ITAT Mumbai rules Tax incidence of non-compete fee is not retrospective

By: Admin
June 11, 2024
Categories: Income Tax News|News
4 Min Read

Non-compete fees received by a taxpayer will be treated as non-taxable capital receipts up to the financial year 2002-03. The amendment, which categorizes 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 a recent ruling.

The ITAT bench confirmed that the amendment lacks retrospective effect and upheld the Commissioner (Appeals)’s decision that classified the Rs. 10 crore non-compete fee received by Lyka Labs — a company involved in manufacturing and selling pharmaceutical formulations — as a capital receipt. On March 12, 2002, Lyka Labs signed a non-compete agreement with its joint venture company, Lyka Hetro Health Care Limited (LHHCL), agreeing not to compete in the marketing, distribution, and selling of certain formulations associated with registered or utilized trademarks.

Lyka Labs and the Commissioner (Appeals) both referenced an earlier Supreme Court ruling involving Guffic Chem. The Supreme Court clearly stated that the amendment is effective only from April 1, 2003 (Assessment year 2004-05 onwards) and does not apply retroactively to non-compete fees received prior to this period.

Additionally, the Supreme Court in this ruling differentiated between compensation for termination/loss of agency (a revenue receipt) and compensation for loss of the source of business due to a negative covenant (a capital receipt). The agreement between Lyka Labs and LHHCL was unquestionably a negative covenant. Consequently, the ITAT bench rejected the I-T department’s appeal.