2022 (2) TMI 580 - HC - Income Tax

Allocable expenditure between the 10A Unit and non-exempt unit - Determination of expenditure on Software Technology Park and Non-Software Technology Park on the basis of gross Profit and not on the basis of turn over - HELD THAT - First question of law raised in this appeal has already been considered and decided by this Court in favour of the Assessee in the case of Commissioner of Income Tax Vs. Pentasoft Technologies Ltd. 2013 (11) TMI 1057 - MADRAS HIGH COURT .as held revenue does not dispute the fact that the major portion of the expenditure incurred by both the units are detectable from the accounts maintained. Only in respect of such of those issues where the expenditure could not be deducted the commissioner upheld the contention of the assessee. Revenue has not placed any material to show how this working would distort the allocable expenditure on the STP unit. Depreciation on Intellectual Property rights and Non-Compete fee treated as intangible assets - HELD THAT - Second substantial question of law raised in this appeal has already been considered and decided by this Court in favour of the Assessee in the case of Pentasoft Technologies Ltd 2013 (11) TMI 1057 - MADRAS HIGH COURT wherein as analysed the agreement and also in the previous portion of this order elaborated upon the various terms and conditions, which bind the parties had observed that the earlier transfer of the trade mark, patents and other rights in favour of the assessee was undoubtedly the transfer of intangible assets, which in terms of section 32(1)(ii) of the Act would be a capital asset entitled to depreciation. Decided in favour of the Assessee

Summary

Issues:
1. Interpretation of expenditure on Software Technology Park and Non-Software Technology Park.
2. Depreciation on Intellectual Property rights and Non-Compete fee under Section 32(1)(ii) of the Income Tax Act 1961.

Interpretation of Expenditure on Technology Parks:
The appellant/Revenue challenged the order passed by the Income Tax Appellate Tribunal regarding the expenditure on Software Technology Park and Non-Software Technology Park for the assessment year 2001-02. The court admitted the appeal based on substantial questions of law related to the allocation of expenditure. The court referenced a previous case where it was established that the allocable expenditure should be determined based on profit earned by respective units rather than turnover. The court rejected the Revenue's argument that turnover should be the basis for allocation, emphasizing that the Revenue had not questioned the correctness of the accounts maintained. It was concluded that the Tribunal rightly upheld the order of the Commissioner of Income Tax (Appeals) in this regard.

Depreciation on Intellectual Property Rights and Non-Compete Fee:
The second substantial question of law revolved around whether Intellectual Property rights and Non-Compete fee are entitled to depreciation under Section 32(1)(ii) of the Income Tax Act 1961. The court referred to a previous case where it was established that a non-compete agreement falls within the ambit of Section 32(1)(ii) of the Act. The court analyzed the agreement between the parties and concluded that the non-compete clause should be seen as a supporting clause to the transfer of copyrights and patents, strengthening the commercial rights transferred to the assessee. It was determined that the non-compete fee is a commercial right related to the transfer of trademarks, copyrights, and patents, making it eligible for depreciation as a capital asset. The court set aside the order of the Income Tax Appellate Tribunal and ruled in favor of the assessee based on the analysis of the agreement and the nature of the rights transferred.

In conclusion, based on the precedents and detailed analysis provided in the judgment, the High Court of Madras dismissed the Tax Case Appeal, answering the substantial questions of law in favor of the Assessee and against the Revenue. The court found that the allocation of expenditure should be based on profit earned by respective units and that Intellectual Property rights and Non-Compete fee are eligible for depreciation under Section 32(1)(ii) of the Income Tax Act 1961.