2012 (1) TMI 104 - AT - Income Tax

Non-compete fee agreement - Held that - We are not in agreement with the arguments of the assessee that non-compete fee is an intangible asset to which provisions of section 32(1)(ii) of the Act are applicable. Therefore in our considered opinion the depreciation cannot be allowed on amount of non-compete fee. We accordingly dismiss this contention of the assessee.

Summary

Issues Involved:
1. Depreciation on new motor vehicles.
2. Exclusion of interest from profits for computing deduction under section 80HHC.
3. Depreciation on non-compete fees.

Detailed Analysis:

1. Depreciation on New Motor Vehicles:
Issue: The assessee claimed depreciation at 50% on new motor vehicles, which was rejected by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals).

Analysis: The assessee did not press this ground during the hearing, and hence, it was dismissed as not pressed.

2. Exclusion of Interest from Profits for Computing Deduction under Section 80HHC:
Issue: The assessee contested the exclusion of interest income from business profits for the purpose of computing deduction under section 80HHC.

Analysis: Similar to the first issue, the assessee did not press this ground during the hearing, leading to its dismissal as not pressed.

3. Depreciation on Non-Compete Fees:
Issue: The assessee claimed depreciation on non-compete fees paid, arguing it created an intangible asset under section 32(1)(ii) of the Income-tax Act.

Analysis: The assessee paid non-compete fees to M/s. Sanmar for agreeing to not compete in the Atofina peroxide business in India for five years. The assessee treated this payment as an intangible asset and claimed depreciation.

Arguments by the Assessee:
- The non-compete fees resulted in the creation of an intangible asset akin to "commercial rights of similar nature" under section 32(1)(ii).
- Cited judicial precedents and circulars to support the claim that non-compete fees should be treated as a capital asset eligible for depreciation.
- Alternative argument: If not treated as a capital asset, the entire expenditure should be allowed as revenue expenditure.

Arguments by the Department:
- Supported the lower authorities' orders, arguing that non-compete fees do not qualify as intangible assets eligible for depreciation.
- Cited decisions from the Delhi Special Bench and other Tribunal cases to support their stance.

Tribunal's Findings:
- The Tribunal noted the facts of the case and the nature of the transaction.
- The Tribunal referred to the decision in the case of Sharp Business Systems (India) Ltd., which held that non-compete fees paid to ward off competition constitute capital expenditure and are not eligible for depreciation.
- The Tribunal emphasized that non-compete fees do not create an intangible asset of the same genus as know-how, patents, copyrights, trademarks, licenses, or franchises.
- The Tribunal also highlighted that non-compete agreements do not create an asset that can be transferred or assigned, unlike other intangible assets.
- The Tribunal concluded that non-compete fees are capital in nature and not eligible for depreciation under section 32(1)(ii).

Conclusion: The Tribunal dismissed the ground of appeal regarding depreciation on non-compete fees, following the precedent set by the Delhi Bench in Sharp Business Systems (India) Ltd. and other relevant cases.

Final Judgment:
The appeal of the assessee was dismissed in its entirety, with the Tribunal ruling against the claims for depreciation on new motor vehicles, exclusion of interest from profits for section 80HHC deduction, and depreciation on non-compete fees. The order was pronounced in the court on January 13, 2012.