domestic and foreign, and just because its turnover got reduced, it cannot be said that there is a loss of source of revenue, the learned counsel for the assessee submitted that the observations of the Assessing Officer in this behalf are totally incorrect and based on surmises, as the reduction in sales is entirely due to market forces and competition by PFIZER and has nothing to do with the cost of production. According to him, the reduction in turnover is consequential to the co-marketing agreement, and in terms of it the assessee by allowing PFIZER to compete with itself, has reduced its access to the markets which has resulted in loss of market share and loss of trading stricture or loss of source of revenue. The compensation received for such loss, it is reiterated, is capital in nature. 4.12 Disputing the finding of the Assessing Officer that the assessee has entered into an agreement with PFI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguishable and is not applicable to the present case. 4.14 Disputing the finding of the Assessing Officer that there was no sale of any capital asset or goodwill and hence the amount of Rs. 6 crores received by the assessee cannot be termed as a capital receipt, the learned counsel submitted that a capital receipt can arise in several ways and sale of capital asset or goodwill is not the only method. 4.15 Further disputing the finding of the Assessing Officer that agreement with PFIZER Ltd. is a conscious one taken by the assessee keeping view the business expediencies hence the assessee cannot contend that it willingly allowed PFIZER Ltd. to compete with itself in the territory of India, the learned counsel submitted that the sale of vaccine in bulk to PFIZER and the loss of source of market are two different aspects and should not be mixed up. Though it is true that the assessee has received a price in consideration for sale of bulk vaccine of PFIZER and the same has been duly disclosed as part of trading receipts by the assessee, he pleaded, the claim of capital receipt is in respect of the compensation received and hence the same should not be mixed up with the sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. as a co-marketer to sell a part of the vaccine produced by it, may be in the later's brand name and that this does not cause extinction or sterilization, partly or fully, of the profit earning source of the assessee and in such a case, there is no question of loss of source of income, the learned counsel reiterated that the co-marketing agreement is not an agreement for merely selling part of the vaccine produced by the assessee to PFIZER as the said co-marketing agreement also has granted valuable rights of co-marketing to PFIZER, which has resulted in damage to the trading structure of the assessee. 4.19 Disputing the finding of the Assessing Officer that even if the agreement is terminated/expired, such termination/expiry leaves the assessee free to carry on its trade, the learned counsel for the assessee submitted that if the agreement is terminated the assessee may be free to carry on its trade, but by that time it would have lost substantial market share and it would be highly difficult to re-capture the same. Hence, according to him the relevant question to be considered is whether the agreement is detrimental to the trading structure of the assessee and not the rights, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om production of Hepatitis-B, whereas in the instant case there is no loss of livelihood because as long as the assessee is able to produce the vaccine and market it freely, along with other competitors, it cannot be said that there is a loss of income. In fact, he pointed out the assessee is getting benefited by selling the vaccine in bulk to PFIZER Ltd., which is acting as a wholesale purchaser. By selling the Hepatitis-B vaccine in bulk to PFIZER Ltd., assessee can concentrate on markets (domestic and foreign) untraversed by PFIZER Ltd. The assessee can also take steps to increase its market share. In this case, he pointed out that the assessee has not given up its profit earning structure, but only co-opted PFIZER Ltd. as a co-marketer to sell a part of the vaccine produced by it, may be in the latter's brand name. This does not cause extinction or sterilization, partly or fully, of the profit earning source of the assessee and in such a case, there is no question of loss of source of income. Even if the agreement is terminated/expired, he submitted that such termination/expiry leaves the assessee free to carry on its trade. He distinguished the case-law relied upon by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of an agency agreement would be revenue and not capital in a case where the agency was one of many which the assessee held and its termination did not impair the profit-making structure of the assessee, but was within the framework of the business, it being a necessary incident of the business that existing agencies may be terminated and fresh agencies may be taken. Thereafter the court held that it was difficult to lay down a precise principal of universal application but various workable rules have been evolved for guidance." 6.3 Before we dwell on the issue, we think it necessary to take cognizance of the complexities of the present day commercial world, the importance of "Brand" and its commercial value. It is said that Indians are becoming 'brand conscious'. Multi-national brands are flooding the market and in this competitive world, a fact that cannot be denied is that 'Brand does matter'. Even in professional fields, foreign law firms or even foreign Accountancy firms, doing the same nature of work, though with higher standards that they set to themselves, have become a brand for others to reckon with. Brands have come to stay and are sought after. Price Water Hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween SHANTHA and PFIZERs. Ltd. dated 14-2-2000, which in our opinion are fundamental to the decision in this case, are extracted below for ready reference-- "Whereas : A.SHANTHA manufactures, promotes and sells a Hepatits-B vaccine under the trademark SHANVAC tm-B within India, amongst other countries. B. PFIZER wishes to purchase quantities of the vaccine from SHANTHA in order to promote, market, distribute and sell them throughout India under a separate trade mark owned by PFIZER. C.The parties desire to co-operate on certain technical and scientific matters. D.PFIZER desires to have, and SHANTHA is willing to consider granting certain options and rights to new products subject to mutually acceptable terms. .................................. 1. Definitions .................................. 1.10 "PFIZER Brand" shall mean the Product which is manufactured by SHANTHA under a manufacturing license referencing a trade mark selected by PFIZER and supplied by SHANTHA to PFIZER under this Agreement for promotion, marketing, distribution and sale by PFIZER under such trademark. 1.11 "Product" shall mean those injectable dosage forms of the Hepatits-B vaccine which are describe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and distribution of the PFIZER Brand in the Territory. 3.2 Other Hepatitis-B Vaccines.--Neither PFIZER nor any of its Affiliates shall promote, market, distribute or sell a Hepatitis-B vaccine for human use in the territory other than the PFIZER Brand. Neither SHANTHA nor any of its Affiliates shall promote, market, distribute or sell a Hepatitis-B Vaccine for human use in the Territory other than the SHANTHA Brand. 3.3 Specifications.--The PFIZER Brand shall be supplied hereunder in finished dosage form and packaged according to the specifications set out in Schedule A as amended from time to time by mutual agreement upon the reasonable request of either party. SHANTHA may not change such specifications without consulting with and receiving the prior written consent of PFIZER. The shelf life of the PFIZER Brand shall be the longer of three years and the shelf life of the SHANTHA Brand. Provided PFIZER complies with section 6, the remaining shelf life of PFIZER Brand delivered to PFIZER shall be at least the length of the shelf life minus seven (7) months, i.e., the elapsed time shall not exceed seven (7) months. ........... 5. Terms 5.1 Initial Term.--This Agreement shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g it to manufacture the PFIZER Brand for sale under PFIZER's trademark; and (c )20 million rupees, due and payable on the date which is two months after the later of the dates referred to in section 7.1(b). 7.2 Payment Procedure.--Each such payments shall be made in accordance with section 9.3. 8. Prices for the Product 8.1 Prices of Commercial Product.--Subject to the other provisions of this section 8 and the provisions of section 13, the prices to be paid by PFIZER for the PFIZER Brand purchased for commercial sale shall be those listed in Schedule B. Such prices do not include the costs of shipment, transit insurance or sales tax, which shall be borne by PFIZER. 8.2 Supply of Bonus Goods.--If during any period of time, SHANTHA supplies units of the SHANTHA Brand as bonus goods free of charge to its customers or as physicians samples, SHANTHA shall supply PFIZER free of charge with such quantity of the same units of the PFIZER Brand as will permit PFIZER to distribute bonus goods free of charge to its customers or as physicians samples (as the case may be) in the same proportion as SHANTHA for the same period of time. ,........... 10. Title and Risk.--Title and risk of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... einafter referred to collectively as the "Trademarks") as it may from time to time determine. SHANTHA shall supply PFIZER with PFIZER Brand bearing such trademarks. PFIZER may freely alter the Trademarks from time to time, provided any new Trademark is not identical to or confusingly similar to the SHANVAC TM-B trademark. PFIZER currently plans to use the trademark HEPASHIELDTM. 13.6 No SHANTHA Rights--SHANTHA shall not, and shall not be deemed to have or acquire any right, title or interest of any kind in any art or aspect of the Trademarks used on or applied to the PFIZER Brand, even though the Trademarks or any part thereof may have been suggested by, or adopted at the substance of SHANTHA. 15.1 Inspections - (a) During regular business hours and upon at least 7 days' advance notice (except in the case of emergencies), representatives of PFIZER and its Affiliates with appropriate qualifications and responsibilities shall be permitted by SHANTHA to inspect the facilities and records of SHANTHA and any of its permitted sub-contractors and observe manufacturing activities to the extent necessary and for the sole purpose of assessing compliance with this Agreement and applicable r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing license filed by SHANTHA for its own brand. PFIZER may exercise the option for any such vaccine at any time within six months after SHANTHA obtains the manufacturing license for the vaccine. If PFIZER exercises its option for any such vaccine, unless the parties agree otherwise, the terms of this Agreement (as supplemented by an agreement on the prices at which SHANTHA supplies the vaccine to PFIZER) shall apply to the new vaccine except that no payments shall be required under section 7 other than those already provided for and paid for by PFIZER. 17.2 Rights to other new products in the Territory.--If at any time during the term of this Agreement SHANTHA develops, manufactures and/or acquires the right to market any new product other than those to which section 17.1 applies, the following provision shall apply : (a )SHANTHA will keep PFIZER reasonably informed of SHANTHA's progress in developing any such product. (b) SHANTHA will give PFIZER access to all registrations and technical information relating to the product. (c )Until the end of the six-month period beginning on the date SHANTHA obtains the manufacturing license for the product, SHANTHA will negotiate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, market, distribute and sell the PFIZER Brand or such competitive product throughout the Territory without any further financial or other obligations to SHANTHA. To assist PFIZER in this regard, upon PFIZER's request SHANTHA shall surrender the manufacturing licnese for the PFIZER Brand. .............. 20(4) Termination by PFIZER without Cause--PFIZER may terminate this agreement without cause upon 60 days advance written notice. However, if PFIZER so terminates this Agreement, for a period of two years from the date of termination PFIZER shall not use in the Territory (a) the brand name "HEPASHIELD" or (B) any other brand name PFIZER may elect to use in lieu of the "HEPASHIELD" brand name to identify a PFIZER Brand marketed by PFIZER under this agreement. .............. 27. Relationship of the Parties - Neither party is, nor shall be deemed to be, an employee, agent, co-venturer or legal representative of the other for any purpose. Neither party shall enter into, be entitled to enter, or hold itself out as having the authority to enter into, any contracts in the name of, or on behalf of the other party. ................" 6.8 On a perusal of this agreement, we are of the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages. In this sense, this agreement was for the betterment of the assessee-company, so that it could expand its manufacturing operations. All the case laws relied upon by the assessee related to situations where there was a termination of certain agency, or receipt of non-compete fee etc. and not where agreements were entered into with an intention to have a stimulating effect on the sales. The situation and facts that have been dealt in those cases are different from that of this case. In this case, PFIZER brand is promoted by sourcing the product from SHANTHA and certain different types of restrictive covenants were agreed to along with transfer of certain existing and future rights. Consideration is separately specified for purchase of Vaccine and for transfer of rights and restrictive covenants. Having said, so, nevertheless, certain fundamental principles have been laid down and discussed in each of these cases, which we will be reverting hereafter, to see whether these propositions are applicable to the facts of the present case. Suffice to say that the Courts have laid down as to how a receipt in pursuance of a restrictive covenant, transfer of a present or future right has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Under this clause, if SHANTHA develops or manufactures any new product, other than those mentioned in section 17.1, then PFIZER, by virtue of this payment, acquired certain rights in such products, which includes exclusive co-marketer right as well as right of first refusal. SHANTHA's right to grant any right to promote, market, distribute or sell new product to a third party is taken away. Further, we observe that at the end of the agreement, i.e. after 15 years, as per clause 5.3 read with clause 20(c)(2), PFIZER shall have the right to manufacture the Product or a competitive product or source the Product or a competitive product from a third party. In other words, the technical information gathered by the SHANTHA for the production of Hepatitis-B vaccine can be commercially exploited by PFIZER in the manner it wants by even licensing the production of this product in a third party manufacturing facility. Thus, it is clear that the amount in question is not paid by PFIZER to SHANTHA for mere purchase of stock, but for certain commercial rights noted above. Product Technical Information (Clause 1.12) and (Clause 17) are certain commercial rights transferred. In addition, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by this company, the secret knowledge acquired by it, technical know-how and information and the manufacturing process, specification, quality control, etc. constitute valuable commercial rights. Patents and trade marks have been obtained by SHANTHA for this product. There is no doubt in our mind that these rights are commercial assets of SHANTHA and these are definitely a source or means through which the assessee carries on its business. These assets are being exploited to earn income. These assets are not SHANTHA'S stock-in-trade or its current asset. SHANTHA does not acquire those rights for selling them as such as a current asset, but it has right over the exploitation of the asset as its profit earning apparatus. Capital asset has been defined as 'a property of any kind held by the assessee' and in the case of Haji Abdul Kader Sahib v. CIT [1961] 42 ITR 296 (at 304) (Ker.), it is held that the definition is of wide amplitude, as to take into account, both tangible and intangible assets and these rights are a property of vital rights which the owner can lawfully exercise to the exclusion of others and he is entitled to use it as he pleases provided he does not infringe any l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not only present, i.e., which are already possessed by it, but also certain future rights that may come into its possession. Rights given up by SHANTHA are under clause 2.2 are (a) not to grant any third party right to market, distribute or sell products, (b) to refrain from selling Bulk Vaccine to any parties; right to supply SHANTHA brand to Nursing Home, etc. with shipments containing more than 1,000 10 ml. vials of product (or equivalent amounts of other vials) with the name of the purchaser. It has taken up the obligation to supply company's goods free of charge to PFIZER to the extent it supplied to customers or physicians. SHANTHA had given up specific right to appoint exclusively the co-marketer for all future products, including combination vaccine or other vaccine or any other product. It is also obligatory on the part of SHANTHA to share all technical information, registration, progress of development, etc. of new products with PFIZER. These exclusive rights which SHANTHA had were given up. Thus, this is a case, where certain rights acquired by the assessee which constituted its capital assets were surrendered for a consideration. Thus, the receipt of Rs. 6 crores was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The latter capital circulates in this sense. My Lords, in the case before us, the Appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting with them to other masters, but by retaining them that he was able to employ his circulating capital in buying under them. I am accordingly of opinion and though they may have been of short duration, they were nonetheless part of his fixed capital.'" The Apex Court went on to observe : ". . . The agency agreements in fact formed a capital asset of the assessee's business worked or exploited by the assessee by entering into contracts for the sale of the Charminar cigarettes manufactured by the company to the various customers and dealers in the respective territories. This asset really formed part of the fixed capital of the assessee's business. It did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f an agreement entered into, as in this case. 6.15 The case of CIT v. Bombay Burmah Trading Corpn. Ltd. [1986] 161 ITR 386 (SC), was also on the issue of termination of leases consequent to which compensation was paid to the assessee for residuary rights under lease in the shape of logs. Here also, the Supreme Court reiterated the concept of circulating capital and fixed capital and held that-- "Normally in trade, there are two types of capital, one circulating capital and the other fixed capital. Fixed capital is what the owner turns to profit by keeping it in his own possession; circulating capital is what he makes profit of by parting with it and letting it change hands. Therefore, circulating capital is capital which is turned over and in the process of being turned over, yields profits or loss. What are capital assets in the hands of one person may be trading assets in the hands of another. The determining factor is the nature of the trade in which the asset is employed. Compensation received for immobilisation, sterilisation, destruction or loss, total or partial, of a capital asset would be capital receipt. If a sum represented profit in a new form, then that would be inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated, the principle that if the agency is considered as a circulating capital, then the receipt in pursuance of the same would be revenue receipt, but if it is a capital asset in the hands of the assessee, then the receipt in pursuance of it would be a capital receipt. 6.17 In the case of Addl. CIT v. (K.P.) (Dr.) Karanth [1983] 139 ITR 479, the jurisdictional High Court was considering a case where the assessee had considerable experience, knowledge and know-how in the manufacture of drugs including INH and Dapsone. He took up an employment with Y. The assessee was entitled to royalty of a certain percentage on total sale on certain items besides salary, for a particular period irrespective of his continuing in employment but so long as the company manufactured the product. After certain disputes and modifications to that agreement, and ultimate compromise, the assessee was paid Rs. 50,000 by Y in consideration of the assessee giving up his right to manufacture the drug or assist directly or indirectly any other party to manufacture the same by giving the technical know-how or supplying the blue print, etc. The Hon'ble High Court held that the assessee has surrendered his knowle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a capital receipt. 6.19 In the case of CIT v. Shamsher Printing Press [1960] 39 ITR 90 , the Supreme Court was considering a case where the assessee was required to vacate his premises on a requisition by the Government and shift its place of business during the duration of war. The Government had paid a certain compensation and the question was whether this compensation was a capital receipt or a revenue receipt. The Hon'ble Supreme Court held that the receipt was not for injury to capital asset including its goodwill and the same was received as compensation for loss of profit for the period during which, it was imagined, the respondent's business would remain stopped before it could be restarted at a new premises, and this clearly is a revenue receipt. 6.20 In the case of CIT v. Durga Prasad More [1971] 82 ITR 540 , the Supreme Court had laid down the test of human probabilities, while holding that it is true that the apparent must be considered real, unless it is shown that there are reasons to believe that the apparent is not real. It went on to hold that the story put up by the assessee was prima facie fantastic story and that the story does not accord with the human proba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid films, taken over by the two firms, with the result that the assessee ceased to be a partner in the said two firms. The assessee claimed this amount as capital receipt but the same was negatived by the Court. After discussing the various case laws, the Court was of the view that the compensation was paid not for preventing the assessee from carrying on his own business, but one paid in the course of business and that the agreement cancelled could not be deemed to be such a fundamental asset of the assessee, on which his trade had been built, so as to constitute the framework of the profit-making apparatus. The Hon'ble High Court has relied on the Supreme Court decision in CIT/CEPT v. South India Pictures Ltd. [1956] 29 ITR 910. In this ex parte judgment qua the assessee - the Hon'ble Delhi High Court was of the view that these two ventures were for the limited purpose of carrying on the assessee's existing business of film distribution and exploitation more effectively by taking the financial help of others. But, the specific finding here is that the commercial asset in the form of the aforesaid films and the agreements were undoubtedly stock in trade of the assessee in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in EID Parry (I) Ltd. v. CIT [2002] 258 ITR 404 ; of the Apex Court in Sunil Siddhartha Bhai v. CIT [1985] 156 ITR 509 ; and of the Apex Court in Sundaram Finance Ltd. v. State of Kerala AIR 1966 SC 1178, also relied upon by the Revenue, lay down certain principles for determining the nature of a transaction and the need to read the documents in their entirety for determining the nature of the concerned transactions, which we have duly taken note of, while determining, hereinabove, the nature of the receipt under the agreement of the assessee with M/s. PFIZER in the instant case. 6.26 With regard to the contention of the Revenue that the treatment of the amount in the hands of payee has to be considered for the purpose of ascertaining whether the receipt in question is a capital receipt or a revenue receipt, we find that this proposition is against the settled proposition of law. The treatment meted out in the hands of a payee need not necessarily be the same in the hands of the recipient or vice versa. This depends on the nature of the activities of the respective parties which resulted in such payment/receipt. To give an example, in the case of a real estate business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, hold that the manner in which payee had treated this payment in its books of account does not in any way help in coming to a conclusion as to whether the receipt in question was a capital receipt or a revenue receipt. 6.28 It is difficult to find a decided case with identical facts. The Hon'ble Delhi Bench of the Tribunal in the case of Ms. Payal Kapur v. Asstt. CIT [2006] 98 ITD 19 , at paras 25 and 26 observed as follows-- "The aforesaid quoted terms and conditions are sufficient to give us an idea as to what sort of asset flowed as per JVA. In our considered opinion the terms and conditions leave on amount of doubt that JVA was a structure or foundation no which the joint business was to be built and carried. It provided mechanism or blue prints and defined role of the parties to the agreement and their commitment and also the manner in which business would be carried. The JVA could not be treated as "business" as admittedly business agreed to be carried was that of manufacture and sale of writing material and stationery. As noted in the case of Rai Bahadur Jairam Valji (supra) it was capital asset invested in the business but not business itself. It was clearly a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difying the two previous agreements as to the basis of profit sharing, extending the branches of the business, and again continuing the principal agreement of 1908 till December, 1940. In 1927, three agreements were made, under which the appellants agreed to determine agreements of 1908, 1913 and 1920 in consideration of the payments to them of 4,50,000 pounds. The Special Commissioners held that sum was paid in respect of the pooling agreements, and must be brought in for the purpose of arriving at the balance of the profits of the appellant for the year ending December, 1927, and consequently that the sum was an income receipt. FINLAY, J., held that the cancelled agreements were a capital asset of the appellants, and that the 4,50,000 pounds was not an income receipt at all. The Court of Appeal restored the decision of the Commissioners, who had held that the sum was not received by the appellants in consideration of the surrender of a fixed capital asset, but arose from a transaction attributable to circulating capital, and therefore an income receipt." On further appeal, House of Lords noted about the agreement between the parties as under-- "The circumstances in which the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade; they were not contracts for the disposal of their products or for the engagement of agents or other employees necessary for the conduct of their business, nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of its appellant's profit-making apparatus. They regulated the appellant's activities, defined what they might and what they might not do, and affected the whole conduct of their business. I have difficulty in seeing how money laid out to secure or money received for the cancellation of, so fundamental as organization of a trader's activities, can be regarded as an income disbursement or an income receipt." "We may state that the matter is fully covered by the decision of House of Lords and by the decision in the case of "Hotel Oberoi". In the light of above discussion, we hold that compensation paid to the assessee was a capital receipt not liable to tax." 6.29 Thus, on a conspectus of the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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