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TMI Blog2024 (11) TMI 972X X X X Extracts X X X X X X X X Extracts X X X X ..... pt. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r PFIZER Limited and supply the same to it. The said Vaccine was to be promoted, marketed and sold by the PFIZER Limited. The assessee under the co-marketing agreement received a sum of Rs.6 crores. 5. The assessee filed the return of income for the assessment year 2000-01. The assessee was served with a notice on 28.03.2002 under Section 148 of the Act. The Assessing Officer passed an order on 31.03.2004 revising the computation of income. A sum of Rs.6 crores received by the assessee under the co-marketing agreement was treated as revenue receipt. Being aggrieved, the assessee filed an appeal. The Commissioner of Income Tax (Appeals) by an order dated 21.10.2004 affirmed the order of assessment and dismissed the appeal. 6. Thereupon the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal ). The Tribunal by an order dated 31.03.2006 inter alia held that a sum of Rs.6 crores received by the assessee was not only for transfer of capital assets but also for waiver of certain rights in enduring nature and for accepting certain restrictive covenants. The Tribunal further held that the aforesaid amount of Rs.6 crores was not receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical know-how, which is a capital asset. It is therefore contended that any compensation received in lieu of such surrender is a capital receipt. It is contended that since the assessee has entered into a non-compete agreement, the same results in loss of source of income to the assessee, which has an adverse impact on the brand and market share on account of co-marketing agreement. It is pointed out that the consideration is separately defined in the agreement for purchase of vaccine i.e., stock in trade and transfer of certain rights in receipt of covenants. Therefore, the amount received under Clause 7 of the co-marketing agreement cannot be treated as revenue receipt. In support of aforesaid submission, reliance has been placed on the decisions in Oberoi Hotel Private Limited vs. The Commissioner of Income Tax AIR (1999) SC 1110 , Commissioner of Income Tax, Punjab, Haryana, Jammu Kashmir and Himachal Pradesh vs. Prabhu Dayal (supra), Additional Commissioner of Income Tax vs. K.P. Karanth (1983) 139 ITR 479 (AP) , V.C. Nannapaneni vs. Commissioner of Income Tax, Hyderabad-2 (2018) 407 ITR 505 (AP) and Shiv Raj Gupta vs. Commissioner of Income Tax, Delhi-IV (2021) 11 SCC 58 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt or a revenue receipt has to be ascertained in the facts and circumstances of the case. Therefore, it is necessary for us to advert to the relevant clauses of the co-marketing agreement, which are extracted below for the facility of reference: 2.1 Appointment: SHANTHA hereby appoints Pfizer as the Exclusive Co-marketer for the product in the Territory. 7. Payment for Appointment, Options and other Rights: 7.1 Instalments: In consideration of SHANTHA s granting the right to compete by appointment of PFIZER as the Exclusive Co-marketer under Section 2.1 and the options granted in Section 17.1 and the exclusive negotiation rights and rights of first refusal granted in Section 17.2, PFIZER each of the following payments to SHANTHA, agrees to make unless this Agreement is terminated and the effective date of termination precedes the due date of payment. (a) 20 million rupees due and payable on the execution and delivery of this agreement; (b) 20 million rupees, due and payable on the later of (i) the date which is two months after the execution of this Agreement and (ii) the date on which SHANTHA obtains written confirmation of a manufacturing license authorizing it to manufacture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 whom Section 17.1 applies, the following provision shall apply: (a) SHANTHA will keep PFIZER reasonably SHANTHA s progress in developing any such product, informed of. (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 exclusively with PFIZER concerning commercialization of the product, and will not negotiate with any third parties concerning the product or offer any rights to the product to third parties. (d) If the parties have not entered into an agreement appointing PFIZER the Exclusive Co-marketer (or some other mutually acceptable agreement) for the product by the end of the six month period referred to in Clause (c), PFIZER shall have a right of first refusal to become the Exclusive Co-marketer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l information, registration, progress of development etc., of new products with the PFIZER. 17. Thus, 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. 18. 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 by LRs (2016) 10 SCC 315 and Principal Commissioner of Income Tax, Bangalore vs. Softbrands India Private Limited (2018) 406 ITR 513 ). 19. Therefore, the subs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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