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TMI Blog2009 (1) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... machinery, plant, or furniture. With the passage of time there have been conceptual changes in all areas of the commercial world. Admittedly, payment made by the assessee company to ward off competition in the export business which was acquired by it from MS. There is no ambiguity or controversy with regard to these facts. Hence, It can be safely concluded, without any further discussion, that what was acquired by the assessee by payment was a business/commercial right. The principle of ejusdem generis applies where the mention of specific items of the same genus is followed by an expression of a general or a residuary nature pertaining to the same genus. The scope of this rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. It signifies a principle of construction. A 'patent' gives its owner an exclusive right to make and sell the subject-matter of the 'patent' for a particular period of time. The grant of a 'patent', to any individual or a firm, provides that individual or firm with competitive advantage over others within a giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text of allowability of depreciation for goodwill under s. 32(1)(ii). the learned CIT(A) ought not to have held that the right acquired by payment of non-compete fee is a business or commercial right similar to know-how, patents, copyrights, trademarks, licences, franchises. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the AO restored." 3. The assessee company (MTIL) is in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to USA, Canada, Europe, and Australia. The assessee wanted to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs, and medicines. 4. Another company, Medispan Limited (MS), was engaged in the business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South East Asian countries. MS agreed to transfer the business and activities of its export division to assessee company (MTIL) vide agreement dt. 12th July, 2000. 5. The consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , initiate steps for registration of products in foreign markets. (b) conduct business outside India on its own, or with a partner-in bulk drugs, pharmaceuticals products and formulations. 7. That the consideration, payable by MTIL to MS for transfer of its export business is an amount of Indian rupees five hundred and thirty three lakhs (Rs. 5,33,00,000) of which: (a) Rs. 200 lacs, is towards compensation for acceptance of non-compete obligation, in respective exports of bulk drugs, pharmaceutical products and formulations. (b) Rs. 200 lacs is towards the use of brand name in countries other than India, and (c) Rs. 133 lacs is towards transfer and assignment of product registration, business agreements, dossiers and licences including dossiers pending approval. 6. In the computation of total income filed with the return, the assessee had claimed the impugned payment of Rs. 2 crores, towards compensation for acceptance of non-compete obligation, at cl. 7(a) above, as revenue expenditure. The AO rejected this claim. 6.1 The assessee made an alternative. claim before the AO, saying that depreciation be allowed under s. 32(1) of the Act on the non-compete fee. The AO rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of the AO be restored. 8. Shri K. Ravi, the learned Authorised Representative reiterated the arguments which were put forward on behalf of the assessee before the AO and the CIT(A). He also filed a written submission before us. His arguments are summarized below. - that the assessee had acquired a bundle of rights from MS vide agreement dt. 12th July, 2000. - that the assessee had paid Rs. 2 crores for acquiring 'non-compete obligation', by which MS was restricted, for a period of ten years, from selling, marketing, registering products in foreign markets, conducting business outside India on its own or with a partner in bulk drugs, pharmaceutical products and formulations. - that the 'non-compete obligation' acquired by the assessee was a business/commercial right, to be used as a tool to carry on the business. - that the 'non-compete right' acquired by the assessee was similar to those mentioned in cl. (ii) of s. 32(1) of the Act. - that the CIT(A) was right in allowing the assessee's claim, and his order needed to be confirmed. 9. We have considered the rival submissions in the light of material on record and the precedents cited. In a nutshell, the issue for co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-compete agreement was not an 'asset', there was no need to go into the question whether it was an 'intangible asset', or whether it was similar to 'know-how, patents, copyrights, trademarks, licenses, franchises'. 12. Before proceeding further, we consider it necessary to mention, briefly, the legislative history and the scope of the provisions dealing with the benefit of 'depreciation' provided under the IT Act, 1961. 12.1 The scope of s. 32(1) was widened by the Finance Act, 1998 by allowing depreciation in respect of 'intangible assets' w.e.f. 1st April, 1999. It was achieved by introducing cl. (ii) in s. 32(1) of the Act. Prior to this, depreciation was allowable only in respect of the 'tangible assets' namely, buildings, machinery, plant, or furniture. With the passage of time there have been conceptual changes in all areas of the commercial world. 12.2 One can see very clearly that the cl. (ii) introduced in s. 32(1), w.e.f. 1st April, 1999, not only extended the benefit of s. 32 to the 'intangible assets' but also gave therein an 'inclusive' definition of the 'intangible assets', for this purpose. 12.3 The 'computer software' was included in the Table in Appendix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons for such apparent inconsistencies could be that the Government wanted to encourage the use of a certain type of assets and to discourage the use of assets of certain other type. 15.2 One could also give the example of a 'computer software', which was included in the Table in Appendix I to r. 5 of the IT Rules, 1962, for and from asst. yr. 2003-04. A computer software is basically a set of instructions written in a language that a computer understands. A computer software, that is available in the market, is generally for a single use; it cannot be used on more than one computer. This is ensured by the manufacturer with the help of a distinctive key or a password. (We are not talking here about the pirated versions of computer software.) And, generally, once it is loaded on a computer it cannot be resold, and it loses its assignability, and transferability. It has, practically, no market value thereafter, but still it remains eligible for depreciation under s. 32 of the Act, year after year. 15.3 The above examples, show that the provisions of s. 32 do not necessarily follow the traditional concept of an 'asset', and an accountant's approach to 'depreciation'. In fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all the export business rights after the transfer. Accordingly, Medispan cannot sell/market its products in foreign markets and conduct business outside India. In view of the above judicial decisions and also considering that the non-compete fee is to ward off competition, the expenditure is purely capital in nature." 21. It is an admitted fact that the payment of Rs. 2 crores was made by the assessee company to ward off competition in the export business which was acquired by it from MS. The relevant cl. (6) of para III of the agreement dt. 12th July, 2000, reads as under: "III........... (6). Non-compete obligation: MS shall not, for a period of 10 years from the date of this agreement- (a) directly or indirectly sell, market, initiate steps for registration of products in foreign markets (b) conduct business outside India on its own, or with a partner-in bulk drugs, pharmaceuticals products and formulations." 21.1 There is no ambiguity or controversy with regard to these facts. Therefore, it can be safely concluded, without any further discussion, that what was acquired by the assessee by paying this amount of Rs. 2 crores was a business/commercial right. 21.2 No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of 'inventing' will reap its reward if users find the result worth paying for. This cannot occur if others reap where the inventor has sown. The 'patent' system is designed to stop the 'free riding' by non-patentees. 25. A 'copyright' means rights conferred upon its owner in respect of his literary, dramatic', musical or artistic work. It does not really mean a right to do something, but only the right to exclude others from the doing of certain specific acts and things. A 'patent' is distinguishable from 'copyright'. The owner of the 'copyright' has a sole right and he has the right to exclude all others from reproducing his work without his permission. The 'copyright' gives protection to its owner from the necessity of having to compete with the product of his own efforts. 26. A 'trademark' is a symbol attached to goods or services that adds or creates a distinctive quality to the product by associating it in the buyers mind with some manufacturer or distributor. Its main purpose is to eliminate 'free riding' by other manufacturers of similar goods and services. The property consists in the right of the owner to use the 'trademark' in relation to specified goods and under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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