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TMI Blog2007 (9) TMI 436X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has become the owner of the brand name with all other attendant rights relating to Lacto Calomine. The Non-compete Agreement entered into by the assessee-company with M/s. DIL was in addition to earlier sale agreement of brand name. As per the Non-Compete Agreement, the assessee paid Rs. 40 lakhs to M/s. DIL. This amount was paid to restrain M/s. DIL from competing directly or indirectly in the business activities carried on by the assessee. The payment made by the assessee company against first agreement of the purchase of brand name was accounted by the assessee-company as an item of capital expenditure. But the sum of Rs. 40 lakhs paid by the assessee-company as Non-Compete fee has been claimed as a deduction being revenue in nature under section 37(1) of the Income-tax Act, 1961. 3. The Assessing Authority did not agree with the argument of the assessee-company that the Non-Compete fee of Rs. 40 lakhs paid by the assessee-company was in the nature of revenue expenditure. The Assessing Officer observed that by making payment of Rs. 40 lakhs to M/s. DIL, the assessee company has acquired an advantage of enduring nature by way of freedom from competition that would have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) : CIT v. G.D. Naidu [1987] 165 ITR 63 (Mad.) Premier Automobiles Ltd. v. CIT [1984] 150 ITR 28 (Bom.) CIT v. Lahoty Bros. Ltd. [1951] 19 ITR 425 (Cal.) V. Damodaran v. CIT [1967] 64 ITR 26 (Ker.) CIT v. Bowrisankara Steam Ferry Co. [1973] 87 ITR 650 (AP) CIT v. Piggot Chapman & Co. [1949] 17 ITR 317 (Cal.). 7. CIT(A) held that in respect of the decisions relied on by the revenue as well as the assessee, what is important is the nature of the payment made by the assessee-company. The product in question was Lacto Calomine which was being manufactured by DIL. Prior to the Non-Compete Agreement, the assessee had made an agreement with M/s. DIL with the condition that the product Lacto Calomine will thereafter be manufactured by the assessee-company and M/s. DIL would stop manufacturing of the product i.e. Lacto Calomine. This product was to be manufactured by the assessee-company for a period of ten years as agreed upon by both the parties in the said agreement. In the agreement, the assessee itself has stated that the payment was made by the assessee to increase the profit earning capacity of the business. The CIT(A) observed that increasing of the profit earning cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business expediency, the amount was expected wholly and exclusively for the business of the appellant. 3.The appellant therefore prays that it be held that, on the facts and circumstances of the case, the said disallowance was unjustified and unwarranted, and that the aforesaid expenditure of Rs. 40 lakhs incurred by the appellant for increasing the profit earning capacity of the business is revenue in nature, and hence allowable as business expenditure under section 37(1) of the Income-tax Act, 1961, and further, the resultant loss be allowed to be carried forward for set off in subsequent years. Without prejudice, 4.the appellant having entered into an agreement effectively for a period of ten years, it is entitled to write off the entire non-compete fees over this period, following the ratio in Madras Industrial Investment Corpn. Ltd. v. CIT 225 ITR 802 (SC). 5.The appellant prays that Assessing Officer be directed to allow them to write off the entire amount of Rs. 40 lakhs over a period of ten years, which is the tenure of the non-compete agreement." 10. Shri J.D. Mistry, the ld. Counsel appearing for the assessee-company argued at length to bring out his point that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come or in perpetuity. Therefore, the restrain imposed upon M/s. DIL cannot be treated as an enduring benefit as far as the business of the assessee is concerned. The ld. counsel submitted that the products manufactured by M/s. DIL and Lacto Calomine acquired by the assessee-company are of the same generic character and therefore, M/s. DIL could introduce the same product in the market in a different name and therefore, restraining M/s. DIL from doing so was essential. Non-Compete fee was essential for assessee-company for facilitating the utilization of acquisition of the brand right and therefore it is to be held that non-compete fee was in nature of rather a maintenance expenditure. 13. The ld. counsel relied on the decision of the Madras High Court in the case of CIT v. G.D. Naidu [1987] 165 ITR 63. In the said case the entire sum paid by the assessee firm as compensation to the partner to shut off competition from them to the bus service for a period of five years was held to be deductible expenditure in computing the income of the firm. The court held therein that by way of such payments the firm had not acquired any asset or advantage of an enduring nature. It was further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lomine which has been acquired to expand and boost the business carried on by the assessee-company. The product acquired by the assessee-company is a patented product. It is a fast moving product. Therefore, any direct expenditure incurred by the assessee-company for acquiring the said brand name is a capital expenditure. The non-compete fee of Rs. 40 lakhs paid by the assessee-company is not for any temporary benefit. The assessee want to exploit the business opportunities coming out of the new brand product to its full swing. Therefore, the assessee-company has to see that M/s. DIL is not competing in any way with the assessee-company inasmuch as the production and marketing of Lacto Calomine are concerned. By paying the amount of Rs. 40 lakhs, the assessee-company is keeping away M/s. DIL from the field for a long period of 10 years. The period of ten years is sufficient for the assessee-company to establish itself in the market in respect of Lacto Calomine. Any future business made by the assessee-company would be directly related to the initial market stand held by it. In that point of view, the non-compete fee paid by the assessee-company is nothing but capital expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be accepted since the expenditure was in the nature of capital expenditure and not revenue expenditure. Summing up his argument, the ld. SR DR contended that the amount of Rs. 40 lakhs paid by the assessee-company to M/s. DIL was for the purpose for acquiring enduring benefit and establishing a new product in the market and therefore the expenditure was in the nature of capital expenditure. 21. Shri J.D. Mistry, ld. Counsel appearing for the assessee, while replying to the arguments of the ld. SR DR submitted that the revenue is excessively hammering on the principle of enduring benefit. He contended that the principle of enduring benefit is not the sole consideration in deciding the nature of an expenditure. An expenditure may be yielding an enduring benefit and even if so, it can be incidental and if the expenditure is for the purpose of facilitating the running of the business carried on by the assessee, the expenditure still takes the character of revenue expenditure. He relied on the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 where the court has held that what is material to consider is the nature of the advantage in a commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... branded product in its sole right from M/s. DIL. The product namely Lacto Calomine is a valuable brand in cosmetic industry and the assessee-company acquired the brand right from M/s. DIL. Once the assessee-company has acquired the brand right of Lacto Calomine with all the attendant rights and privileges from M/s. DIL, the assessee becomes the owner of that brand against the entire world. The assessee-company brought has in, a new profit making apparatus in the form of a brand name in its possession. It is for the purpose of expansion into new line of product. It is also necessary for the assessee to see that the demand for the new product in the hands of the assessee-company should not be adversely affected by any possible competition from M/s. DIL. Therefore, it has entered into another Non-Compete agreement. Non-Compete Agreement has imposed restrain on M/s. DIL from indulging in competition with the assessee-company for a period of ten years. 23. In the cosmetic industry where fashion and technology are fast changing, a ten year period is sufficiently long period and the benefit of restrain acquired by the assessee for the period of ten years is definitely an enduring benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to facilitate the running of business of the new product. The exact nature of Non-Compete fee in the present case has set out a scenario of introducing a new product through the ownership of the brand name. Therefore, the payment of Non-Compete fee is in the nature of initial outlay necessary for launching a new product in the market through the hands of the assessee-company. Therefore, in the light of the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 as well as in the facts of the case, we find that the Non-Compete fee of Rs. 40 lakhs paid by the assessee-company was in the nature of capital expenditure. Therefore the first ground raised by the assessee is rejected. 26. Regarding the alternate contention of the assessee that the amount of Rs. 40 lakhs has to be allowed for a period of ten years proportionately, it is also not tenable in law. This point was considered by ITAT, Mumbai Bench in the case of Montgomery Watson Consultants India (P.) Ltd. v. Asstt. CIT [2004] 90 ITD 324 in which the Tribunal held that the expenditure which is in the nature of capital expenditure cannot be treated as deferred expenditure to be spread ov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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