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TMI Blog2011 (6) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the expenditure incurred by way of non-compete fee is capital in nature, it cannot be allowed to be spread over for the period of seven years - against assessee. - IT APPEAL NO. 4564 (DELHI) OF 2004 - - - Dated:- 30-6-2011 - A.D. JAIN, K.D. RANJAN, JJ. Ajay Vohra and Sachit Jolly for the Appellant. Stephen George for the Respondent. ORDER K. D. Ranjan, Accountant Member. This appeal by the assessee for assessment year 2001-02 arises out of order of the ld. CIT (Appeals)-XI, New Delhi. 2. The grounds of appeal raised by the assessee are reproduced as under :- 1. That the ld. CIT (Appeals) erred on facts and in law in confirming disallowance of ₹ 3,00,00,000/- made by the assessing officer in respect of the amount paid to M/s. Larsen and Toubro Limited, in lieu of the same agreed not to enter into competing business with the appellant for seven years, holding the same to be a capital expenditure incurred for obtaining an enduring benefit; 2. That the ld. CIT (Appeals) erred on facts and in law in holding that the aforesaid expenditure was not allowable revenue expenditure, alleging that M/s. Larsen and Toubro was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration the assessee imported office automatic machines like photo copiers, facsimile machines, note book computers etc. from Sharp Corporation, Japan worth ₹ 39,10,20,045/- out of which sales of ₹ 30,98,57,317/- were made. The assessee during the relevant period paid ₹ 3 crores to L T Ltd. in lieu of the latter, not setting up undertaking/assisting in setting up undertaking any business in India of selling, marketing and trading of electronic office products for a period of 7 years. The assessee treated the amount of ₹ 3 crores as deferred revenue expenditure in the books of accounts and was being written off over a period of 7 years. However, in the return of income the amount of ₹ 3 crores was claimed as revenue expenditure under section 37(1) of the Income-tax Act, 1961. 6. On a query by the assessing officer, it was submitted by the assessee that the amount paid by Sharp Business India Ltd. to L T was merely to facilitate the business of Sharp Systems India Ltd. and in no way going to touch the fixed capital as such. The assessee placing reliance on the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enter the market and again make a name for itself in selling, marketing and trading office automation products. Hence, the contention of the AO that the assessee had received an enduring benefit was not tenable. The competition had been warded off only to some extent and not totally as there were many major players other than L T which were engaged in the business of marketing and selling the electronic/electric products. It was further submitted that the payment of ₹ 3 crores was made to secure the market share of the assessee and to ward off competition from a potential business rival in order to ensure and protect the profitability of the assessee. The payment of non-compete fee did not result in acquisition of any capital asset, nor did the same add to a profit earning apparatus of the assessee. It was to be further appreciated that there was non-enduring benefit in the capital field which resulted in any such advantage being treated as capital expenditure. The payment of non-compete fee has a direct or rational nexus with the assessee's business and therefore, should be treated as revenue expenditure. The assessee placed reliance on several decisions in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbay High Court has held that where the payment was made by the assessee towards construction of an over-head supply line, which always belonged to Gujarat Electricity Board, the supply was guaranteed under the aforesaid agreement for a minimum period of 7 years. The assessee was to pay normal charges for the amount of electricity consumed by it. The payment made by the assessee for ensuring supply of electricity, which was essential for the manufacture of phosphorus was held to be revenue in nature. Further Hon'ble Delhi High Court in the case of CIT v. Saw Pipes Ltd. [2008] 300 ITR 35 (Delhi) the expenditure on laying electric service line for new unit was incurred. Ownership of cable remained with the Electricity Board. Advantage, though enduring, was intended to enable the assessee to carry on its business more efficiently, leaving the fixed capital un-touched, the expenditure was, therefore, held to be allowable as revenue expenditure. Hon'ble Supreme Court in CIT v. Coal Shipment (P.) Ltd. [1971] 82 ITR 902 has held that the payment made in pursuance to agreement not to export coal to Burma during the subsistent of agreement was allowable as revenue expenditure as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee is not an intangible asset and, therefore, depreciation cannot be allowed. 10. In rejoinder the ld. AR of the assessee submitted that the payment was not made for taking over of business. Nothing was transferred. Therefore, the decision of Special Bench of the Tribunal is distinguishable. He placed reliance on the decision of Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 198 ITR 297/64 Taxman 442 for the proposition that the decision cannot be applied in piece-meal; the context in which the decision was rendered is to be seen. If the decision was to apply in the case of interveners, Special Bench should not have kept those matters pending but have decided the cases along with the case of Tecumseh India (P.) Ltd. (supra). 11. We have heard both the parties and gone through the material available on record. In the case before us there is no dispute that before formation of joint venture by L T and Sharp Corporation, Japan, L T was engaged in the business of developing, manufacturing, marketing, distributing and selling among other things, various electronic equipments and products in India and had a well-established country- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. AR of the assessee that the payment of non-compete fee has not created any asset or advantage in the capital field and, therefore, it should be revenue in nature. The decision of Hon'ble Supreme Court in the case of Madras Auto Service (P.) Ltd. (supra) cannot be applied to the facts of the case before us. In that case the assessee had taken the premises for 39 years on lease and invested in the construction of building. The building did not belong to the assessee and the assessee was paying nominal rent for a period of 39 years. Under these circumstances, Hon'ble Supreme Court held that no asset of enduring nature was created and, therefore, the expenditure was to be treated as revenue in nature. The ratio of this decision is of no avail in the cases of non-compete payments as in that case the incurring of expenses did not create any asset as against that it has been clearly held by the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) that the protection fee paid by the assessee had acquired an advantage of an enduring nature which ensured for the benefit of the whole of the business. The decision of Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ITAT Delhi Special Bench in the case of Tecumseh India (P.) Ltd. (supra) has examined the proposition canvassed by the assessee that the purpose of making non-compete fee is to maintain the profitability of the business by insulating the same from the risk of competition This contention of assessee has been rejected after detailed discussion keeping in view the judicial pronouncements. It has been held that when expenditure is made for initial outlay or for expansion of business or for a substantial replacement of equipment, then it would fall under capital expenditure. The payment of non-compete fee for acquisition of business has been held as capital expenditure as the same was incurred for initial outlay of the business. In the instant case the expenditure was incurred to ward off the competition for a period of 7 years at the start of the business and hence will form part of initial outlay of the business. Accordingly the assessee's case is squarely covered by the decision of Special Bench in the case of Tecumseh India (P.) Ltd. (supra). Therefore, the expenditure by way of non-compete fee has to be treated capital in nature. 15. We are conscious of the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or commercial rights of similar nature . The intangible asset falling in expression any other business or commercial rights of similar nature should belong to same genus to which know- how, patents, copy rights, trademarks, licenses/franchises belong. Therefore, the expression any other business or commercial rights of similar nature would mean that the business or commercial right should be in the nature of know-how, patents, copy-rights, trade-marks, licenses or franchises. By no stretch of imagination, the non-compete fee can be treated to have belonged the same genus to which know-how, patents, copyrights, trademarks, licences/franchises belong. 18. An asset whether tangible or intangible must be one for which a market value can be ascertained. There is no dispute that know-how, patents, copyrights, trademarks, licenses/franchises etc. are intellectual property rights, which can be transferred/assigned/leased out to any other parties for a price. Non-compete agreement between two parties is like personal services contract which is un-assignable. Personal services contract cannot survive on the demise of either of the parties. Similarly the non-compete agreement betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured or produced over-night, but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a similar benefit or advantage or reputation built over a certain span of time and the customers associate with such assets . 20. Thus from the decision of Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P.) Ltd. (supra) it is clear that business or commercial rights of similar nature are not manufactured or produced over-night, but are brought into existence by experience and reputation. The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copy rights, trade marks, licenses, franchises etc. Therefore, in view of decision of Hon'ble Delhi High Court in the case of Hindustan Coco Cola Beverages (P.) Ltd. (supra) non-compete agreement would not create an asset of intangible nature eligible for depreciation under section 32(1)(ii) of the Act. The decision of the ITAT, Chennai Bench in the case of Medicorp. Technologies (India) Ltd. (supra) was rendered prior to the decision of Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. On further appeal to the Hon'ble Supreme Court it was held that liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purpose of its business in order to generate funds for its business activities. It was, therefore, expenditure. The assessee had in its return correctly claimed a deduction only in respect of proportionate part of the discount of ₹ 12,500/- over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the discount on debenture account which was written off over the period of debentures. The assessee was entitled to deduct a sum of ₹ 12,500/- out of discount of ₹ 3 lakhs in the relevant assessment year. Hon'ble Supreme Court also held that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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