TMI Blog2021 (2) TMI 463X X X X Extracts X X X X X X X X Extracts X X X X ..... eipt of compensation to the AO. In absence of any evidence to prove that all materials necessary for completion of assessment were placed before the AO, it cannot be said that the AO has considered the issue and formed an opinion on the issue. Unless, the AO has formed an opinion on the issue on the basis of materials furnished by the assessee, then it cannot be said that the assessment has been reopened on mere change of opinion. There is no merit in the arguments taken by the assessee challenging reopening of assessment. In so far as, various case laws cited by the assessee including the decision of Hon ble Supreme Court in the case of CIT vs. Kelvinator India Ltd [ 2010 (1) TMI 11 - SUPREME COURT] we find that those case laws are not applicable to facts of present case and hence, are not considered. Hence, we reject the ground taken by the assessee challenging reopening of assessment. Addition towards compensation received for termination of manufacturing agreement u/s.28(va)(a) - assessee is not owning any know-how, patent and trade-mark required for manufacturing of goods. Consequently, compensation paid for pre-closure of manufacture agreement cannot be brought to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 28(va) is arbitrary, unjust and bad in law. In this regard, the appellant wishes to submit as under: On Jurisdiction: 1. In this connection it is respectfully submitted Ld.CIT(A) has failed to consider the arguments put forward at the time of hearing and in the written submissions, fairly, judicially on jurisdiction of the issue, the copy of the same is reproduced as below: a. There is no valid reason for again re-opening the same assessment for the second time, as it was evident that all material, they relied upon were already made available to them during the first assessment itself. b. The appellant has submitted more than 30 items of details/documents in the first hearing during the assessment proceedings. We enclose herewith the copy of the notice received from AO and submissions made for the same. c. The submission includes Notes to Accounts and Tax Audit Report . The appellant has reported about the accounting treatment of money received for cancellation of manufacturing contracts in Note No: 10. Further in the Tax Audit Report also the same is reported under Amount not credited Profit Loss A/c and treated as Capital Receipt. d. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g agreement. 3. The above schedule was available with the Assessing Officer when the original assessment was completed. Thus the appellant disclosed fully and truly all the materials relevant to the assessment for the Assessment year 2009-10. After taking into considerations of the above schedule of the Balance Sheet which represents the Capital Accumulation of ₹ 8.75 crores, the AO completed the original assessment u/s 143(3). a. CIT(A) erred in recognizing a capital receipt as Extra-ordinary item or exceptional item and deciding it as a revenue receipt. Extraordinary item or exceptional items are those that revenue in nature but not directly resulted due to current year normal operations. Hence, the same should be reported as below line item and will not fonn part of current period profit/loss it will be treated as part of Net Profit. Please refer Guidance Note of ICAI on the Schedule III to the Companies Act, 2013 para 9.6 and para 9.7,which explains the criteria for treating an item as Extra-ordinary or exceptional . b. Further the method of accounting treatment followed by the appellant for Capital Receipt justified based on the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness contract is not a capital gain/business income but a non- taxable capital receipt . It is to be noted that the decision of the Bombay High Court was upheld by the Hon ble Supreme Court -(2018) 97 taxmann.com 136(SC). 8. In this case, there is a breach of contract giving rise to claim for damages and the compensation was paid on account of failure to honor the commitment which is capital in nature.(10 Years Manufacturing Agreement). 9. This compensation is for extinction of right to sue which is a capital receipt not chargeable to tax. 10. The Ld.CIT(A) has noted that as the appellant has entered into another agreement with Dr.Reddy s Lab, on similar conditions on 20/11/2006 for a period of TWO months after termination of the manufacturing agreement in September 20006.Based on this the CIT(A)A has concluded the receipt as Revenue Receipt. However, CTT(A) also has noted certain conditions mentioned in the termination agreement about, surrender of Licenses, non manufacture of similar products by SMI or its promoters etc., In this context it is permanent to understand the business model that is prevailing the pharmaceutical industry based on which it can be clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced w.e.f. AY 20 19-20. The compensation received in this case is chargeable to tax u/s 28(ii)(e) only. However, the same was introduced with effect from AY 2019-20 only and does not apply to the year under consideration. 15. In view of the above submissions, compensation received by the appellant is not taxable u/s 28(va). 16. Further the compensation is only to avoid litigation connected with the agreement, further it is in lieu of cancellation of manufacturing contract which is a revenue generating stream of activity. 17. The assessee received the compensation under agreement for relinquish his right to sue in contract agreement. The property asset was not transferred to the assessee. Hence this transaction is outside the scope u/s 2(47) of IT Act. The following case laws are relied in this regard: a. M/s Chheda Ho-using development corporation vs Addln CIT ITAT Mumbai in ITAT No 86/Mum/2017 dated 29/05/2019 b. Bhojison Infrastructure P Ltd Vs. ITO (ITATAhmedabad) dated 1 7/09/2018 inITA 2449/Ahd/2016. 18. The Appellant has not received the amount under agreement for not to share in knowhow, copyright, Patent, trademark, license as specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. In the given case, the appellant is only a contract manufacturer of Dr. Reddy s Laboratories Limited with the inputs given by them viz., their know-how, patent, trademarks, and speculation of pharma products. Thus, the appellant is not owning any know-how, patent and trademarks, Further, the appellant is not restricted to carry out his business being a manufacturer of pharma products. (emphasis supplied). Whereas, Section 28(va) speaks about not carrying out any activity in relation to any business; or (b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. Since, the appellant is not compel to quit business (as per the Termination Agreement) as envisaged in Section 28(va) nor appellant posses any know-how, patent and trademarks, the said provision is not applicable to the appellant. Rather, the appellant is only prohibited to use know-how, patent and trademarks of Dr. Reddy Laboratories Limited. However, the above compensation falls under the category of a new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited company engaged in the business of manufacturing and marketing of pharmaceutical products, filed its return of income for assessment year 2007-08 on 31.10.2007 declaring loss of ₹ 6,01,45,065/-. The assessment for the impugned assessment year was completed u/s.143(3) of the Income Tax Act, 1961 (hereinafter the Act ) on 15.12.2009 and determined total loss at ₹ 3,00,43,396/- by inter-alia making addition of ₹ 3.01 crores towards disallowance of expenditure u/s.40(a)(ia) of the Act and disallowing long term capital loss claimed by the assessee of ₹ 4,20,058/-. The case has been subsequently reopened u/s.147 of the Act for the reasons recorded as per which, income chargeable to tax had been escaped assessment within the meaning of Section 147 of the Act and accordingly notice u/s.148 dated 23.03.2012 was issued and served on the assessee. The case was taken up for scrutiny and during the course of assessment proceedings, the AO, called upon the assessee, to explain as to why amount received from Dr.Reddy s Laboratories Ltd., for termination of contract manufacturing agreement cannot be assessed as profits liable to be taxed u/s.28(va)(a) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for the relevant assessment year. The assessee has also challenged addition made by the AO on merits in light of certain judicial precedents including the decision of Hon ble Supreme Court in the case of CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., (2018) 400 ITR 108 (Bom) and argued that compensation for breach of contract resulting in loss of source of income is not capital gain / business income, but a non-taxable capital receipt. The assessee further submitted that, in order to bring into tax compensation received for termination of contract, it should be in the nature of non-compete fee for compensating for surrender or non-using of technical know-how which can be brought to tax, but compensation paid for loss of business cannot be brought to tax before amendment to Section 28(ii)(e) of the Act w.e.f., assessment year 2019-20. 5. The ld.CIT(A) after considering relevant submissions of the assessee and also by relying upon certain judicial precedents, rejected legal ground taken for challenging reopening of assessment on the ground that there is no merit in arguments of the assessee that the assessment has been reopened on mere change of opinion, because the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. On the other hand, there was enough material to suggest that the appellant had failed to disclose fully and truly all material facts relevant for computing the assessable income. This is evident from the fact that the assessee did not route the receipt of compensation through the profit and loss account and credited the same straightaway to the capital reserve and disclosed it in the balance sheet as capital reserve which was nil as at the beginning of the year. This receipt of ₹ 6 crores is a one-time event and constitutes one sixth of the total revenues disclosed in the financial. The accounting policies also do not throw any light as to the creation of this capital reserve. Under normal circumstances, such a receipt has to be considered as an exceptional item and should be properly disclosed in the financial by way of Notes to Accounts. For these reasons, there cannot be any hesitation in holding that the assessee had failed to disclose truly and fully all the material facts necessary for the completion of assessment. In order to constitute change in opinion , the assessment earlier made must, either expressly or by necessary implication, convey an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed effective from April 1 2006. In Para 4 Sai Mirra and VSR agreed to issue a No Objection Certificate in the agreed format (Annexure III) appointing any other contracting manufacturer other than Sai Mirra or its affiliate or manufacture the same on its own, for manufacture of the products covered under the principal agreement (f) In Page 6 in Para 12 of the Agreement under the head Non-compete, it is mentioned as under: Sal Mirra and VSR shall not directly or indirectly manufacture finished dosage formulations similar to products using the information till 31.03.2010 or use receptively similar brand names or trademarks to those of Dr. Reddys. Sai Mirra and VSR shall not do any act which is prejudicial to the interest of Dr Reddys. M/s Sai Mirra and 1/SR agrees that the restrictions hereunder are fair and reasonable. (g) In Page 9, In Para 24 under the head full and final settlement, it is mentioned as under: In consideration of the obligations of Sai Mirra hereunder and the full and final settlement of all claims of Sal Mirra, Dr Reddy s has agreed to pay a sum of ₹ 600 lakhs. 6.4. After going through the above terms and conditions, it is cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.147 of the Act. 7.1 The ld.AR for the assessee submitted that reopening of assessment is bad in law and liable to be quashed, because there is no valid reason for reopening of assessment, which is evident from the fact that the AO has formed reasonable belief of escapement of income on the basis of Notes to Accounts and Tax audit report filed by the assessee along with return of income which were very much available at the time of assessment proceedings. The ld.AR further submitted that the formation of belief by the AO is not based on any tangible material which came to his possession subsequent to completion of assessment. Therefore, in absence of any fresh tangible material if assessment is reopened, then it is a case of mere change of opinion, which is not permissible under the law. In this regard, the ld.AR relied upon the decision of Hon ble Supreme Court in the case of CIT vs. Kelvinator India Ltd., (2010) 320 ITR 561. The ld.AR has also relied upon the decision of Bombay High Court in the case of Asian Paints Ltd. vs. DCIT, (2009) 308 ITR 195 (Bom). 7.2 The ld.DR, on the other hand strongly supporting order of the CIT(A) submitted that the AO has formed reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue. Unless, the AO has formed an opinion on the issue on the basis of materials furnished by the assessee, then it cannot be said that the assessment has been reopened on mere change of opinion. We, therefore, are of the opinion that there is no merit in the arguments taken by the assessee challenging reopening of assessment. In so far as, various case laws cited by the assessee including the decision of Hon ble Supreme Court in the case of CIT vs. Kelvinator India Ltd., supra, we find that those case laws are not applicable to facts of present case and hence, are not considered. Hence, we reject the ground taken by the assessee challenging reopening of assessment. 8. Coming to the issue on hand, the AO has made addition towards compensation received for termination of manufacturing agreement u/s.28(va)(a) of the Act, on the ground that any sum whether received or receivable in cash or kind under agreement for not carrying out any activity in relation to any business shall be chargeable to Income Tax under the head profits and gains of business or profession for not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or profession . From this, it is very clear that up to assessment year 2019-20, compensation received for termination of any agreement cannot be taxed u/s.28(ii)(e) of the Act. In this case, the compensation received pertains to previous year before the amendment to Section 28(ii)(e) of the Act. Therefore, the said amount cannot be brought to tax as compensation or any other payment due to or received by any person by whatever name called in connection with termination of terms and conditions of any contract u/s.28(ii)(e) of the Act. 8.2 Having said so, let us examine whether the same falls within the ambit of Section 28(va)(a) of the Act. The provisions of Section 28(va)(a) of the Act, deals with any sum whether received or receivable in cash or in kind under agreement for not carrying out any activity in relation to any business for not sharing any know-how, patent, copyright, trade-mark, license, etc. In the present case, from the facts available on record, it is abundantly clear that the assessee acts as a contract manufacturer for drugs and the specification of such drugs has been provided by Dr.Reddy s Laboratories Ltd. Further, the agreement dated 14.04.2000 clearly s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Revenue and the Hon ble Supreme Court in CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., (2018) 97 taxmann.com 136 (SC) upheld the order of the Hon ble Bombay High Court and dismissed the SLP filed by the Revenue. Therefore, from the above it is very clear that any compensation received for termination of manufacturing agreement is in the nature of capital receipt for loss of investment in business or loss of profit from business but, it cannot be treated as revenue receipts liable to be taxed u/s.28(va)(a) of the Act. For better understanding, the findings of the Hon ble Bombay High Court are reproduced as under:- Under the master agreement, the right of first refusal was vested with LFFL to carry out the bottling activities in the territory of Bangalore. There was a clear indication that there would be formation of Bangalore subsidiary and there would be an investment agreement also between the parties for this purpose. The necessary guidelines as to how the subsidiary would be formed, various assignments of the bottling rights only to such a newly formed company and to be held and formed by Parle Group and later on the Coca Cola Company will join in after subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Assessing Officer has treated the receipt to be taxed as long term capital gains on protective basis and the Commissioner (Appeals) has treated the same receipt to be taxed as casual and non-recurring taxable income under section 10(3), the argument was that the assessee received this sum of ₹ 16.06 crore as compensation from the Coca Cola Company for breach of the right of first refusal agreement with regard to bottling rights of Pune territory. The Assessing Officer, according to the assessee, solely relied upon the observations and findings in the assessment order dated 30th March, 2001 in the case of Aqua Bisslery Limited, wherein, the receipt was taxed under the head long term capital gains . Once the factual basis was laid before the Commissioner (Appeals) and it was found that the same was identical to the case of Panic Soft Drinks Private Limited except for the fact that in the present case, the assessee was in the bottling business for Parle Group of Companies, there was a right of first refusal and the assessee was to carry on the business of bottling for the Coca Cola Company. A detailed business plan was submitted. However, the Coca Cola Company, without a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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