Non-Compete Fee To Be Treated As “Revenue Receipt” From 01.04.2003: ITAT

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has held that the non-competitive fee received by the assessee is treated as 'revenue receipt' in the hands of the assessee but only post-amendment, i.e., w.e.f. 01.04.2003.The bench of Kavitha Rajagopal (Judicial Member) and Om Prakash Kant (Accountant Member) has observed that the amendment to Section 28(va) of the Finance Act, 2002 is only w.e.f. 01.04.2003 relevant to A.Y. 2004-05 onwards and does not have a retrospective effect for taxing the non-compete fee received prior to the period. The bench found that there was no infirmity in the order of ld. CIT(A) in holding the non-compete fee to be in the nature of a 'capital receipt' for the period before April 1, 2003.The respondent/assessee company is in the business of manufacturing and selling bulk formulations of pharmaceutical products. The manufacturing units are situated in Mumbai, Valsad, Ankleshwar, and Tarapur. The assessee company had filed its return of income, declaring loss under the normal provisions and book profit under Section 115JB. The assessee's case was selected for scrutiny, and the assessment order was passed by the A.O. determining the total income at Nil after making the disallowance in respect of receipts for non-competing scientific and technical information.The assessee appealed before the first appellate authority, challenging the additions made by the A.O. The CIT(A) confirmed the addition of a receipt for non-competent scientific and technical information amounting to Rs. 17,40,00,000/-.The assessee and the department were in appeal before the Tribunal, challenging the order of the CIT(A), where the Tribunal set aside the issue of receipt on non-competition fee amounting to Rs. 10 crore and upheld the addition of Rs. 7.40 crore on transfer of scientific know-how and technical information. The AO passed the assessment order upholding the addition of non-compete fees of Rs. 10 crores as a 'revenue receipt'.The first appellate authority in an appeal filed by the assessee deleted the addition by holding the same to be a 'capital receipt' and the such receipt was liable to tax only after A.Y. 2003-04 as per the amendment to Section 28(va) of the Finance Act, 2002, w.e.f. 01.04.2003.The payment received as a non-competition fee under a negative covenant was always treated as a capital receipt until FY 2003–04. It was only via the Finance Act, 2002, that clause (va) was inserted in Section 28 of the Income-tax Act, 1961, with effect from April 1, 2003, that the capital receipt was made taxable.The department contended that the assessee has not given up its source of income by way of the agreement signed by the assessee with LHHCL and has not proved that it has given up the marketing and sale of other products other than those mentioned in the agreement. The non-competition fee of Rs. 10 crore was 'revenue receipt' liable to be taxed in the hands of the assessee. The assessee contended that the non-competition fee was liable to be taxed as 'revenue receipt' only after A.Y. 2003-04 as per the Finance Act, 2002, and was not liable to tax prior to A.Y. 2003-04. For years 1998–99 and 2001–02, the coordinate bench held the non-competition fee to be a 'capital receipt' not taxable in the hands of the assessee. The court, while dismissing the department's appeal, held that the consideration received by the assessee towards the non-competition fee is 'capital in nature', as it is already held that the amendment to Section 28(va) is not applicable to the year under consideration. The intention of the legislature was to clear the ambiguity of the non-competition fee received by the assessee by treating the same as a 'revenue receipt' in the hands of the assessee but only post-amendment, i.e., w.e.f. April 1, 2003. Counsel For Appellant: Samir ShahCounsel For Respondent: Manish SareenCase Title: ACIT-2(2)(1) Versus Lyka Labs Ltd.Case No.: IT A No. 2520/Mum/2023Click Here To Read The Order

Non-Compete Fee To Be Treated As “Revenue Receipt” From 01.04.2003: ITAT

Mariya Paliwala

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