In M/s. Bharat Serums & Vaccines Ltd. v. ACIT, the division bench of the Mumbai Income Tax Appellate Tribunal held that the sale consideration received on the sale of patent is taxable under the head “capital gains” under the provisions of the Income Tax Act.
The Assessee-company, is engaged in the business of manufacturing and trading of pharmaceuticals. During the course of assessment, the AO noted that the assessee had sold a patent namely Profafal for 1.5 crores, for which it had claimed that no expenditure was incurred for acquiring the patent. According to the assessee, the patent was a capital asset and the entire receipt on assignment of patent is not taxable. Rejecting these claims, the AO held that the receipt from sale of patent was a revenue receipt and is taxable under the head ‘capital gains’. Accordingly, he completed assessment by invoking s. 55(2) of the IT Act.he further observed that the assessee was engaged in the business of research development,manufacturing, wholesale trading and licensing of bio-pharmaceuticals, biotechnology products, serums and process related technology for human therapeutic and it had manufacturing facility and state-of-art research facilities etc. According to him, it was not possible to develop a process / patent without input from specialized / skilled personnel in a state-of-art research facility, that process of developing a patent was a part of a business of the assessee, that it had claimed all the expenses for skilled personnel and research facility in the P&L account, that the claim made by it in not incurring any cost for developing the patent was not acceptable. The CIT(A) confirmed the order.
Before the Tribunal, the assessee argued that they had transferred know how and patent and therefore, section 55(2) is not applicable since it does not deal with the assets in question. Furthermore, even if expenditure was incurred for developing the patent no cost was ascertainable.
Discussing the concept of ‘patent’, the bench noted that “it is a long-term process of visualising an idea, experimenting, reaching at certain conclusions and testing of such conclusions, so that the fruit of the labour are enjoyed by the person who tirelessly pursues a goal for years together. It is a culmination of extensive research work and logical analysis.Patent is a legal document that is granted by the Sovereign and gives an inventor exclusive right to make/use/sale an invention for a specified number of years.Previously invented items can also be subject matter of patents, provided they demonstrate significant improvement.”
“Patent prevents all others,not only the imitators,but even the independent entrepreneurs, having the same idea but not implemented till that date,from using the invention for a specified period.It may pose serious difficulty for the competitors, but the proverbial early birds are always rewarded.Though a patent could affect a large number of people, patents are not freely available for all improvements. Only patentable inventions are recognised by the authorities concerned. A patentable invention must pass three basic tests namely it must be novel,it must be non-obvious and it must be useful.In other words, invention should not previously exist and it should be a significant improvement to the existing technology. Besides,patents cannot be granted for invention that would only be used for an illegal or immoral purpose.No patent can be granted on a law of nature or scientific principles even if a person discovers it for the first time.It is said that the goal for resisting the patents is to encourage people to bring qualitative and far-reaching changes in the technology so that it could benefit the society at large.”
The bench further noted the distinction between a patent and trademark and noted that the patent protects substance of article. “Medical Patents require clinical tests and administering drugs to the patients. Clinical tests have to be performed under controlled conditions.For understanding the effective mass and the side-effects of the medicine large sample survey spread over a reasonable time span is a must.Considering the side-effects of ‘Profofal’, as narrated earlier,the research work is to be done with care.In short,before getting a patent of medicine like the item under consideration, the assessee has to carry out a lot of research analysis and experimentation. Naturally it would require incurring of expenditure for both the activities.Such a tedious and cumbersome process was adopted by the assessee to have a right to manufacture/produce/process ‘Profofal’.
” Diving deeply into the facts of the case, the bench noted that the product ’Profofal’ is a generic medicine available in the market and the patent was for the purpose to have right to manufacture /produce/ process some article/thing. Upholding the order, the bench said “The patent was registered for commercial exploitation of the same in India as well as in the international market.It was transferred to the assignee for exploiting it commercially. Section 55(2)(a) talks of right to manufacture, produce or process any article or thing.Therefore,as per the amended provisions,the right to manufacture/ produce/ process would be taxable under the head capital gains and cost has to be taken at Rs. nil.In these circumstances,in our opinion the FAA has rightly invoked the provisions of Section 55 and taxed the disputed amount under the head capital gain.