2015 (8) TMI 843 - AT - Income Tax

Claim of depreciation on non-compete right as intangible asset - Held that - The Tribunal in assessee s own case for the assessment years 2003-04 to 2006-07 2015 (8) TMI 750 - ITAT MUMBAI held that the non compete clause under agreement should be read as a supporting clause to the transferor of the copy rights and patents rather to strengthen the commercial right, which was transferred in favour of the assessee. Rejected the argument of revenue that non-compete fee is in the nature of a negative right and it cannot be of a commercial right of similar nature and the expression similar nature shall be relatable to patents, copy rights and trade mark license or franchise or any other business - the assessee is entitled for depreciation for non-compete payment for acquiring non-compete right which is intangible asset - Decided in favour of assessee. Disallowance of contractual payment - Held that - Even if the assessee was under contractual obligation to compensate for income-tax liability, then also same cannot be claimed as deduction, because it tantamounts to paying of sum on account of any rate or tax levied on the profits and gains of any business or profession as stipulated in section 40(a)(ii). Either the assessee pays the income-tax liability of the other person or pays by itself or compensates the same, will not make a difference as there cannot be distinction between such discharge of liability. That it cannot be held to be a allowable expenditure. Thus, the finding of the CIT(A) that income-tax liability cannot be allowed as deduction is upheld. Similarly, regarding payment of excise duty, it has not been rebutted before us that same is not towards penalty for evasion of excise duty and that such a penalty is not penal but compensatory in nature. Thus, without any detail to controvert this finding of CIT(A), it can be inferred as relating to the evasion of duties and penal in nature. Accordingly, the said amount of ₹ 15,90,229/- being amount of penalty and additional duty cannot be held to be allowable within the ambit of section 37(1). Thus, on this score also the decision of the Hon ble CIT(A) is upheld. - Decided against assessee. Determining the ALP u/s 92C(2) after granting 5% sale harbour - Held that - The standard adjustment of 5% as given by the CIT(A) cannot be allowed as this controversy has been set at rest by Finance Act, 2012 with insertion of sub-section (2A) to section 92C with retrospective effect. With this amendment, it has been clarified that where variation by way of arithmetic mean comprised at which transaction has actually been undertaken, exists by 5% of the arithmetic mean, the assessee shall not be entitled to exercise the option. Accordingly, we hold that Ld. CIT(A) has not justified in granting standard adjustment of 5%. - Decided in favour of revenue.

Summary

Issues Involved:
1. Treatment of payment towards Non-Compete Rights as Intangible Asset for depreciation.
2. Disallowance of contractual payments made to M/s Xylon Holdings Pvt Ltd.
3. Determination of Arm's Length Price (ALP) for transfer pricing adjustments.

Issue-Wise Detailed Analysis:

1. Treatment of Payment towards Non-Compete Rights as Intangible Asset for Depreciation:
The assessee claimed depreciation on a non-compete fee of Rs. 50 lakhs paid to Mr. Shekhar K Shah, which was capitalized in the books. The Assessing Officer (AO) and CIT(A) disallowed the depreciation, arguing that non-compete fees cannot be treated as intangible assets. The Tribunal, however, found that this issue had been previously decided in favor of the assessee for assessment years 2003-04 to 2006-07. The Tribunal referenced the Karnataka High Court's decision in CIT vs. Ingersoll Rand International Ind. Ltd, which held that non-compete rights are intangible assets eligible for depreciation under section 32(1)(ii). The Tribunal also cited the Madras High Court's decision in Pentasoft Technologies Ltd. vs. DCIT, which supported the view that non-compete clauses strengthen commercial rights and are thus depreciable. Consequently, the Tribunal allowed the depreciation claim on non-compete rights for the assessee.

2. Disallowance of Contractual Payments Made to M/s Xylon Holdings Pvt Ltd:
The assessee entered into an agreement with Xylon Holdings Pvt Ltd to take over certain liabilities, including income tax and excise duty liabilities, totaling Rs. 74,02,764. The AO disallowed these payments, arguing that income tax liabilities cannot be claimed as expenditure and that excise duty penalties are not allowable under section 37 of the Act. The CIT(A) upheld this disallowance, emphasizing that income tax payments are not deductible and that the excise duty penalties were penal in nature. The Tribunal agreed with the CIT(A), stating that income tax liabilities, whether paid by the assessee or compensated to another party, are not deductible under section 40(a)(ii). The Tribunal also upheld the disallowance of excise duty penalties, as they were deemed penal and not compensatory. Therefore, the Tribunal confirmed the disallowance of the contractual payments.

3. Determination of Arm's Length Price (ALP) for Transfer Pricing Adjustments:
The revenue challenged the CIT(A)'s determination of the ALP, which granted a 5% safe harbor adjustment, reducing the transfer pricing adjustment to Rs. 20,42,500 from Rs. 63,55,322 determined by the TPO. The Tribunal noted that this issue was now settled against the assessee due to the amendment brought by the Finance Act, 2012, which clarified that the 5% adjustment cannot be applied if the variation exceeds 5% of the arithmetic mean. Consequently, the Tribunal held that the CIT(A) was not justified in granting the 5% standard adjustment, and the revenue's appeal on this ground was allowed.

Conclusion:
- The assessee's appeal was partly allowed, with the Tribunal granting depreciation on non-compete rights.
- The disallowance of contractual payments made to Xylon Holdings Pvt Ltd was upheld.
- The revenue's appeal regarding the ALP determination was allowed, disallowing the 5% safe harbor adjustment.

Order:
The Tribunal pronounced the order in the open court on 14th August 2015, with the assessee's appeal partly allowed and the revenue's appeal allowed.