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Commissioner of Income Tax Versus M/s. Chemech Laboratories Ltd.

2017 (1) TMI 248 - MADRAS HIGH COURT

Valuation towards non-compete fee - whether non-compete and brand acquisition were equally important components in the transfer of an undertaking - Held that:- Considering with the apparent intention of the parties to attribute some amount of the total consideration towards Non-compete as seen from clause 3.6 of the Non-compete Agreement. The learned counsel would, upon instructions, suggest that a sum of ₹ 1 crore might be adopted as a reasonable valuation towards non-compete fee. In the .....

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a critical difference. The Substantial Question of Law is answered in favour of the Revenue and against the Assessee - Tax Case Appeal No. 1492 of 2007 - Dated:- 23-12-2016 - Nooty Ramamohana Rao And Anita Sumanth, JJ. For the Appellant : Mrs.Hema Muralikrishnan For the Respondent : Mr.R.Vijayaraghavan for M/s.Subbaraya Aiyar JUDGMENT ( Judgment of this Court was delivered by Anita Sumanth, J. ) The Assessee/Respondent in this appeal (CLL) was engaged in the business of manufacture and marketin .....

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no part thereof was attributable to non-compete. The Assessing Authority, however, held that part of the consideration of ₹ 6 crores would be attributable to non-compete as well. According to him, the bifurcation could be made on the basis of the instalments set out in the agreement, being upfront payment of ₹ 4 crores upon execution of the agreement, ₹ 1 crore upon transfer to SPIL of necessary registration under the Drug Laws and Rules and ₹ 1 crore upon completion of .....

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n-compete, the justification being that non-compete and brand acquisition were equally important components in the transfer of an undertaking. The Assessment was enhanced to this effect. 3. The Assessee filed an Appeal before the Income Tax Appellate Tribunal (ITAT) which reversed the orders of the CIT(A) as well as the assessing authority holding that the entire sum of ₹ 6 crores would only constitute a capital receipt not liable to tax in the year under consideration and that no portion .....

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tion Agreement as follows: 4. CLL intends to sell and SPIL intends to acquire the entire Brands and any and all rights related thereto, past, present and future and whether or not registered, free of all encumbrances, claims, etc, and to this end the Parties wish to enter into an Agreement on the terms and conditions specified herein; 5. The parties specified the terms and conditions for the sale of Brands, Assignment of Trade Marks, Copy Rights, Designs etc and interestingly, the Non-compete Ag .....

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ly or indirectly retain, use, sell, licence, or in any manner deal with or make available to any person in the Territory, the Brands, or any symbol, monogram, logo, word, device letter, numeral, picture, or combination of any or all of these elements which is, in any manner, confusingly similar to the Brands or any registrations in relation thereto. Without prejudice to the generality of the foregoing, and unless specifically authorized in writing by SPIL, and if so authorized then in the manner .....

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ewith. The non-compete agreement dated 06.02.2003 sets out the agreement of the parties in terms almost similar to the Brand Acquisition agreement as under: 2.Non-competition 2.1. During the term of this Agreement, CLL shall not compete with SPIL and/or any of its Affiliates in the business in the Territory nor shall it commence, engage in, be interested in or carry on the business or any business similar to that of the business. Provided that, nothing herein shall be construed to restrict CLLs .....

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ut the prior written consent of SPIL, CLL shall not, on their own behalf or on behalf of any person, entity or group, directly or indirectly; (i)hire or solicit the employment of (A) any current client or customer of SPIL or (B) any officer, director or employee of SPIL or (ii) solicit the business of any current client or customer of SPIL. Article 3 details the specific areas of non competition such as Manufacturing, Trade, Stocking, Assistance and Licences. 7. The parties agreed that the consi .....

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t SPIL has made and the receipt of which is hereby acknowledged by CLL. b.A sum of ₹ 10,000,000/- (Rupees Ten Million only) payable upon CLL submitting to SPIL, necessary registrations under the new Drug Laws & Rules, to enable SPIL to import any of the products or the Active Drug Substances in respect of any of the products. SPIL shall pay simple interest at a rate lower of, 7% p.a. and the rate offered by ICICI Bank on deposits placed with the Bank for a tenure of one year, on the sa .....

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he agreement. 8. In this background, the question before us is, whether any part of the consideration of ₹ 6 crores would relate, and be attributable to, the activity of non-compete. We dont have to look far for the answer. The parties, in clause No. 3.6 of the non-compete agreement dated 06.02.2003, confirm the reasonableness of the covenants as well as the consideration agreed upon in the following terms: 3.6.Reasonableness At the instance of SPIL, CLL has agreed to the above and both t .....

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ts dated 06.02.2003 thus depict a composite transaction in respect of which the amount of ₹ 6 crores has been paid. As agreed upon by the parties, some part of the total consideration would thus have to be attributed towards the activity of non-compete as well. The Assessing Officer attributes a sum of ₹ 4 crores towards non-compete, modified to ₹ 3 crores by the CIT(A) further modified to nil by the Tribunal. The Tribunal finds that the dominant purpose of the transaction was .....

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y sum, whether received or receivable, in cash or kind, under an agreement for - (a)not carrying out any activity in relation to any business [or profession] or Provided that sub-clause (a) shall not apply to (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business [or profession], which is chargeable under the head Capital gains. Inserted by the Finance Act, 2002 wi .....

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ness, the consideration for which would be taxable as business income. Thus, post 1.4.2003, consideration received towards a negative covenant, as contra-distinguishable to consideration received towards the transfer of business rights, would be liable to tax as business profits. The question whether the activity of non-compete was incidental or dominant was thus irrelevant, and the Tribunal mis-directed itself in addressing itself to the same. This is particularly so since the parties themselve .....

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