The Income Tax Appellate Tribunal (ITAT) Chennai on Monday ruled that that compensation received for pre-closure of contract manufacturing agreement 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 which can be brought to tax.
The Assessee, M/s. Sai MirraInnopharm, a private limited company engaged in the business of manufacturing and marketing of pharmaceutical products, filed its return of income for the assessment year 2007-08 declaring a loss of Rs.6,01,45,065. The assessment was completed under section 143(3) of the Income Tax Act, 1961and determined total loss at Rs.3,00,43,396 by inter-alia making the addition of Rs.3.01 crores towards disallowance of expenditure under section 40(a)(ia) of the Act and disallowing long term capital loss claimed by the assessee of Rs.4,20,058.
The case was subsequently reopened and was taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer (AO), called upon to explain as to why the amount received from Dr.Reddy’s Laboratories Ltd., for termination of contract manufacturing agreement cannot be assessed as profits liable to be taxed under section 28(va)(a). In response, the assessee submitted that the company had entered into a contract manufacturing agreement with Dr. Reddy’s Laboratories Ltd., for manufacturing drugs for a period of 10 years. The contract was later terminated by Dr. Reddy’s before completion of the contract period for their business reasons for which they have paid a sum of Rs.6 crores for loss of investments made in manufacturing facilities as well as the loss of profit from the business. The assessee claimed that, since the amount received from Dr. Reddy’s Laboratories Ltd., is in the nature of capital receipts, the sum has been credited directly to the ‘reserves and surplus’ account hence not taxable under the said section.
Judicial member Duvvuru RL Reddy and Accountant Member G. Manjunatha sided with assessee here in this case and based on the precedence set in CIT vs. Parle Soft Drinks (Bangalore) P. Ltd., (2018) 97 and ruled, “we are of the considered view that compensation received for pre-closure of a 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.”
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