Case Law Details
Sai Mirra Innopharm Private Limited Vs ITO (ITAT Chennai)
On perusal of details filed by the assessee, we find that the assessee has entered into a contract manufacturing agreement with Dr.Reddy’s Laboratories Ltd., for a period of 10 years for manufacturing of drugs as per the specification provided by the principals, but the know-how required for manufacturing of drugs is not possessed by the assessee. Subsequently, Dr.Reddy’s Laboratories Ltd., has terminated the contract before the completion of contract period for the reasons best known to them and demanded the assessee to surrender all the information and manufacturing license for the products produced for them. As a result of this, the assessee company has incurred huge loss in the form of investments made for manufacturing facilities as well as loss of profit from the business for which Dr.Reddy’s Laboratories Ltd., has compensated the assessee for such loss and paid a sum of Rs.6 crores in the impugned assessment year. The case of the assessee was compensation received from Dr.Reddy’s Laboratories Ltd., is for loss of investments made in manufacturing facility and loss of profit from the business, but not a non-compete fee as referred to u/s.28(va)(a) of the Act, for surrendering technical know-how used for manufacturing of drugs. Therefore, in order to understand whether amount received for termination of manufacturing agreement is in the nature of non-compete fee as referred u/s.28(va)(a) of the Act, or a loss of profit from business which can be brought to tax u/s.28(ii)(e) of the Act has to be understand. As per Section 28(ii) of the Act, any compensation or other payment due to or received by an assessee can be brought to tax and such nature of receipts has been defined in sub-clause (a) to (d). Further, sub-clause (e) has been inserted by Finance Act, 2018 w.e.f., 01.04.2019 as per which “compensation by whatever name called in connection with the termination or the modification of the terms and conditions, of any contract relating to his business can be brought to tax as “Profits and gains of business 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.
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 states that the assessee was in the business of manufacturing and selling of pharmaceutical products and has also necessary facilities and infrastructure required for the manufacture of said products, but has not possessed the know-how required for manufacturing of goods. From the above, it is very clear that the technical know-how required for manufacturing of drugs is supplied by Dr.Reddy’s Laboratories Ltd. Further, when the assessee is already in the business of manufacturing and distribution of pharmaceutical products and is not having necessary know-how for manufacturing of drugs to be supplied to Dr.Reddy’s Laboratories Ltd., as per the agreement between the parties, the amount paid for termination of contract cannot be brought to tax u/s.28(va)(a) as non compete fee for not using any know-how, patent, copyright and trade-mark etc. Therefore, we are of the considered view that compensation received by the assessee under agreement for breach of contract for giving rise to claim for damages is for the loss of source of income and for relinquish his right to sue in contract agreement. Hence, said compensation does not fall under the purview of Section 28(va)(a) of the Act. We further noted that in the given case, the assessee is only a contract manufacturer with inputs given by the principals. Thus, in our considered view the 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 tax u/s.28(va)(a) of the Act, because the same is not in the nature of compensation or any sum paid for not carrying out any activity in relation to any business or not sharing any know-how, patent, copyright, trade-mark, license or any other business or commercial right, which is evident from the fact that even after the termination of agreement with Dr.Reddy’s Laboratories Ltd., the assessee continue to manufacture and distribute pharmaceutical products.
We are of the considered view that compensation received for pre-closure of contract manufacturing agreement with Dr.Reddy’s Laboratories Ltd., is in the nature of capital receipt paid for loss of profit from business / loss of investment, but not in the nature of any compensation or other sum paid for not using any know-how, patent, copyright, trade-mark, license, etc., which can be brought to tax u/s.28(va)(a) of the Act. The AO as well as the CIT(A) without appreciating the facts, had simply made addition towards compensation received from Dr.Reddy’s Laboratories Ltd., u/s.28(va)(a) of the Act. Hence, we direct the AO to delete addition made towards compensation received for termination of contract manufacturing agreement.
FULL TEXT OF THE ITAT JUDGEMENT
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