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2017 (8) TMI 1474 - AT - Income TaxNature of expenditure - non-compete fee - revenue or capital - Held that - Various clauses in the first agreement itself demonstrate that the agreement was initially for a period of 5 years and even the consideration is an annual payment based on the annual turnover. Therefore, it appears to be a payment for loss of revenue to Kapil Chit Funds (P) Ltd and is dependent upon the business carried on by the assessee. Therefore, in our opinion, the decision of the jurisdictional High Court in the case of Andhra Fuels (P) Ltd 2016 (6) TMI 103 - ANDHRA PRADESH HIGH COURT is clearly applicable to the facts of the case before us. The restrictive covenant is only for a period of 5 years and is extendable by a further period as mutually agreed to by both the parties. The agreement is also liable to be terminated with prior notice of 10 months. The agreement also includes various other services to be provided by Kapil Chit Funds (P) Ltd to the assessee company and the payment was not just for non competition. The payment made by the assessee to Kapil Chit Funds (P) Ltd is revenue expenditure as without the said payment, the assessee could not have carried on its business more efficiently and profitably. Thus the payment is in the nature of revenue expenditure and is an allowable deduction u/s 37(1)- Decided in favour of assessee
Issues Involved:
1. Nature of the "non-compete fee" expenditure: whether it is capital or revenue in nature. 2. Applicability of various legal precedents to determine the nature of the expenditure. 3. Treatment of the expenditure in the hands of the payer versus the recipient. Detailed Analysis: 1. Nature of the "non-compete fee" expenditure: The primary issue revolves around whether the non-compete fee paid by the assessee should be considered as capital expenditure or revenue expenditure. The assessee argued that the payment was not only for non-competing but also for several other services rendered, and thus, it should be classified as revenue expenditure. The assessee contended that the payment did not result in any enduring benefit and was made to enable the assessee to carry on its business more efficiently and profitably. 2. Applicability of various legal precedents: Several case laws were cited by both parties to support their respective contentions. The Revenue relied on the Supreme Court's decision in Assam Bengal Cement Co. Ltd vs. CIT, where the payment was considered capital in nature due to the enduring benefit it provided. However, the Tribunal distinguished this case from the present one by highlighting that the non-compete agreement in the current case was for a limited period of 5 years and was specific to the holding company, unlike the broader and longer-term agreement in Assam Bengal Cement Co. Ltd. The assessee cited several cases to support its claim that the non-compete fee should be treated as revenue expenditure: - CIT vs. Coal Shipment P Ltd: The Supreme Court allowed the deduction as revenue expenditure for payments related to actual business operations. - CIT vs. Andhra Fuels (P) Ltd: The jurisdictional High Court held that a non-compete fee for a period of 3 years was revenue in nature as it did not provide an enduring benefit. - Crystal Chemie (P) Ltd vs. ACIT: The Tribunal allowed the commission paid for services as revenue expenditure. - CIT vs. Eicher Ltd: The Delhi High Court considered non-compete payments as revenue expenditure, emphasizing that no capital asset was acquired. - Orchid Chemicals & Pharmaceuticals Ltd vs. ACIT: The Tribunal treated non-compete fees as deferred revenue expenditure. The Tribunal concluded that the nature and character of the payment should be determined based on the purpose and benefit derived. In this case, the agreement was initially for 5 years, extendable, and the payment was annual and dependent on the assessee's turnover, indicating a revenue nature. 3. Treatment of the expenditure in the hands of the payer versus the recipient: The Tribunal rejected the argument that the treatment of the payment in the hands of the recipient (holding company) should determine its nature in the hands of the payer (assessee). The Tribunal clarified that the nature of the payment could differ for the payer and the recipient, using the example of machinery purchase, which is capital for the buyer but revenue for the seller. Conclusion: The Tribunal found that the non-compete fee paid by the assessee was revenue in nature, as it was for a short period and did not provide an enduring benefit. The payment was necessary for the assessee to carry on its business efficiently and profitably. Therefore, the Tribunal allowed the deduction under Section 37(1) of the Income Tax Act. Order: The assessee's appeal was allowed, and the order was pronounced in the Open Court on 31st August 2017.
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