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TMI Blog2012 (11) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectly informed of the position of law would come to?" 2. The appellant, a company which used to import, market and sell electronic office products and equipment in India, at the relevant time, was incorporated on 29.02.2000, as a joint-venture of M/s. Sharp Corporation, Japan, and L&T Ltd. During the year under consideration, the appellant paid Rs. 3 crores to L&T as consideration for the latter not setting-up or undertaking or assisting in the setting-up or undertaking any business in India, of selling, marketing and trade of electronic office products for seven years. This amount was treated as deferred revenue expenditure in the assessee's books of accounts and written-off over corresponding period of seven years. For Assessment Year 2001-02, in the return filed, assessee claimed entire sum as Revenue deduction. The assessee contended, during the proceedings that the amount paid facilitated its business and did not enhance or alter the fixed capital and ought to be treated as revenue expenditure. The AO, however, disallowed the deduction on account of non-compete fee, by order dated 19.03.2004, as according to him, it conferred a capital advantage of enduring value. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituted capital expenditure. In this regard, reliance was placed upon the judgment reported as Empire Jute Co. Ltd. v. CIT 124 ITR 1 (SC). It was submitted that even if expenditure is incurred for obtaining some advantage that may be enduring, nevertheless, be on the revenue account. It was emphasized by the assessee that not every advantage of enduring nature acquired by an assessee would result in a capital expenditure and that the material consideration is the nature of advantage as viewed in a commercial sense. Thus, mere facilitation of the trading operations of an assessee or its enabling management and conduct of its business so as to carry on more efficiently or more profitably, leaving the fixed capital untouched, would not amount to revenue expenditure. Learned counsel also relied upon the decision in Alembic Chemical Works Co. Ltd. v. CIT, Gujarat 177 ITR 377 (SC). The appellant's counsel placed heavy reliance on the judgment CIT v. Madras Auto Service (P.) Ltd. 233 ITR 468 (SC) and submitted that the mere length of time during which an advantage is conferred as a result of the expenditure is not a determinative factor and that in these circumstances what the Court shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not carrying or competing with it for term-basis for five years. The High Court had there held that the expenditure was in the nature of revenue expenditure and no business had been acquired by payment of the amount. It was contended that likewise, in the present case, the non-competing fee in consideration of L&T not entering into the same business activity for a period of seven years. This did not create any capital asset and that expenditure merely facilitated the mere efficiency, profitability and conduct of the assessee's business; it was, therefore, deductible under Section 37(1). 6. It was next argued in the alternative that the Tribunal fell into error in concluding that the right to trade freely in the market is not an asset and does not qualify for depreciation under Section 32. Special reliance was placed on Section 32(1)(ii) which enables depreciation in respect of know-how, patent, copyright, trademark, licences, franchises or any other business or commercial rights of similar nature being intangible assets owned - wholly or partly by the assessee and used for the purpose of business. Learned counsel emphasized that once the Tribunal concluded that the assessee had ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing fee. In any event, submitted counsel, the payment did not result in any intangible asset akin to patent or intellectual property right. Therefore, in view of the decision of this Court in Hindustan Coco Cola Beverages P. Ltd. (supra), the non-competing agreement did not create asset or intangible nature or kind which qualified for depreciation. 9. It can be gathered from the previous discussion that the assessee claimed deduction, as revenue expenditure, the sum of Rs.3 crores, paid by it to L&T, towards non-competing fee. The agreement between the assessee and L&T by which the latter was not to compete with the assessee, was to subsist for seven years. This Court is conscious of the fact that the ruling in Empire Jute Co. Ltd. (supra) and Alembic Chemical Works Co. Ltd. (supra) have emphasized that a single test, i.e. whether the payment results in an enduring benefit cannot be conclusive in a decision as to whether an expenditure qualifies as one falling or in the capital field. Those decisions have emphasized the need to shift from an narrower field to a broader one, to ascertain the real nature of the advantage which a tax-payer would derive. The test now well-settled is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting concern, requiring the previous management not to enter into identical business. The Court had held that the deduction towards non-competing fee could not be allowed as it conferred a capital advantage. 10. In the present case, the appellant is a joint-venture between M/s. Sharp & L&T. Apparently, the agreement entered into with the L&T in view of the changed relationship ensures that the latter does not enter into the same business. Although it is contended that the advantage is only by way of facilitation of the appellant's business and ensuring greater efficiency as well as profitability, on the other side, what can be seen is that the arrangement is to endure for a substantial period, i.e. 7 years. Coupled with the fact that the L&T has its own presence in consumer goods sector and would be, if it chooses - able to put up an effective competition for business engaged in by the assessee, there is no doubt that the amount is to ensure a certain position in the market by keeping-out L&T. Applying the test indicated in the Empire Jute Co. Ltd. (supra), Alembic Chemical Works Co. Ltd. (supra) and Coal Shipments P. Ltd. (supra), this Court is the opinion that the deduction ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssertion of a right in rem. The decisions of this Court in Hindustan Coco Cola Beverages P. Ltd. (supra) and that of the Kerala High Court in B. Ravindran Pillai (supra) underlined that goodwill is also a species of depreciable right which can claim the benefit of Section 32. Those decisions were based on the ruling of the Supreme Court in CIT v. B.C. Srinivasa Setty 1981 (128) ITR 294 (SC) and subsequent cases which have ruled that goodwill is a depreciable capital asset. So far as the decisions in Techno Shares & Stocks Ltd. (supra) is concerned, the Supreme Court clearly limited its holding that the right to membership of Stock Exchange is in the nature of "any other business or commercial right" which was an intangible asset as is evident from the following observations: "Before concluding we wish to clarify that our present judgment is strictly confined to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is "business or commercial activity" which gives a non-defaulting continuing membership and right to access Exchange and to participate therein and in that sense ..... X X X X Extracts X X X X X X X X Extracts X X X X
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