2017 (1) TMI 248 - HC - Income Tax

Valuation towards non-compete fee - whether non-compete and brand acquisition were equally important components in the transfer of an undertaking - Held that - Considering with the apparent intention of the parties to attribute some amount of the total consideration towards Non-compete as seen from clause 3.6 of the Non-compete Agreement. The learned counsel would, upon instructions, suggest that a sum of ₹ 1 crore might be adopted as a reasonable valuation towards non-compete fee. In the aforesaid facts and circumstances, the sum of ₹ 1 crore towards non-compete appears to be proper and would serve the ends of justice. We are conscious of the fact that in attributing an amount of Rs. One crore towards negative covenant, we are substituting yet another value in preference to those already adopted by the lower authorities. However the factual aspects of the matter, as noted by us in paragraph 11 and 12 have not been taken into consideration, and this, we believe, makes a critical difference. The Substantial Question of Law is answered in favour of the Revenue and against the Assessee

Summary

Issues involved:
1. Attribution of consideration between brand acquisition and non-compete agreements for tax assessment.

Comprehensive Analysis:
1. The case involved the attribution of consideration between brand acquisition and non-compete agreements for tax assessment. The Assessee claimed that the entire sum of ?6 crores related solely to the transfer of business under the Brand Acquisition Agreement and not to non-compete. However, the Assessing Authority held that part of the consideration should be attributed to non-compete, specifically ?4 crores, and taxed accordingly.
2. The Commissioner of Income Tax (Appeals) modified the attribution, agreeing that 50% of the total consideration, ?3 crores, should be attributed to non-compete. The Income Tax Appellate Tribunal (ITAT) reversed the orders, stating that the entire sum of ?6 crores constituted a capital receipt not liable to tax, and no portion should be attributed to non-compete.
3. The key question raised was whether the Tribunal was correct in attributing the entire consideration to the sale of the brand name, overlooking the presence of non-compete agreements in the contracts. The agreements clearly outlined the sale of brands along with non-compete covenants, making it essential to consider both aspects in the tax assessment.
4. The judgment delved into the details of the agreements, highlighting clauses that integrated the non-compete agreements with the brand acquisition agreements. The consideration terms were specified in the agreements, indicating payment schedules and the nature of transactions involved in the composite deal.
5. The legal analysis focused on the interpretation of Section 28(va)(a) of the Income Tax Act, distinguishing between consideration for positive rights like business transfer and negative rights like non-compete agreements. The legislative intent post-1.4.2003 was clear that consideration received for non-compete agreements should be taxable as business profits.
6. The judgment also addressed the issue of attribution, considering the specialized nature of the business transferred and the exclusivity involved. The court balanced the arguments presented by the Assessee regarding the uniqueness of the transferred business with the need to attribute a reasonable valuation towards non-compete fees.
7. Ultimately, the court decided to attribute ?1 crore towards the non-compete agreement, emphasizing the significance of factual aspects that had not been adequately considered by the lower authorities. The judgment favored the Revenue, answering the Substantial Question of Law in their favor and disposing of the Tax Case Appeal accordingly.