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TMI Blog2012 (1) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of Rs.13,66,914 from the profits of the business for computing deduction under section 80HHC. 2.1 The learned Commissioner of Income-tax (Appeals) has failed to appreciate that the appellant is engaged in export business and not in investments. The interest earned has nexus with the export business." At the time of hearing, the learned authorised representative Shri Vikram Vijayaraghavan submitted that he is not pressing the abovestated grounds of appeal. He has also made an endorsement to this effect on the grounds of appeal in the appeal memo. Therefore, these grounds of appeal are dismissed as not pressed. Ground No. 3 of the appeal reads as under: "3. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of depreciation of Rs. 45,35,625 on non-compete fees of Rs. 3,62,85,000 at 25 percent (12.5 percent for half year). 3.1 The learned Commissioner of Income-tax (Appeals) has failed to appreciate that the non-compete fees has all the characteristics of 'any other commercial rights of similar nature' referred to in the depreciation schedule." It was the submission of the learned authorised representative that the non-compete fees of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned authorised representative that the goodwill is not a right, enforceable against anybody whereas the noncompete covenants are legally enforceable rights. It was the submission that goodwill is derived on the excess of the consideration paid over the net value of assets acquired, whereas non-compete fees is paid under a specific agreement. It was, therefore, the submission that the decision pertaining to goodwill cannot be applied in the case of non-compete fees. Lastly, it was the contention that the assessee's case is covered by the decision of the hon'ble Jurisdictional High Court in the case of CIT v. G. D. Naidu (Late) [1987] 165 ITR 63 (Mad). It was also the submission that the case of the assessee is covered by the decision of the hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). It was the submission of the learned authorised representative that the decision of Smartchem Technologies Ltd. v. ITO [2005] 97 TTJ (Ahd) 818 was directly in favour of the assessee on this issue. It was the alternative contention of the learned authorised representative that if non-compete fees are not treated as intangible capital asset eligible fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees to US dollars 7,50,000 was to be paid by the assessee to M/s. Sanmar in consideration of M/s. Sanmar, N. Shankar, managing director of Sanmar Group and M/s. Chemplast Sanmar Ltd. agreeing to give up their right to carry on the Atofina peroxide business in India for a period of five years. Apart from the said agreement, a separate agreement dated October 11, 2002 was entered into between the assessee and M/s. Sanmar whereby a sum of Rs.3,62,85,000 was paid by the assessee to M/s. Sanmar to give up their right to carry on Atofina business in India. This payment was treated as an intangible asset within the meaning of Explanation 3 to section 32 and claimed depreciation at 12.5 percent thereon amounting to Rs. 45,35,625. The Assessing Officer disallowed the claim for depreciation on the ground that the payment made as consideration for the other party to give up their right to carry on the business for a period of five years cannot fit into the list of items designated as intangible asset or any other business or commercial rights of similar nature. Therefore, the amount paid by the assessee does not result into acquisition of any intangible asset which is eligible for deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Mad) the issue involved was whether the expenditure on non-compete fee is revenue or capital in nature and the issue on allowance of depreciation on non-compete fee was not involved in those case laws. He further observed that Circular No. 8 of 2002 ([2002] 258 ITR (St.) 13) of the Board relied upon by the assessee was an issue on an entirely different context. It explains about the issue of taxability of non-compete fees in the hands of the recipient under section 28 of the Act and does not provide that non-compete fees should be equated with other tangible assets mentioned under section 32(1)(ii) of the Act He further observed that as on the date of passing of the order, there was no decision of the hon'ble jurisdictional High Court or the Tribunal directly on the issue. Lastly, the learned Commissioner of Income-tax (Appeals) observed that the provisions of section 32(1)(ii) of the Act are clearly against the assessee since the non-compete fee is not included for the purpose of depreciation and that the basic requirement for allowance of depreciation on an asset was that it should have been used for the purpose of business of the assessee. The payment of non-compete fees does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipments and products in India. The joint venture would have faced tough competition if L&T Ltd. had set up any undertaking or assisted in setting up, undertaking any business in India of selling/marketing and trading of electronic office products. To ward off that competition, the assessee-company had paid Rs. 3 crores to L&T Ltd. Therefore, by payment of non-compete fee to L&T Ltd. the competition for a period of 7 years has been eliminated. The period of 7 years is quite long during which any new company can establish its reputation and a reasonable market share would have been acquired. Therefore, the payment made by the assessee to L&T Ltd. is not to increase the profitability, but to establish itself in the market and acquire market share. By keeping away L&T Ltd. from the same business, the assessee had visualized to acquire a good market share. The contention of the assessee that after a period of 7 years L&T Ltd. would have entered in the same trade and, therefore, the expenditure should be treated as revenue in nature, we are not in agreement with this arguments of the assessee. The payment has been made to ward off the competition for a period of 7 years during which any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of Punjab State Industrial Development Corporation Ltd. v. CIT [1997] 225 ITR 792 (SC) has held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of capital expenditure since the expenditure was directly related to the expansion of capital base of the company and thus it was not an expense in the nature of revenue. The hon'ble Delhi High Court in the case of CIT v. J. K. Synthetics Ltd. [2009] 309 ITR 371 (Delhi) had held that the basic test to determine the nature of an expenditure remains same even in the context of modern situation and these tests are the test of (i) initial outlay of the business, (ii) the aim and objects of the expenditure, (iii) enduring benefit test, and (iv) the test of fixed and circulating capital. In the case of the assessee the payment of Rs. 3 crores to L&T Ltd. has been made at the start of business of joint venture. Therefore, the assessee's case will fall under the first test laid down in CIT v. J.K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion from L&T Ltd. is capital in nature and as such, it cannot be allowed as revenue expenditure. Accordingly, we do not find any infirmity in the order passed by the learned Commissioner of Income-tax (Appeals) confirming the addition made by the Assessing Officer. 17. Alternatively, it has been argued that in case the expenditure is treated as capital in nature, in view of the decision of the Tribunal in the case of ITO (OSD) v. Medicorp Technologies India Ltd. [2010] 2 ITR (Trib) 367 (Chennai) depreciation should be allowed as non-compete fee is an intangible asset. Under section 32(1)(ii) depreciation in respect of know-how, patent, copyright, trade mark, licences, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998, owned wholly and partly by the assessee and used for the purpose of business or profession, shall be allowed at the specified rates. From a plain reading of language of section 32(1)(ii) it is clear that (i) the asset should be an intangible asset ; (ii) should be wholly or partly owned by the assessee ; and (iii) used for the purposes of business or profession. All three condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages P. Ltd. [2011] 331 ITR 192 (Delhi) ; [2011] 238 CTR (Del) 1 ; [2011] 50 DTR 122 while dealing with issue of depreciation on goodwill in paragraph 22 held as under : '22. To effectively understand what would constitute an intangible asset, certain aspects, like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely, trademark, right, patent, etc., and further whether it would come within the clause, namely, "any other business or commercial rights which are of similar nature" are to be borne in mind'. The hon'ble Delhi High Court in paragraph 24 explained the meaning of 'business or commercial right of similar nature' in the following words : '24. It is worth noting that the meaning of "business or commercial rights of similar nature" has to be understood in the backdrop of section 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat payment of non-compete fee should be spread over in the light of decision of the hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC). We have considered the submissions made by the assessee. We following the decision of the Special Bench, Delhi in the case of Tecumseh India P. Ltd. [2010] 5 ITR (Trib) 150 (Delhi) have held that payment of non-compete fee is capital expenditure. In Madras Industrial Investment Corporation Ltd. the assessee issued debentures in December, 1966 at a discount. The total discount on issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For the assessment year 1968-69 the assessee wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with June 30, 1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. The Assessing Officer disallowed the claim but the Appellate Assistant Commissioner allowed deduction of Rs. 12,500. On further appeal the Tribunal held that the entire expenditure of Rs. 3 lakhs was allowable as ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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