2018 (7) TMI 2148 - AT - Income Tax

Depreciation on Goodwill and Non-compete Fees - Whether the consideration paid by the assessee included consideration towards restraining the seller to carry on a similar business for a period of 8 years - HELD THAT - A payment made towards non-compete fees pursuant to a composite agreement by virtue of which the transferor was restrained from the using same trade mark copyright etc. has to be read as a supporting clause to transfer of copyright and patents transferred as intangible assets in terms of Sec. 32(1)(ii) of the Act. Our aforesaid view stands fortified by the judgment of the Hon ble High Court of Madras in the case of Pentasoft Technologies Ltd. Vs. DCIT 2013 (11) TMI 1057 - MADRAS HIGH COURT as not being persuaded to subscribe to the claim of the revenue had concluded that the payment made towards non- compete fees under an agreement should be read as a supporting clause to the transfer of the copyright and patents to strengthen the commercial right which was transferred in favour of the buyers. The High Court holding that the assessee would be entitled for claim of depreciation under Sec.32(1)(ii) as regards the payment made towards non-compete fees pursuant to a composite agreement - Also see Ingersoll Rand International Ind Ltd. 2014 (6) TMI 934 - KARNATAKA HIGH COURT - Decided against revenue.

Summary

Issues Involved:

1. Depreciation on Goodwill and Non-compete Fees.
2. Validity of the Dispute Resolution Panel's (DRP) direction to allow depreciation.
3. Whether non-compete fees qualify as an intangible asset for depreciation under Section 32 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Depreciation on Goodwill and Non-compete Fees:

The core issue was whether the depreciation of ?1,36,31,137/- claimed by the assessee on goodwill and non-compete fees was justified. The assessee had acquired the textile chemical trading division of two companies for ?13,49,53,000/-, out of which ?2,59,04,000/- was the net value of trade debtors, trade creditors, and trade stock. The remaining ?10,90,49,099/- was capitalized as goodwill, which included non-compete fees. The Assessing Officer (A.O) disallowed the depreciation claim, arguing that non-compete fees did not lead to the acquisition of any intangible asset and thus did not qualify for depreciation under Section 32 of the Act. The A.O relied on the judgment of the High Court of Delhi in Sharp Business Systems Vs. CIT-3 and other judicial pronouncements to support this disallowance.

2. Validity of the Dispute Resolution Panel's (DRP) direction to allow depreciation:

The DRP, upon reviewing the facts and contentions, directed the A.O to allow the depreciation on the composite amount paid towards goodwill and non-compete fees. The DRP observed that the payment was a composite amount for goodwill and non-compete fees without any bifurcation. The DRP relied on the judgments of the High Court of Madras in M/s Pentasoft Technology Ltd. Vs. DCIT and the High Court of Karnataka in CIT Vs. Ingersoll Rand International Ind Ltd., which supported the claim for depreciation on non-compete fees under a composite agreement.

3. Whether non-compete fees qualify as an intangible asset for depreciation under Section 32 of the Income Tax Act, 1961:

The Tribunal examined whether the non-compete fees could be considered an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act. The Tribunal referred to the Sale and Purchase Agreement, which indicated that the payment was a composite amount for goodwill and non-compete fees without specific bifurcation. The Tribunal noted that the issue was squarely covered by the judgments of the High Court of Madras and the High Court of Karnataka, which held that non-compete fees under a composite agreement could be considered as supporting the transfer of intangible assets and thus eligible for depreciation. The Tribunal cited the High Court of Madras's decision in Pentasoft Technologies Ltd. Vs. DCIT, which concluded that non-compete fees should be read as a supporting clause to the transfer of copyrights and patents, thereby entitling the assessee to claim depreciation.

Conclusion:

The Tribunal upheld the DRP's direction to allow the depreciation on the composite amount paid towards goodwill and non-compete fees. The Tribunal dismissed the revenue's appeal, affirming that the assessee was entitled to depreciation on the composite amount, as supported by the judgments of the High Court of Madras and the High Court of Karnataka. The grounds of appeal raised by the revenue were dismissed, and the appeal was pronounced dismissed in open court on 11.07.2018.