2014 (6) TMI 934 - HC - Income Tax

Non-compete fee - whether capital in nature - whether assessee is entitled to depreciation on the same - Held that - A right acquired by way of non- compete can be transferred to any other person in the sense that the acquirer gets the right to enforce the performance of the terms of agreement under which a person is restrained from competing. When a businessman pays money to another businessman for restraining the other businessman from competing with the assessee he gets a vested right which can be enforced under law and without that the other businessman can compete with the first businessman. When by payment of non-compete fee the businessman gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. Generally non-compete fee is paid for a definite period. The idea is that by that time the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Therefore that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how patents copyrights trade marks licences franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an intangible asset . Their right to carry on business without competition has an economic interest and money value. The term or any other business or commercial rights of similar nature has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which inturn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision ie. precisely what the Tribunal has held. - Decided in favour of the assessee

Issues Involved:
1. Nature of non-compete fee (capital or revenue expenditure)
2. Eligibility of depreciation on non-compete fee under Section 32(1)(ii) of the Income Tax Act, 1961

Detailed Analysis:

1. Nature of Non-Compete Fee:
The primary issue was whether the non-compete fee paid by the assessee should be treated as capital expenditure or revenue expenditure. The assessee argued that if the non-compete fee is paid for warding off competition for a short period, it should be treated as revenue expenditure deductible under Section 37 of the Income Tax Act. The Assessing Officer, however, treated the non-compete fee as capital expenditure and disallowed it as revenue expenditure. The Commissioner of Income Tax (Appeals) upheld this view, considering the non-compete fee as capital expenditure but denied depreciation. The Tribunal also held the non-compete fee to be capital in nature, but allowed depreciation, treating it as a business or commercial right under Section 32(1)(ii).

2. Eligibility of Depreciation on Non-Compete Fee:
The core legal question was whether the non-compete fee, being capital expenditure, qualifies for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. The Revenue contended that non-compete fee does not constitute a commercial or business right for allowing depreciation as it does not satisfy the user-test. The assessee argued that the payment of non-compete fee allowed them to carry on business without competition, conferring a commercial and business right, thus qualifying for depreciation under Section 32(1)(ii).

Judgment Analysis:

Tribunal's Decision:
The Tribunal held that the non-compete fee is in the nature of capital expenditure and qualifies as a business or commercial right, thus allowing depreciation. This decision was based on the interpretation of Section 32(1)(ii), which includes "know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature" as intangible assets eligible for depreciation.

High Court's Interpretation:
The High Court upheld the Tribunal's decision, providing a detailed interpretation of Section 32(1)(ii). The Court referred to several judgments, including those from the Delhi High Court, the Supreme Court, and other High Courts, to substantiate that the scope of Section 32 has been widened to include intangible assets acquired on or after April 1, 1998. The Court emphasized that the term "business or commercial rights of similar nature" should be interpreted broadly to include rights that facilitate business efficiency, such as non-compete agreements.

Key Judgments Referenced:
- Delhi High Court in Commissioner of Income Tax Vs. Hindustan Coco Cola Beverages Pvt. Ltd.: This judgment highlighted that Section 32 allows depreciation on both tangible and intangible assets, including business or commercial rights of similar nature.
- Supreme Court in Nat Steel Equipment Pvt. Ltd. Vs. CCE: Defined "similar" to mean corresponding to or resembling in many respects, not identical.
- Delhi High Court in Areva T and D India Ltd Vs. Deputy Commissioner of Income Tax: Explained that business or commercial rights need not be identical to know-how, patents, etc., but must be of similar nature.
- Madras High Court in M/s. Pentasoft Technologies Ltd. Vs. The Deputy Commissioner of Income Tax: Held that non-compete agreements could fall within the ambit of Section 32(1)(ii) as they confer commercial rights.
- Income Tax Appellate Tribunal in Assistant Commissioner of Income Tax Vs. Real Image Tech. (P) Ltd.: Stated that non-compete fees confer commercial or business rights similar to patents, copyrights, etc., and qualify as intangible assets for depreciation.

Conclusion:
The High Court concluded that the non-compete fee paid by the assessee confers a commercial or business right, qualifying it as an intangible asset under Section 32(1)(ii) of the Income Tax Act. Therefore, the assessee is entitled to claim depreciation on the non-compete fee. The Court affirmed the Tribunal's order and dismissed the Revenue's appeal, answering the substantial question of law in favor of the assessee.

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