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I-T - Whether entire consideration paid for transfer of business under three separate agreements for Brand Acquisition, Consultancy and Non-compete, would be taxable as 'business income' - NO: HC

By TIOL News Service

CHENNAI, JAN 09, 2017: THE ISSUE IS - Whether entire consideration paid for tansfer of business under three seperate agreements for Brand Acquisition, Consultancy and Non-compete, would be taxable as 'business income'. NO IS THE VERDICT.

Facts of the case:

The assessee company, CLL, was engaged in the business of manufacture and marketing of pharmaceuticals. It entered into three separate agreements with an entity, SPIL for Brand Acquisition, Consultancy and Non-compete. The parties agreed that the consideration for transaction shall be a sum of Rs.6 crores. For the AY 2003-04, CLL took a stand in its assessment that the amount of Rs.6 crores related solely to the transfer of business under the Brand Acquisition Agreement and no part thereof was attributable to non-compete. The AO, however, held that part of the consideration of Rs.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 Rs.4 crores upon execution of the agreement, Rs.1 crore upon transfer to SPIL of necessary registration under the Drug Laws and Rules and Rs.1 crore upon completion of one year from the date of execution of the agreement. Thus AO attributed an amount of Rs.4 crores that, according to him, represented payment towards non-compete and duly brought the same to tax.

On appeal, the HC held that,

++ The business transfered by CLL is highly specialized and exclusive. It was explained that only three companies in the World were engaged in the manufacture of the aforesaid biological products viz. Viz Serono, Switzerland, Organon, Holand and Instituto Massone, Argentina. The third entity which was under exclusive agreement with CLL now stood transferred to SPIL under the Brand Acquisition Agreement. Thus, according to him, the re-entry of CLL into this market, or for that matter competing in this area, is just wishful thinking and an impossibility. We have however, to reconcile this with the apparent intention of the parties to attribute some amount of the total consideration towards Non-compete as seen from the Non-compete Agreement. The counsel would suggest that a sum of Rs.1 crore might be adopted as a reasonable valuation towards non-compete fee. In the aforesaid facts and circumstances, the sum of Rs.1 crore towards non-compete appears to be proper and would serve the ends of justice. It is known that in attributing an amount of Rs. One crore towards negative covenant, we are substituting yet another value in preference to those already adopted by the lower authorities. However the factual aspects of the matter have not been taken into consideration, and this, makes a critical difference. The Substantial Question of Law is therefore answered against the Assessee.

(See 2017-TIOL-50-HC-MAD-IT)


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