Non-compete fees received by a taxpayer will be a non-taxable capital receipts up to the financial year 2002-03. The amendment to treat non-compete fees as taxable revenue receipts came into effect only from April 1, 2003 – this was upheld by the Income-tax Appellate Tribunal (ITAT), Mumbai bench in its recent order.
The amendment does not have a retrospective effect, held the ITAT bench and declined to set aside the order of the Commissioner (Appeals), who had treated the non-compete fees of Rs.10 crore received by Lyka Labs (a company engaged in manufacture and sale of bulk formulation of pharmaceutical products) as a capital receipt.
Lyka Labs had as per an agreement dated March 12, 2002 entered into a non-compete agreement with its joint venture company Lyka Hetro Health Care Limited (LHHCL) for not competing with LHHCL in the marketing, distribution and selling activities of certain formulations for the trade mark which has been registered or used by it.
Both Lyka Labs and the Commissioner (Appeals) relied on an earlier order given by the Supreme Court in the case of Guffic Chem. The apex had categorically held that the amendment is only with effect from April 1, 2003 (Assessment year 2004-05 onwards) and does not have a retrospective effect for taxing the non-compete fee received prior to the said period.
The Supreme Court in this order had also distinguished the compensation received for termination/loss of agency and a loss of source of business as per a negative covenant where the former would be a ‘revenue receipt’ and the latter a ‘capital receipt’. There is no doubt that the agreement entered into by Lyka Labs and LHHCL was a negative covenant. Accordingly, the ITAT bench dismissed the appeal filed by the I-T department.