TMI Blog2007 (11) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of pharmaceutical products, which are sold both in domestic and export market. In addition, the assessee was also marketing a Nitro Glycerine based product named 'Angispan TR', manufactured by another company named 'Sidmak Laboratories India Ltd.' In the course of assessment proceedings, it was noticed by the Assessing Officer that there was a credit entry of Rs. 6 crores in the Profit and Loss A/c on account of receipt for transfer of marketing and clinical data and allied rights. In the computation of income filed along with the return of income, the assessee company claimed deduction in respect of the above receipt on the ground that it was a capital receipt not chargeable to tax. In the note No. 13 to the computation of total income, the assessee explained as under: "During the year the company has entered into agreement with US Vitamin Ltd. The company shall not compete with US Vitamin Ltd. directly or indirectly or through it affiliates in the promoting, distribution and selling activities of formulation made from the bulk drug nitro glycerine. The company has received consideration sum of Rs. 6 crores towards non-compete fees. It is submitted that the consideration r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of business to the USV. In addition to transfer of above know-how, Lyka was also restricted from making available/assigning the said information to a third party for a period of 3 years. Further for a period of 5 years Lyka or its affiliates are restricted from competing with USV in the sale and distribution of formulation made from nitro glycerine or having the same as its main ingredient." 4. The contention of the assessee before the Assessing Officer was that the above information and data was a self-generated asset with no cost and therefore the amount received by the assessee for giving up such asset was in the nature of capital receipt not chargeable to tax. Reliance was placed on the Supreme Court judgment in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294. It was also contended that there was non-compete clause in the agreement and therefore the consideration for the same also amounted to capital receipt in view of the Supreme Court judgment in the cases of Gillanders Arbuthnot Co. Ltd. v. CIT [1964] 53 ITR 283 and CIT v. Best Co.(P.) Ltd. [1966] 60 ITR 11. Reliance was also placed on two judgments of Hon'ble Madras High Court in the cases of CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That the definition of income in section 2(24) of the Income-tax Act ('the Act') is an inclusive definition which would include any receipt which can properly be described as income. Relial1ce was placed on the Supreme Court judgment in the case of CIT v. G.R. Kartikeyan [1993] 201 ITR 866. In view of the above reasons, it was held by him that the sum of Rs. 6 crores received by the assessee was Revenue receipt chargeable to tax. Accordingly, the addition was made. 6. The matter was carried in appeal before the learned CIT(A) before whom following submissions were made: (i) that marketing information and knowledge developed by the assessee during the course of its engagements in the business, constituted a self-generated asset. Therefore, the consideration received was a capital receipt not chargeable to tax; (ii) even assuming that capital receipt is chargeable to tax under section 45 of the Act under the head 'Capital gains', the capital gain cannot be computed inasmuch as no cost was incurred in acquiring such asset as it was a self-generated asset and therefore no income can be brought to tax in view of the judgment of the Hon'ble Supreme Court in the case of B.C. Sriniv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of the view that the amount received could not be considered as a capital receipt. It was also observed by him that marketing rights were acquired by the assessee in the normal course of business with the help of its marketing staff and thus expenditure had been incurred in acquiring such rights. Consequently, it would be taxable under the head 'Capital gain' even assuming it to be capital receipt. The addition made by the Assessing Officer was therefore upheld. Aggrieved by the same, the assessee is in appeal before the Tribunal. 8. The learned Counsel for the assessee has reiterated the stand of the assessee before the Assessing Officer as well as learned CIT(A) and therefore, the same need not be repeated. However, he has also relied on the decision of the Tribunal in the case of PL. Chemical Ltd. v. Asstt. CIT [2003] 86 ITD 46 (Mad.) as well as the decision of Calcutta High Court in the case of CIT v. A.S. Wardekar [2006] 283 ITR 432. On the other hand, the learned D.R. has also reiterated the reasonings given by the Assessing Officer as well as learned CIT(A) and therefore, the same need not be repeated. However, it has been submitted by him that in the case of USV, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormation pertaining thereto; and D. USV is also engaged in the business of manufacturing, marketing and distributing inter alia various cardiac products and desires to expand its market, increase its market share and expand its activities in the field of Nitro glycerine based Formulations; and E. At the request of USV and for the consideration mentioned herein, LYKA has agreed to provide to USV the aforesaid clinical data, scientific details, reports on clinical trials carried on by LYKA in the last few years, valuable market information more particularly set out in the Schedule hereunder written (hereinafter referred to as the Scientific and Marketing Know-how); and F. LYKA has represented that it is not restrained under any law or contract to disclose the aforesaid clinical data, scientific details, reports on clinical trials carried on by LYKA in the last past few years and the valuable market information. Now this agreement witnesseth and it is hereby agreed by and between the parties hereto as under: 1. On or before 28-2-1998 LYKA shall supply and provide to USV clinical data, scientific details, reports on clinical trials carried on by LYKA in the past few years, valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns based on the bulk drug Nitroglycerine. (b) Source of manufacture of Formulations from the bulk drug Nitroglycerine. (c) Break up of Statewise list of wholesalers, stockists and dealers of the Formulations. (d) Break-up of Statewise sales of Formulations for last 5 years. (e) Break-up of Statewise list of specialists, doctors, cardiologists and institutions as short listed by LYKA with respect to the Formulations referred to in the above Agreement. (f) Visual aid designs, copies of promotional material used. Sd (Mr. N.I. Gandhi for L YKA Labs Ltd.) Sd (Mr. P.K. Tewari For USV Ltd.) 10. The perusal of the above agreement reveals the following facts and obligations: 1. that assessee had been in the business of distribution and selling the formulation made from the bulk drug Nitroglycerine, apart from manufacturing of drugs manufactured by it. 2. in the course of its bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as capital receipt. There is no hard and fast rule to determine the character of the receipt. It would depend on the facts of each case. The nomenclature given to the transaction by the parties is also not relevant The true nature of the transaction has to be ascertained from covenants of the contract [National Cement Mines Industries Ltd. v. CIT [1961] 42 ITR 69 (SC)]. A receipt can be said to be capital when it is relatable to the transfer of capital asset other than the stock-in-trade. The capital asset may be tangible or intangible. In the case of tangible asset, the asset must be physically transferred from one person to the other person. Dispossession of the asset from the transferor is the condition precedent. Such transfer may be once for all by way of sale or may be for an enduring period. What would be the enduring period would depend on the facts of each case. On the other hand, in the case of intangible asset, the possession may continue to remain with the transferor such as know-how, expertise, invention, formulation etc. The question arises as to when such asset can be said to be transferred so as to treat the consideration relating to such asset as capital receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been held that compensation paid for cancellation of a contract is normally a capital receipt but if such payment does not affect the trading or profit making structure of the assessee's business nor deprive him of the source of income, then it would be revenue receipt. 15. Now coming to the facts of the case, we find that assessee has simply parted with the information regarding its marketing structure such as list of wholesellers, stockists and dealers of formulations, Statewise sales figures of such formulation for the last 5 years, list of specialists, doctors, cardiologists and institutions, who recommend such formulation, promotional materials and clinical datas as is apparent from the schedule to the agreement. Even after imparting such information, it always remained with the assessee-company. The marketing structure of the assessee remained intact. The only obligation of the assessee is that it shall not disclose such information to other parties for a period of 3 years. Further, the assessee is not restrained from using this information for marketing its own manufactured goods or goods manufactured by other companies. Further, the assessee can provide such information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the learned CIT(A) on this aspect of the issue is therefore upheld. 19. As far as other aspect of the issue is considered, we are in agreement with the contention of assessee's counsel that payment relatable to non-compete covenant amounts to capital receipt in view of Supreme Court judgment in the case of Gillanders Arbuthnot Co. Ltd. as well as various other decisions of the Tribunal. There is no dispute that assessee was marketing 'Angispan TR' a Nitroglycerine formulation for various years. USV wanted to enter the market in respect of its own formulation and therefore intended to avoid the competition. Hence, there was a loss of source of income for a period of 5 years. Thus, in our opinion, the receipt was a capital receipt not chargeable to tax. The order of the learned CIT(A) is therefore set aside on this aspect of the issue. 20. Since the payment received is composite one and part of the same has been found to be revenue receipt, the receipt has to be bifurcated and apportioned. In the absence of any material on the aspect of valuation, we think it appropriate to remit the matter to the file of Assessing Officer for adjudication of the issue of valuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t judgment in the case of UCO Bank v. CIT [1999] 237 ITR 889 for the proposition that in case of sticky loans, the assessee is permitted to change the method of accounting from accrual to cash basis. Certain other decisions were also relied on, which are mentioned in the order of learned CIT(A). 24. The learned CIT(A) found that the income on accrual basis was not booked by the assessee since the concerned parties had not accepted the claims and therefore the method of accounting was changed from mercantile to receipt basis. It was also seen by the learned CIT(A) that objection of the Assessing Officer related to the change in the method of accounting which was not consistent. It was also found by the learned CIT(A) that assessee was claiming deduction in respect of interest paid on accrual basis by following the mercantile system of accounting but the method was changed only in respect of interest income from Sundry Debtors. The learned CIT(A) also took note of the amendment made in section 145 of the Act, which was effective from 1-4-1997 i.e., assessment year 1997-98. According to the amended provisions of section 145, the assessee either could follow the mercantile system or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144." A bare reading of the above provisions makes it clear that from the assessment year 1997-98, assessee was permitted to follow either the cash system of accounting or mercantile system of accounting. No third method is permissible as per amended provisions. Such amended provisions nullify the effect of the judgment of Hon'ble Bombay High Court in the case of Citibank N.A. The learned CIT(A) has found as a fact that assessee was claiming deduction on account of inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given wholly and exclusively for the purpose of business and consequently, the interest paid by the assessee was an allowable deduction under section 36(1)(iii) of the Act. On appeal, the learned CIT(A) following his earlier order for the assessment year 1997 -98, confirmed the disallowance but on quantification it was held that the deposit to the extent of Rs. 30 lakhs was reasonable and consequently the disallowance was rejected with reference to the balance amount of Rs. 45 lakhs. Still aggrieved, the assessee is in further appeal before the Tribunal. 28. After hearing both the parties, we find that this issue is now covered in favour of the assessee by the decision of the Tribunal in assessee's own case for the assessment year 1997-98 in ITA No. 1596/Mum./01. The said decision has been further followed by the Tribunal in assessee's own case pertaining to assessment year 1999-2000 copy of which is placed on record. Following the same, the issue is decided in favour of the assessee. Order of the learned CIT(A) is therefore modified and the entire disallowance sustained by him is deleted. Departmental Appeal 29. The first ground relates to the disallowance of interest of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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