2011 (2) TMI 703 - AT - Income Tax

Non-compete fees - Capital expenditure - The facts are exactly similar to the facts in the case of Tecumseh India (P.) Ltd. vs. Addl. CIT considered by the Special Bench of ITAT, Delhi (2010 -TMI - 205282 - ITAT, DELHI) wherein the said claim of noncompete fees was considered and held as capital in nature. It was the submission that the CIT(A) erred in allowing the same as revenue expenditure. Delayed payment of PF/ESIC - This issue is crystallised by the jurisdictional High Court in the case of CIT vs WMI Cranes Ltd (2007 -TMI - 77782 - BOMBAY HIGH COURT) - Respectfully following, the ground raised by the Revenue is rejected. Interest u/s 36(i)(iii) - the A.O. has disallowed proportionate amount of interest from interest free advances given to subsidiaries and associate concerns. It has been stated by the appellant that no loans were given to the subsidiaries or associate concerns and the balance was only the build up of the regular trade transaction with those concerns. The appellant has filed details showing that there were regular transaction with those concerns including purchases made or advances given against purchases including bill discounting and reimbursement of expenditure - The appellant has further drawn my attention to the Supreme Court decision in the case of S.A. Builders (2006 -TMI - 3364 - SUPREME COURT) - Decided in favour of assessee. Disallowance u/s. 40(a)(i)- no material is brought on record by the revenue to contradict the factual observations made by the Assessing Officer. It is neither the ground of the revenue that the factual recordings by the CIT(A) were wrong and the issue should be set aside to the Assessing Officer for fresh adjudication on these facts - The only ground of disallowance seems to be that the assessee company has given loans and advances to its subsidiaries and related parties without charging any interest - The test laid down by the Hon ble Supreme Court in the case of SA Builders has been correctly applied by the first appellate authority - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of Rs. 2.50 crores as 'non-compete fees' treated as 'capital expenditure'.
2. Deletion of disallowance of Rs. 32.57 lakhs for delayed payment of employee's contribution to PF/ESIC.
3. Deletion of disallowance of Rs. 51.89 lakhs for interest-free advances to sister concerns.
4. Deletion of addition of Rs. 51.73 lakhs on account of unutilized Modvat credit.

Issue-wise Detailed Analysis:

1. Non-compete Fees:
The core issue revolves around the classification of Rs. 2.50 crores, part of Rs. 10 crores paid as non-compete fees, which the CIT(A) allowed as revenue expenditure. The assessee acquired a pharma business from Rallis, including assets and liabilities, and paid Rs. 10 crores as non-compete fees, which was treated as deferred revenue expenditure over four years. The Assessing Officer (A.O.) classified this as capital expenditure, citing enduring benefits and relying on precedents like Chelpark Company Ltd. vs. CIT and CIT vs. Coal Shipments P. Ltd. The CIT(A) disagreed, noting the benefit was only for four years and did not transfer the brand name 'Rallis'. The ITAT, however, aligned with the A.O., referencing the Special Bench decision in Tecumseh India (P.) Ltd. vs. Addl. CIT, which treated similar non-compete fees as capital expenditure. The ITAT concluded that the non-compete fee was part of the initial outlay for acquiring the business and thus capital in nature. The ITAT also addressed the alternate claim for depreciation, remanding it back to the A.O. for examination.

2. Delayed Payment of PF/ESIC:
The dispute here concerns the deletion of disallowance for delayed payment of PF/ESIC contributions. The CIT(A) upheld disallowance for payments beyond the grace period but allowed those within it. The ITAT referenced the jurisdictional High Court decision in CIT vs. WMI Cranes Ltd., which crystallized the issue, leading to the rejection of the Revenue's ground.

3. Interest-free Advances to Sister Concerns:
This issue pertains to the disallowance of Rs. 51.89 lakhs in interest under section 36(1)(iii) due to advances to sister concerns. The A.O. noted the assessee advanced Rs. 11.25 crores out of borrowings of Rs. 51.08 crores. The CIT(A) allowed the claim, stating the advances were trade-related, not loans, and referenced the Supreme Court decision in S.A. Builders. The ITAT upheld the CIT(A)'s findings, noting similar issues in earlier years were resolved in favor of the assessee.

4. Unutilized Modvat Credit:
The final issue involves the deletion of an addition of Rs. 51.73 lakhs for unutilized Modvat credit. The CIT(A) verified the entries and noted the assessee reduced the unutilized Modvat credit from the purchase account, negating the need for addition to closing stock. The ITAT agreed, referencing similar resolutions in earlier years and upheld the CIT(A)'s findings.

Conclusion:
The ITAT partly allowed the Revenue's appeal, specifically reversing the CIT(A)'s decision on non-compete fees and remanding the depreciation claim for further examination. The other grounds raised by the Revenue were rejected, upholding the CIT(A)'s decisions on PF/ESIC payments, interest-free advances, and unutilized Modvat credit.