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2013 (5) TMI 302 - AT - Income TaxDepreciation on the capitalised sum of non - compete fees - disallowance as the expenditure is in no way connected with the acquisition of various assets - Non-compete fees - revenue v/s capital - assessee contested against issue not to be falling under current assessment year - Held that - The clauses clearly show that under no circumstance, the new company, i.e. the assessee, shall be able to use the technical knowhow upto 31.03.1998. The agreement between GGL and PEL under all circumstances and for all practical purposes was a prospective agreement, which could only have been made effective from 01.04.1998. It is also interesting to note that, the AO also took note of this fact, because, the AO noted that the payment of the agreed amount was paid to PEL on 02.04.1998. This can only infer, that the agreement dated 26.02.1998 actually came into force on 01.04.1998.On these fact, it is clear that the operation of the agreement, technical knowhow and application of non compete arrangement came into force on 01.04.1998, which would fall in assessment year 1999-2000, i.e. the year under consideration. DR s submission that non compete does not find place in the provision have to be accepted because non compete fee does not fall within the ambit of any other commercial or business rights, because, even when examining the meaning of different words, as per law Lexicon, word license means an authority to do something which would otherwise be inoperative, wrongful or illegal, a formal permission from a Constituted authority to do something. The meaning of the word franchise means right conferred by the government to engage in a specific business or a exercise corporate powers,corporate franchise, general franchise. Know-how is the fund of technical knowledge and experience acquired by a highly specialized production organization. It is usually noted vary according to, and may even be determined by, its use. Like office or factory buildings, patents and trademarks, and good will, it may be described as a capital asset while it is retained by a manufacturer for his own purposes, but, unlike these, its supply to another is not a transfer of a fixed capital asset because it is not lost to supplying manufacturer In Sections 530 and 531 disposal of know-how know-how means any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations. Thus the expression non compete fee could not be extracted. It is important, therefore, to read both the parts as read in Sharp Business Systems (2011 (6) TMI 505 - ITAT DELHI) to explain the genus of any other business or commercial rights of similar nature with the earlier words. as upheld by the Hon ble Delhi High Court 2012 (11) TMI 324 - DELHI HIGH COURT . Thus the assessee does not satisfy, the payment made to acquire non compete right, being an asset, as per the second part of clause (ii) to section 32(1), and is, therefore, not eligible for depreciation as per law - as non compete fee is not an asset, depreciation cannot be allowed - Against assessee.
Issues Involved:
1. Treatment of non-compete fee: Whether it is an intangible asset liable for depreciation or should be spread over the tenor period. 2. Admissibility of additional ground of appeal by the assessee. 3. Validity of depreciation claim on non-compete fee under Section 32(1)(ii) of the Income Tax Act, 1961. 4. Determination of the character of non-compete agreement and its eligibility for depreciation. 5. Spread over of non-compete fee as directed by the CIT(A). Detailed Analysis: 1. Treatment of Non-Compete Fee: The primary issue in both the assessee's and the department's appeals is the treatment of the non-compete fee. The assessee argued that the non-compete fee should be treated as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. Alternatively, the assessee contended that the payment should be spread over the tenor period of the non-compete agreement. 2. Admissibility of Additional Ground of Appeal: The assessee filed an additional ground of appeal, arguing that the payment of Rs. 18 crore was made for know-how and the consequent non-compete covenant. The department objected to the additional ground, stating that it was not part of any earlier proceedings. The tribunal, however, admitted the additional ground based on the Full Bench decision of the Hon'ble Bombay High Court in Ahmedabad Electricity Co. Ltd. vs CIT, which allows the Tribunal to permit additional points to be raised if they arise from the subject matter of the proceedings. 3. Validity of Depreciation Claim on Non-Compete Fee: The assessee claimed depreciation on the non-compete fee under Section 32(1)(ii), which includes intangible assets such as know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. The tribunal considered various judicial precedents, including decisions in ACIT vs Real Image Tech. (P.) Ltd., ITO Vs Medicorp Technologies India Ltd., Bunge Agribusiness (India) (P.) Ltd. Vs DCIT, and others, which allowed depreciation on non-compete payments by treating them as business or commercial rights. 4. Character of Non-Compete Agreement: The tribunal examined whether the non-compete agreement constituted a capital asset eligible for depreciation. The tribunal noted that the agreement between the assessee and PEL, dated 26.02.1998, and the subsequent agreement with NPIL, effective from 01.04.1998, indicated that the non-compete fee was paid for acquiring technical know-how and enforcing non-compete covenants. The tribunal referred to the decision in Tecumseh India (P.) Ltd. vs ACIT by the Special Bench at Delhi, which held that non-compete fee was a capital expenditure. 5. Spread Over of Non-Compete Fee: The CIT(A) directed the AO to spread over the payment of Rs. 18 crore over the period of the tenor, i.e., 18 years. The tribunal, however, held that since the non-compete fee was a capital expenditure and not an asset eligible for depreciation, the spread-over approach was not applicable. The tribunal sustained the order of the CIT(A) on this issue and upheld the AO's disallowance of depreciation on the non-compete fee. Conclusion: The tribunal concluded that the non-compete fee did not qualify as an intangible asset under Section 32(1)(ii) and was not eligible for depreciation. The assessee's appeal was dismissed, and the revenue's appeal was allowed, rejecting the claim for depreciation and the spread-over approach for the non-compete fee.
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