2023 (10) TMI 1409 - AT - Income Tax

Nature of expenses - payment of non-compete fees - HELD THAT - Particular clause of non-compete agreement clearly demonstrate that non-compete fees cannot be considered on standalone basis. We note that non-compete fee paid by the assessee forms part of initial outlay on the acquisition of business by the assessee and in the combined reading of the asset purchase agreement and non-compete agreement suggest that non compete agreement was very much part of the entire part of the purchase of business of GE India Pvt Ltd by the assessee. Hence by virtue of non compete agreement assessee has acquired the right to carry on business unfettered by any competition which results in the protection for business as a whole and will help appreciate the whole of the capital assets. Hence we find no force in the argument of assessee. We agree with the alternative argument of the ld. Counsel that since it was held as capital expenditure the assessee is entitled for depreciation u/s.32 (1)(ii) of the Act. We direct the AO to allow depreciation on payments made on non- compete fees and customer and other contracts backlog orders customer and suppliers lists u/s.32(1)(ii) of the Act. This issue of the assessee is party allowed as indicated above. Disallowing the provision made towards litigation and sales tax matters - assessee had created a provision towards litigation and sales tax matters - AO disallowed the claim since assessee neither furnished any satisfactory reply nor submitted any scientific working to the estimate of provision for this expenditure - HELD THAT - The assessee had filed the complete details and explanation which was not available before with the AO nor the CIT(A). Hence for better adjudication we remit the issue back to the file of the Assessing Officer who will allow the claim in case assessee files satisfactory reply or produce scientific mode for the estimates. The assessee will file complete details of provisions list before the AO based on scientific basis as held in the case of Rotork Control India Pvt. Ltd. 2009 (5) TMI 16 - SUPREME COURT Hence this issue of assessee is remitted back to the file of the AO for fresh consideration and the orders of the ld. Assessing Officer and ld. CIT(A) on this issue is set aside.

Summary

Issues Involved:
1. Disallowance of payment of non-compete fees.
2. Disallowance of expenditure incurred in respect of customer and other contracts, backlog orders, customer and suppliers lists.
3. Disallowance of provision towards litigation and sales tax matters.

Issue-wise Detailed Analysis:

1. Disallowance of Payment of Non-Compete Fees:
The primary issue concerns the disallowance of non-compete fees amounting to INR 2,42,80,088, which the assessee claimed as revenue expenditure. The CIT(A) upheld the AO's decision, considering the expenditure as capital in nature. The assessee argued that the expenditure did not bring into existence any asset or enduring advantage and that the agreements for non-compete and asset purchase were independent. The AO, however, noted that the non-compete agreement was integral to the asset purchase agreement, making it part of the initial outlay on the acquisition of the business. Consequently, the non-compete fee was treated as capital expenditure. The CIT(A) supported this view by referencing judicial precedents, including the Supreme Court's decision in Assam Bengal Cement Company Ltd., which held that protection fees providing enduring advantage are capital expenditures. The Tribunal agreed with the CIT(A) but allowed the assessee's alternative plea for depreciation on the non-compete fee, treating it as an intangible asset under section 32(1)(ii) of the Act.

2. Disallowance of Expenditure Incurred in Respect of Customer and Other Contracts, Backlog Orders, Customer and Suppliers Lists:
The second issue pertains to the disallowance of expenditure amounting to INR 79,11,750 for customer and other contracts, backlog orders, and customer/supplier lists, which the assessee also claimed as revenue expenditure. The CIT(A) upheld the AO's decision, treating these expenditures as capital in nature. The assessee argued that these costs were incurred to enable smooth and effective business operations. The Tribunal noted that these expenditures were part of the initial outlay on the business acquisition and provided enduring benefits, thus qualifying as capital expenditures. However, similar to the non-compete fees, the Tribunal allowed depreciation on these expenditures under section 32(1)(ii) of the Act.

3. Disallowance of Provision Towards Litigation and Sales Tax Matters:
The third issue involves the disallowance of a provision amounting to INR 57,90,464 towards litigation and sales tax matters. The AO disallowed the provision, stating that it was not based on a scientific method, a decision upheld by the CIT(A). The CIT(A) referenced the Supreme Court's judgment in Rotork Control India Pvt Ltd vs. CIT, which requires provisions to be based on a reliable estimate. The assessee provided detailed breakdowns of the provision, including duty drawback, non-collection of form C, and differential duty for SVB loading. The Tribunal noted that these details were not available to the AO or CIT(A) and remitted the issue back to the AO for fresh consideration. The AO was instructed to allow the claim if the assessee provided satisfactory and scientifically-based estimates.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO to allow depreciation on non-compete fees and other related expenditures as intangible assets and to re-evaluate the provision for litigation and sales tax matters based on scientific estimates.