Itta/138/2007 Of The Commissioner Of Income Tax-Iii Hyderabad v. M/S. Satiofi Healthcare India Private Limited

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD MONDAY,THE EIGHTEENTH DAY OF TWO THOUSAND AND TWENTY FOUR PRESENT THE HON'BLE THE CHIEF JUSTICE ANDTHE HON'BLE SRI JUSTICE J. SREENIVAS INCOME TAX TRIBUNAL APPEAL NO: [138 OF ][2OO7] lncome tax Tribunal Appeal under [Section 260-A ][of ][the ][lncorne ][tax ][Act, ][1961,]against the order of the lncome [Tax ][Appellate ][Tribunal, ][Hyderabad Bench ][B,]Hyderabad dated 31-03-2006 in ITA [No. ][1163 ]I [Hydl ][2004 ][for ][Assessment Year]2OOO-2O01 preferred against the order of the [Commissioner ][of ][lncome ][Tax](Appeals) lV , Hyderabad daled 21-10-2004 in Appeal [No. ][127 ][/ACIT-3 ][(1yClT ][(A)-]lV/04-05 preferred against the order [of ][the ][Asst. ][Commissioner ][of ][lncome ][Tax 3 ][(1)]Hyderabad dated 31-03-2004 in PAN/GIR [No. ][ ]Between: The Commissior of lncome Tax-lll, Hyderabad ...APPELLANT AND M/s. Sanofi Healihcare lndia Private Limited, [having ][its ][office ][at Divyasree ][Trinity, ][Bth]Floor, Plot No. 5, Hitech City Layout, Sy. [No. ][6a(Part), Madhapur ][Village']SerilingampallyMandal, Ranga Fieddy-District,'Hyderabad. RESfuNDENT- Amended Vide ClO. daled 13-12-2O23 [in ][l.A.No. ][1 ][of ][2023.] Counsel for the Appellant: SRl. [J. ][V. ] [(Sr. ] [TAX)] Counsel for the Respondent: , ,SRI CH.PUSHYAM KIRAN The Court delivered the following [Judgment:] THE HON'BLE THE CHIEF JUSTTCE ALOK ARADHEANDAND THE HON'BLE SRI JUSTICE J.SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL No.138 of2OO7 JUDGMENT; (Per the Hon'ble the Chief Justice Alok Aradhe) Mr. J.V.Prasad, learned Senior Standing Counsel lor Income Tax Department for the appellant. Mr. Rohan Aloor, learned counsel representing Mr. Ch.Push),arn Kiran, learned counsel for therespondent. 2. This appeal under Section 260A of the Income Tax Act, 196 1 (hereinafter referred to as [.the ]Act,) has beenpreferred by the Revenue. The subject matter of the appealpertains to assessment year 2OOO_O1. The appeal wasadmitted on following substantial question of law:admitted on following substantial question of law: "Whether the finding of the Income Tax Appeilate Tribunal that the amount of Rs.6crores received by the Assessee under alAgreement with pFIZER Company is acapital receipt not liable to tax as the same./capital receipt not liable to tax as the same./ rS not a revenunot a revenurevenue receipt exigible to tax, is rS not a revenunot a revenurevenue receipt exigible to tax, isnot erroneous in Iaw for non_consideringthe relevalt facts decided by the AssessingOfficer andconfirmed by the AppellateAuthorities?,, 3. The factual background in which the aforesaid substantial question of law arises for our considerationneed mention. 4. The assessee is engaged in the business of manufacture and sa-le of Hepatitis_B Vaccine under thetrade name ..Sharrvac_8,,. The assessee is equipped within-house Research and Development team and claims to bethe first company in India to deveiop the Hepatitis-BVaccine. The assesrco-marketin* "o."*;: :;::_::;;. ffi ,; co-marketing "*;agreement, the assessee has agreed tomanufacture the Vaccine in buik quantities for pFIZERLimited and supply the same to it. The said Vaccine was tobe promoted, marketed and sold by the PFIZER Limited.The assessee under the co-marketing agreement received asum of Rs.6 crores. aa 5. The assessee filed the return of income for theassessment year 2000-0 1. The assessee was served rvith anotice on 28.O3.2OO2 under Section 148 of the Act. TheAssessing Officer passed an order on 31.03.2004 reuisingthe computation of income. A sum of Rs.6 crores reoeivedby the assessee under the co-marketing agreemenl- wastreated as re\renue receipt. Being aggrieved, the assesseeliled an appeal. The Commissioner of Income Tax (Appeals)by an order dated 2l.lO.2OO4 alfirmed the order ofassessment and dismissed the appeal. aa 5. The assessee filed the return of income for theassessment year 2000-0 1. The assessee was served rvith anotice on 28.O3.2OO2 under Section 148 of the Act. TheAssessing Officer passed an order on 31.03.2004 reuisingthe computation of income. A sum of Rs.6 crores reoeivedby the assessee under the co-marketing agreemenl- wastreated as re\renue receipt. Being aggrieved, the assesseeliled an appeal. The Commissioner of Income Tax (Appeals)by an order dated 2l.lO.2OO4 alfirmed the order ofassessment and dismissed the appeal. 6. Thereupon the assessee filed an appeal Lreforethe Income Ta-x Appellate Tribunal (hereinafter referred toas 'the Tribunal'). The Tribunal by an order tlated31.03.2006 inter alia held that a ium of Rs.6 croresreceived by the assessee was not only for transfer of czrpitalassets but also for waiver of certain rights in endrrringnature ald for accepting certain restrictive covenarrts. TheTribunal further held that the aforesaid amoun t ofRs.6 crores was not received from transfer of stock in 1_radeand therefore the same cannot be treated as revenue receipt. It was therefore herd that the assessee has receivedthe aforesaid amount by way of a capital receipt. Hence,this appeal.the aforesaid amount by way of a capital receipt. Hence,this appeal. 7 . l,earned Senior Standing Counsel for theRevenue has taken various clauses of the co_marketingagreement and has submitted that none of the clauses ofthe co-marketing agreement affect the trading rights of theassessee. It is further submitted that under the aforesaidagreement, no capital asset has been transferred in favourof PFIZER Limited and there is no sale of the brand underthe co-marketing agreement but oniy a sale of vaccines. Itis contended that the said agreement neither alfects thetrading structure of the assessee in any manner nor theassessee is deprived of its source of .income. It is pointedout that under the co-marketing agreement, the assessee isrequired to supply the vaccine in bulk quantity to pFIZERLimited and agreement has been entered into in usualcourse of business. It is also urged that the assessee is atliberty to carry on the trade. It is contended that theTribunal erred in law in reversing the well-reasoned orders passed by the Assessing Officer as well asi theCommissioner of Income Tax (Appeals). In support of hissubmission, reliarce has been placed on the decisions inGillanders Arbuthnot and Company Limited vs. TheCommissioner of Income-Tax, Calcuttar, Commissionerof Income-Tax, Punjab, Haryana, Jammu & Kashmirand Himachal Pradesh vs. prabhu Dayal2, patialaBiscuit Manufacturers private Limited vs.Commissioner of Income-Tax, punjaba, Ansal propertiesand Industries Ltd. vs. Commissioner of Income_Taxa,Commissioner of Income-Tax vs. Dr. R. L. Bhargavas,Gujco Carriers vs. Commissioner of Income_Taxo. andCommissioner of Income-Tax vs. Manoranjan picturesCorporation (Priavate) LimitedT. 8. On the other hand, the other hand, other hand, hand, learned counsel for thefor thetheassessee has submitted that the assessee has receil,.ed asum of Rs.6 crores for transfer of technical know_how andr AIR 1965 SC 452 On the other hand, the other hand, other hand, hand, learned counsel for thefor thethe 2 AIR 7972 SC 386 3 (197 L) 82 ITR 8 12 (SC) 4 (2o 12l, 347 ITR 6a7 (Delhi) s 1zoo2) 174 CTR (DEL) 50 6 (2OO2) 2s6 ITR 50 (cuJ) 7 ILR 1998 DELHI 197 8. On the other hand, the other hand, other hand, hand, learned counsel for thefor thetheassessee has submitted that the assessee has receil,.ed asum of Rs.6 crores for transfer of technical know_how andr AIR 1965 SC 452 On the other hand, the other hand, other hand, hand, learned counsel for thefor thethe 2 AIR 7972 SC 386 3 (197 L) 82 ITR 8 12 (SC) 4 (2o 12l, 347 ITR 6a7 (Delhi) s 1zoo2) 174 CTR (DEL) 50 6 (2OO2) 2s6 ITR 50 (cuJ) 7 ILR 1998 DELHI 197 for giving up the rights in any new vaccine which may bedeveloped by it in relation to Hepatitis-B. It is also pointedout that under the co-marketing agreement, the assesseehas surre4dered its knowledge and technical know_how,which is a capital asset. It is therefore contended that anycompensation received in lieu of such surrender is acapital receipt. It is contended that since the assessee hasentered into a non-compete agreement, the same results inloss of source of income to the assessee, which has anadverse impact on the brand ald market share on accountof co-marketing agreement. It is pointed out that theconsideration is separately defined in the agreement forpurchase of vaccine i.e., stock in trade and tralsfer ofcertain rights in receipt of covenants. Therefore, theamount received under Clause 7 ['of ]the co-marketingagreement cannot be treated as revenue receipt. In supportof aforesaid submission, reliance has been placed on thedecisions in Oberoi Hotel Private Limited vs. TheCommissioner of Incomq Tai8, Commissioner ofIncome Tax, Punjab, Haryana, Jammu & Kashmir and8 ArR (1999) SC 1110 4 Himachal Pradesh vs. prabhu Dayal (supra), Additional Commissioner of Income Tax vs. K.p. Karanths, V.C.Nannapaneni vs, Commissioner of Income Tax,Hyderabad-2ro and Shiv Raj Gupta vs. Commissioner ofIncome Tax, Delhi-Ivlr.Income Tax, Delhi-Ivlr. We have considered the riva_l submissions madeon both sides.on both sides. 10. The solitary issue which arises for consider.ation in this appeal is whether the payment of the amount madeto the assessee under the agreement is a capital recerpt ora revenue receipt. It is well settled that contract c,r anagreement betu,een the parties must be construed havingregard to the intention of the parties and such an intentionhas to be gathered from the Ianguage empioyed in the:greement. It is equally well settled proposition that anagreement has to be read as a whole. The Supreme C:ourtin Kettlewell Bullen and Company Limited vs. , (1983) 139 rTR 479 (AP)10 (2018) 407 rTR soS (AP)tt (2o2r) 11 SCC 58tt (2o2r) 11 SCC 58 Commissioner of Income Taxr2 has laid down the test todistinguish the capital receipt from the revenue receipt. Ithas been held that where payment is made under acovenant to compensate a person which does not affect histrading structure or his business or deprive him of hisdistinguish the capital receipt from the revenue receipt. Ithas been held that where payment is made under acovenant to compensate a person which does not affect histrading structure or his business or deprive him of hissource of income, such a covenant being a normal incidentof business, which leaves him free to carry on his tradeshall be treated as revenue receipt. However, if theof business, which leaves him free to carry on his tradeshall be treated as revenue receipt. However, if thecovenant impairs the trading structure of the assessee orresults in loss of income to the source of income of theassessee, the payment made under such a covenant shallbe treated as capital receipt.be treated as capital receipt. 11. The issue whether an amount received by theassessee on the condition not to _carry on a competitivebusiness was in the nature of capital receipt wasconsidered by the Supreme court in Gillanders Arbuthnotand Company Limited (supra). It was held that thecompensation received by the assesse€ for loss of agencywas revenue receipt, whc\reas compensation received for r /^l restraining from carrying on the competitive business wascapital receipt. 12. The principles laid down in Kettlewell Bullen 11. The issue whether an amount received by theassessee on the condition not to _carry on a competitivebusiness was in the nature of capital receipt wasconsidered by the Supreme court in Gillanders Arbuthnotand Company Limited (supra). It was held that thecompensation received by the assesse€ for loss of agencywas revenue receipt, whc\reas compensation received for r /^l restraining from carrying on the competitive business wascapital receipt. 12. The principles laid down in Kettlewell Bullen and Company Limited (supra) were referred to withapproval in Prabhu Dayal (supra). 13. In Guffic Chem private Limited (supra), the Supreme Court reiterated the principles laid do.,vn inGillanders Arbuthnot and Company Limited (supra) andheld that in case an amount is received under a negativecovenant by the assessee, it is in the nature of a c;rpitalreceipt. 14. A three-Judge Bench of the Supreme Cotrrt in Shiv Raj Gupta vs, Commissioner of Income Tax, Delhi_fVls followed the decision in Guflic Chem private Limited(supra). 15. The nature and character of a receipt whether the same is a capital receipt or a revenue receipt has 1:o beascertained in the facts ald circumstances of the r:ase. 'r lzot [t; ][11 ]scc s8 Therefore, it is necessary for us to advert to the relevantclauses of the co-marketing agreement, which are extractedclauses of the co-marketing agreement, which are extracted below for the facility of reference: "2.1 Appointment: SHANTHA hereby appointsPfizer as the Exclusivc Co-marketer for the product inthe Territory. 7. Payment for Appointment, Options andother Rights: 7.1 Instalments: In consideration ofSHANTHA's granting the right to compete byappointment of PFIZER as the Exclusive Co-marketerunder Section 2.1 and the options gralted in Section17.1 and the exclusive negotiation rights and rights offirst refusal gralted in Section 17.2, 9FIZE,R each ofthe following payments to SHANTHA, agrees to makeunless this Agreement is terminated ald the effectivedate of termination precedes the due date of pa5rment.(a) 20 miltion rupees due and payable on theexecution and delivery of this agreement; (b) 20 million rupees, due aird payable on t}telater of (i) the date which is two months after theexecution of this Agreement arld (ii) the date on whichSHANTHA obtains written confirmalion of amanufacturing license au thorizing it to manufacturethe PFIZER Brald for sale under pfizer,s Trademark;ard (c) 2O million rupees, due and payable on ttredate which is two months after th€ later of the datesreferred to in Section 7. I (b). \ \ 7.2 Payment procedure: Each such paymentshali be made in accordance with Section 9.3. 8. Prices for the Product: 8.1 Prices of Commercial Product: Subjec:tto the other provisions of this Section 8 and theprovisions of Section 13, the prices to be paid byPFIZER for the PFIZER Brand purchased forcommercial sa-Ie shall be those listed in Schedule Ei.Such prices do not include the costs of shipment:,transit insurance or sa.les tax, which shall be borne b-yPFIZER 8.2, Supply of Bonus Goods: If during arr.lperiod SHANTHA supplies units of the SHANTHI\Brand as bonus goods free of charge to its customersor as physicians samples, SHANTHA shall suppl.rBrand as bonus goods free of charge to its customersor as physicians samples, SHANTHA shall suppl.rPFIZER free of charge with quantity ol the same unitr;of the PFIZER Brand as will permit PFIZER rodistribute bonus goods free ol charge to its customer:ior as physicials samples (as the case may be) in thr:of the PFIZER Brand as will permit PFIZER rodistribute bonus goods free ol charge to its customer:ior as physicials samples (as the case may be) in thr:same proportion as SHANTHA for the same period o[time.time. 17. Rights to new products within theterritory: 8.2, Supply of Bonus Goods: If during arr.lperiod SHANTHA supplies units of the SHANTHI\Brand as bonus goods free of charge to its customersor as physicians samples, SHANTHA shall suppl.rBrand as bonus goods free of charge to its customersor as physicians samples, SHANTHA shall suppl.rPFIZER free of charge with quantity ol the same unitr;of the PFIZER Brand as will permit PFIZER rodistribute bonus goods free ol charge to its customer:ior as physicials samples (as the case may be) in thr:of the PFIZER Brand as will permit PFIZER rodistribute bonus goods free ol charge to its customer:ior as physicials samples (as the case may be) in thr:same proportion as SHANTHA for the same period o[time.time. 17. Rights to new products within theterritory: 17.1.Option for new Hepatitis-B products inthe territory: If at any time during the term of thisAgreement, SHANTHA develops, manulactures and / otAgreement, SHANTHA develops, manulactures and / otacquires the right to market any new Hepatitis-Bvaccine or any vaccine that contains a combinationwith another Hepatitis-B PRIZER shall have thewith another Hepatitis-B PRIZER shall have the exclusive option to become the Exclusive Co_marketeer in the Territory for the vaccine. (a) keepPFIZER reasonably informed of SHANTHA,s progressin deveioping any such vaccine, pFIZER access{b) give to all registrations and technical information relatingto the vaccine, and (c) hle an application for ain deveioping any such vaccine, pFIZER access{b) give to all registrations and technical information relatingto the vaccine, and (c) hle an application for aseparate manufacturing license for a brand of tl evaccine that could be co-marketed by pFIZER, inaddition to and simultareously with the applicationfor a malufacturing license hted by SHANTHA for itsown brald. PFIZER may exercise the option for anyfor a malufacturing license hted by SHANTHA for itsown brald. PFIZER may exercise the option for anysuch vaccine at any time within six months afterSHANTHA obtains the manufacturing license for thevaccine. If PFIZER exercises its option for any suchvaccine, unless the parties agree otherwise, the termsof this Agreement (as supplemented by an agreementvaccine, unless the parties agree otherwise, the termsof this Agreement (as supplemented by an agreementon the prices at which SHANTHA supplies the vaccineto PFIZER) shall apply to the new vaccine except thatno paJments sha-ll be required under Section 7 otherthan those already provided for and paid for byPFIZER.to PFIZER) shall apply to the new vaccine except thatno paJments sha-ll be required under Section 7 otherthan those already provided for and paid for byPFIZER. 17.2 Rights to other new products in theterritory: If at arry time during the term of thisAgreement, SHANTHA develops, manufacrures arrd/oracquires the right to market zrny n€w product otherthan those to whom Section 17.1 applies, thefollowing provision shall apply:territory: If at arry time during the term of thisAgreement, SHANTHA develops, manufacrures arrd/oracquires the right to market zrny n€w product otherthan those to whom Section 17.1 applies, thefollowing provision shall apply: (a) SHANTHA will keep PFIZER reasonablySHANTHA's progress in developing aly such product,informed of (b) SHANTHA will give PFIZER access to allregistrations and technical information relaLing to theproduct. (.) UnLiI the end of the six-month periodbeginning on the date SHANTHA obtains ttremalufacturing license for the product, SHANTHA willnegotiate exclusively with PFIZER concerningcommercialization of the product, and will notnegotrate with any third parties concerning theproduct or offer any rights to the product to thirdparties. (a) SHANTHA will keep PFIZER reasonablySHANTHA's progress in developing aly such product,informed of (b) SHANTHA will give PFIZER access to allregistrations and technical information relaLing to theproduct. (.) UnLiI the end of the six-month periodbeginning on the date SHANTHA obtains ttremalufacturing license for the product, SHANTHA willnegotiate exclusively with PFIZER concerningcommercialization of the product, and will notnegotrate with any third parties concerning theproduct or offer any rights to the product to thirdparties. (d) If the parties have not entered into anagreement appointing PFIZER the Exclusive Co-marketer (or some other mutually acceptableagreement) for the product by the end of the sixmonth period referred to in Clause (c), PFIZER shallhave a right of first refusal to become the ExclusiveCo-marketer (or acquire such other rights asSHANTHA offers a third party) for the new product. Asa consequence, SHANTHA shall not grant to a thirdparty the right to promote, market, distribute or sellthe new product in the Territory without hrst offeringto grant such rights to PRIZER on terms andconditions no less favourable than those offered to thethird party. Within one month following receipt ofSHANTHA's offer, PFIZER may accept the offer. IfPFIZER accepts the offer, the two parties will finalise,execute ald exchange the necessar;r documents assoon as possible ald in any event within two monthsafter the date of PFIZER's acceptance.,, 16. From perusal of the agreement, the followingfacts cal be gathered: (il (il The assessee has granted the right to marketand sale of patent product of the assessee under the braldname of PFIZER. (ii) In case assessee invents, develops, manufactures or acquire the right to market any newHepatitis vaccine or any combination of vaccines, theHepatitis vaccine or any combination of vaccines, thePFIZER shall have the option of becoming the exclusive co_marketer of the future product.marketer of the future product. (iii) The assessee's right to grant any right topromote, market, distribute or seil new product to a thirdparty is taken away. (i") Under the agreement, if the assessee developsor manufacturers any new product, the pFIZER by virtue ofpayment made under the agreement, acquires certainrights in such products which includes exclusive co-marketer right as well as right of first refusal. lvl [Af ][the ][end ]of the agreement, i.e., after fifteen years, PFIZER shall have the right to manufacture the product or a competitive product or source the prod.uct orcompetitive product from a third party.competitive product from a third party. (vi) Clauses 1.74, 2.2, 3.2, 13.2, 17.l anct t7.2 contain restrictive covenants. (vii) The amount under the agreement has nol been paid by PFIZER to assessee for purchase of stock in tieu ofcertain commercial rights.certain commercial rights. (viii) The patents and trademark which have not been obtained by the assessee for the vaccine have beengiven up for a consideration. (ix) Thus, rights in capital asset of the ass;essee have been rehnquished by entering into the agreementwhich is a restrictive covenant.which is a restrictive covenant. (x) The assessee has given up the riglrt to appointment exclusively to co-marketer for all {utureproducts including combination of vaccine or any othervaccine or any other product. (xi) The assessee is also required to share all technical information, registration, progress of development etc., of new products with the PFIZER. 17. Thus, the payment of the amount [under ][the]has been made to [the ][assessee ][as ][it ][has]agreement surrendered its rights in [a ]capital [asset, ][namely ][patent ][and]trademark. The agreement in [question ]is [a ][negative/]restrictive covenant ald 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 [appa-ratus of ][the ][company ][and]therefore, is a capital [receiPt.] (xi) The assessee is also required to share all technical information, registration, progress of development etc., of new products with the PFIZER. 17. Thus, the payment of the amount [under ][the]has been made to [the ][assessee ][as ][it ][has]agreement surrendered its rights in [a ]capital [asset, ][namely ][patent ][and]trademark. The agreement in [question ]is [a ][negative/]restrictive covenant ald 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 [appa-ratus of ][the ][company ][and]therefore, is a capital [receiPt.] 18. The finding recorded [by ][the ][Tribunal ][that ][the] arnount received under the [agreement ][is a ][capita'l ][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 ][260,{ of ][the]Act cannot interfere with [the ][finding ][of ][fact ][until ][and]unless the same is demonstrated [to ][be ][perverse' ][(see]Malan [Bi ][by ][LRsr+ ][and ][Principal]Syeda Rahimqrlnisa [ys. ] " [120t6; ][10 ][scc ][315] Commissioner of Income Tax, Bangalore vs. SoftbrandsIndia Private Limitedrs).India Private Limitedrs). 19. Therefore, the substantial question of law framed by this Court is alswered in the negative and infavour of the assessee.favour of the assessee. 20 dismissed. In the result, the appeal fails and is accordingly Miscellaneous petitions, if any, shall stand dismissed 'o'.BrEtYfEFts?HIA //TRUE COPYII t)' To SECTION OFFICER 1. The rncome TaxAppeilate Tribunar, Hyderabad Bench B, HyderabadHyderabad Bench B, Hyderabad 2. The Commissioner of lncome Tax (Appeals) lV , Hyderabad, Hyderabad 3. The Asst. Commissione 4 one cc to sRr , rJ:H":J"r'."::X]#ff*"'" 5. one cc to one cc to cc to to sRr cH. pusHyAM Advocare lopuc] " 5. one cc to one cc to cc to to sRr cH. pusHyAM KTRAN, oor"*,"tt"'.1; KTRAN, oor"*,"tt"'.1; 6. Two CD CopiesTwo CD Copies kul/gh KT) 's 120t8; [+06 ]ITR st: HIGH COURT DATEO:1811112024 ORDERlTTA.No.138 ot 20Q7 DISMISSING TFIE ITTA obtyUL\P\ IItl(IHE s14I;l? [76 ][urrl ][ml]\ii.".",.I.-_\:__