9911796707
TMI Blog2013 (5) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... l in assessment year 1999-2000, i.e. the year under consideration. DR's submission that non compete does not find place in the provision have to be accepted because non compete fee does not fall within the ambit of any other commercial or business rights, because, even when examining the meaning of different words, as per law Lexicon, word license means an authority to do something which would otherwise be inoperative, wrongful or illegal, a formal permission from a Constituted authority to do something. The meaning of the word franchise means right conferred by the government to engage in a specific business or a exercise corporate powers,corporate franchise, general franchise. "Know-how" is the fund of technical knowledge and experience acquired by a highly specialized production organization. It is usually noted vary according to, and may even be determined by, its use. Like office or factory buildings, patents and trademarks, and good will, it may be described as a "capital asset" while it is retained by a manufacturer for his own purposes, but, unlike these, its supply to another is not a transfer of a fixed capital asset because it is not lost to supplying manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led. 3. From the recalled order, the jurisdiction cast upon the ITAT is limited to the extent, to delve upon the original grounds no. I and III in the assessee's appeal and as consequence of these grounds, the appeal filed by the department also has to be adjudicated. 4. In the appeal filed by the assessee and by the department, the issue pertains to non compete fee and its application, that is, whether non compete fee is an intangible asset, liable for depreciation, or whether, amount paid by the assessee can be spread over, over the tenor period. 5. Hence, the instant appeal on the issue of treatment to be given on the applicability of non compete agreement. 6. In the integram, the assessee filed an additional ground of appeal, which reads as under: Ground No I. The CIT(A) ought to have held that the payment of Rs. 18 crore was made for know how and the consequent non compete covenant, for which allowance should have been made in Appellant's Income. Ground No. II The Appellant craves leave to add, alter, amend or delete all or any of the grounds of appeal. 7. The DR raised an initial objection on the additional ground, as raised at this stage of the proceeding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order, we find that the issue of non compete fee as per original proceedings, and seeking it now as knowhow, are in tandem. We, therefore, admit the additional legal ground as raised on 04.11.2011. ITA no. 4842/Mum/2004 : Assessee's appeal: 11. Grounds no. I, II III and Additional Ground are against the disallowance of Rs. 18,00,00,000/- paid by the assessee for acquiring knowhow and/or payment as non compete fee, which are being reproduced hereunder for convenience : GROUND I 1. The Commissioner of Income-tax (Appeals)XXVI, Mumbai ["the CIT(A)"] erred in confirming the action of the Assistant Commissioner of Income-tax, Range 6(3) ["the AO'] in disallowance of depreciation on the capitalised sum of non- compete fees over various assets on the alleged ground that the expenditure is in no way connected with the acquisition of various assets. 2. He failed to appreciate and ought to have held that:- (i) the non-compete fees formed part of the total consideration paid for acquisition of the glass division: (ii) allocation over various assets and liabilities was carried out on a fair basis arrived at by technical experts; and (iii) the said allocation was in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited (GGL) (Now known as Piramal Glass Limited). The assessee-company (GGL), and NIPL are the group companies of Piramal Enterprises Limited (PEL). 13. The assessee company (GGL), was carved out of NPIL, being the two glass manufacturing units, located at Kosamba and Jambusar (both in Gujarat). 14. Immediately after inception of GGPL, on 06.02.1998, vide an agreement dated 26.02.1998 with PEL, assessee sought to acquire technical knowhow, preambled as Non Competition Agreement, wherein NPIL was the confirming party. GGPL, thereafter entered into an agreement dated 16.04.1998 with NPIL for spin off, sell and transfer as slump sale with effect from 01.04.1998, which was approved by the Board of Directors in the EGM of NPIL on 20.03.1998 for the manufacture and marketing of glass to be produced by the newly incorporated company, i.e. GGL. 15. To demonstrate the business and commercial relationship of PEL, NPIL and GGL (assessee company), the Senior Counsel assailed the agreements as entered into by the assessee company. 16. The Senior Counsel first referred to the agreement dated 26.02.1998 entered into by the assessee and PEL, wherein it clearly mentioned, "B. PEL owns an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by GGL from 31st day of March, 1998 nor shall it compete with the business of NPIL for a period of three years from the date of this Agreement. (few words of the clause are not clear in the xerox copy) 2. PEL shall not directly or indirectly make available in any manner whatsoever to any person, Company or entity the technical know-how for manufacturing and marketing the glass containers which at present is being used by the said Gujarat Glass Division and upon spinning off the Division to GGL, the said know-how will be used by GGL. 3. PEL shall not directly or indirectly engage in the manufacture, sale or distribution of the glass containers, whether under the brand name "Gujarat Glass" or any other brand name during the term of this Agreement. 4. In consideration for the restrictive covenants, agreed and undertaken by PEL herein, GGL has agreed to pay a sum of Rs. 18,00,00,000/- (Rupees Eighteen Crores Only) to PEL on/or immediately after the execution of this Agreement. 5. During the term of this Agreement, PEL shall not directly or indirectly own, manage, operate, control or to be employed by, participate in or be connected in any manner whatsoever in the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Vendor at the agreed consideration as aforesaid free from all encumbrances (except any encumbrances created or existing to secure only the liabilities referred to in Clause 3 above) and that they shall enter into the execute such deeds, agreements and other documents as may be required and as the Vendor and the Purchaser may mutually decide so as to expeditiously complete the transfer of the Glass Division/Undertaking by the Vendor or the Purchaser. 5. The Purchaser shall have the use benefit of the Undertaking from 1st April, 1998 and before 31st March, 1999 the legal beneficial transfer and assignment of the Undertaking to the Purchaser shall be completed in accordance with the agreement between the parties all applicable laws all consents, no-objections and permissions (by whatever name called) required for the same shall be obtained all conditions thereof shall be complied with. The aforesaid consideration shall be paid by the Purchaser to the Vendor in accordance with the Schedule of payments to be mutually agreed between the Purchaser and the Vendor in writing. 6. The Vendor and the Purchaser may mutually decide the mode of transfer and/or making available to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or after 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deduction shall be allowed - 23. The Senior Counsel submitted, for the purposes of impugned issue, clause under reference is (ii) to sub section (1) of section 32. As mentioned in the facts, the assessee came into being in February of 1998, when it entered into an agreement with PEL who would provide technical knowhow to the assessee, which was, till then and upto 31.03.1998 was to be used by NPIL. The assessee then, vide agreement dated 16.04.1998 took over glass divisions, forming a distinct company from NPIL. The assessee, therefore, took over, amongst other assets, technical knowhow and enforced non compete agreement to be effective from 01.04.1998. 24. The Senior Counsel demonstrated from the conjoined reading of the two agreements that the assessee entered into first agreement with PEL on 26.02.1998 and then with NPIL on 16.04.1998. He submitted that, reading of both the agreements independently of each other and in isolation, would not render any inference. 25. The Senior Counsel, thus argued that whether it was in the name o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal held that the expenditure was capital following the decision of the Delhi Special Bench. Thereafter, it held that such non-compete right was depreciable following Chennai Tribunal in the case of ACIT Vs Real Image Tech. (P.) Ltd. (120 TTJ 983)(Chn.). 4. M/s Scott Glass India Pvt. Ltd. Vs. DCIT (1698/Mum/2003)(Mum.) The assessee acquired all the assets of BGTL and paid non-compete fee of Rs. 34.47 crore. The Mumbai Tribunal allowed depreciation thereon relying on the decisions of the Chennai Tribunal in the cases of Medicorp, Real Image and Radaan. 5. Serum Institute of India Ltd. Vs ACIT (147 Ui 594)(TM Pune) TVL, the predecessor company (which was later amalgamated into the assessee) paid non- compete fee of Rs. 2.4 crore to its founder, Dr. Rao and claimed the same as revenue expenditure and alternatively claimed depreciation. The Tribunal held that the payment gave rise to a capital asset, which was a business or commercial right. The Tribunal followed the decision of the Chennai Bench in the case of Real Image. 6. Ind Global Corporate Finance Pvt. Ltd. vs DCIT 2012 TIOL 524 ITAT Mum The assessee acquired the merchant banking business from Ind Global Financial Trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod. Therefore, the amount paid was held to be in respect of an intangible asset 4. Kotak Forex Brokerage Ltd. Vs ACIT (33 SOT 237)(Mum.) In this case, the assessee paid an amount of Rs. 1.88 crore towards the use of the name 'Kotak' and claimed depreciation thereon terming it as depreciation on goodwill. The Tribunal held that business or commercial rights are rights obtained for effectively carrying on the business or commerce. Commerce is a wider term, which encompasses business in its fold. Therefore, any right which is obtained for carrying on the business effectively and profitably has to fall within the meaning of intangible asset. The Tribunal held that goodwill was similar to the specified assets and accordingly the assessee was allowed depreciation. 5. CIT Vs Hindustan Coca Cola Beverages (P.) Ltd. (331 ITR 192)(Delhi) In this case, the High Court held that commercial rights are such rights which are obtained for effectively carrying out the business 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 obtained for carrying on the business with effectiveness is likely to fall or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of Delhi Tribunal was concerned with a case of takeover of business and payment of non-compete fee. The Tribunal noted that the purchase price paid for the business (excluding non-compete fee) was Rs. 49.85 crores. If a further sum of Rs. 2.65 crores paid on account of non-compete fee was added to the same, the total would come to Rs. 52.50 crores, which was the amount mentioned in the MOU for transfer of the business. Therefore, the Tribunal held that non-compete fee was capital expenditure. Thereafter, at Para 127, Tribunal observed, relying on the decision of the Supreme Court in Assam Bengal Cement Co. Ltd. (27 ITR 34) (SC) that the payment of non-compete fee went to appreciate the whole of the capital assets of the business. 2. CIT vs Smifs Securities Ltd. 348 ITR 302 This view has also been held by the Supreme Court in the case of CIT vs Smifs Securities Ltd. 348 ITR 302. At Para 6, the Supreme Court has noted that because of acquisition of goodwill the market worth of the assessee stood increased. Therefore, it is submitted that if the non-compete fee is not found to be depreciable as an intangible asset, then, it should be spread over various assets and depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant provision. The DR, also placed reliance on the decision of coordinate Bench at Delhi in the case of Sharp Business Systems (India) Ltd. vs DCIT, reported in 133 ITD 275 (Del), wherein, after detailed discussion, the Delhi Bench decided that non compete fee is not an asset, on which depreciation could be allowed, because, according to the Delhi Bench, it is an arrangement, not an asset. 32. The DR, finally submitted that no submissions came forthwith from the Senior Counsel, on the basis on which the issue was recalled and the instant hearing is taking place. The DR, therefore, submitted that since there are no comments on the Third member decision of Paper Products Limited, by the Senior Counsel, then it must be assumed that the case cited by the original Bench in the original hearing is acceptable to the assessee and also that the observations of the revenue authorities must be sustained and the claim now being raised through the additional ground be rejected and dismissed. 33. In the rejoinder, the Senior Counsel submitted that the assessee had allocated the non compete fee to its assets as on 01.04.1998, as per the purchase price paid to NPIL, which were Rs. 2,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, namely, 'to tax the income'. We are of the view, 'owner' is a person who is entitled to receive income from the property in his own right". This position may be a little different from the decision of Privy Council, cited above, wherein the Privy Council observed, "It cannot be disputed that a person in possession of land in the assumed character of owner and exercising peaceably the ordinary rights of ownership has perfectly good title against all the world but the rightful owner. And if the rightful owner does not come forward and assert his title by the process of law within the period prescribed by the provisions of the statute of limitation applicable to the case, his right is forever extinguished and the possessory owner acquires an absolute title". In the present case, the transfer of an intangible, from PEL to GGL took effect on 01.04.1998. Keeping in view the decision of Podar Cements (supra), GGL could only exert its domain on and after 01.04.1998. Before this date, the intangible was in use by NPIL, which the owner, PEL could have never transferred to GGL. After this date, neither PEL nor NPIL could ever exert any right of any kind over the knowhow. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with NPIL, the assessee, in any case had to wait upto 01.04.1998, and according to the agreement dated 26.02.1998, clause C, page 2 and clause F, page 3, which reads as under: C. The said Gujarat Glass Division of NPIL, is using the said technical know-how provided by PEL for it's business of manufacturing glass containers, as aforesaid. F. As a result of the protracted negotiations between PEL and NPIL, NPIL has agreed to enter into a Memorandum of Undertaking with GGL, for spin-off, sale and transfer of its said Glass Division to GG with effect from 1st April, 1998 and also to initiate all the required process of obtaining statutory and other approvals, consents, no-objection including approval of its shareholders required under section 293(1)(ii) and 372 of the Companies Act, 1956 for such spin off the Gujarat Glass Division and making investment in GGL. G. PEL has agreed to retrain from (i) providing the technical know how for manufacture of glass containers to any other Company or entity so that the said technical know-how is exclusive with GGL, (ii) carrying on the business of packaging or of manufacturing glass, and (iii) competing with the business of GGL as GGL would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may be and to the extent required, the consent of the Company be and is hereby accorded to the Board of Directors of the Company (hereinafter referred to as "the Board" which term shall also mean and include any Committee(s) which the Board may constitute to exercise the powers of the Board including the powers conferred by this resolution) to transfer the Company's Glass Division including the assets and liabilities together with the use of all the licenses, permits, consents and approvals whatsoever and all the rights, benefits and obligations attached thereto, as a going concern to Gujarat Glass Limited, a newly incorporated Company for the purpose, effective from 1st April, 1998 for such consideration and on such terms and conditions as the Board may deem fit, with liberty to the Board to appoint its Committee(s) authorising the powers vested in the Board. Resolved further that the Board be and is hereby authorised to settle all or any of the matters pertaining to or arising out of and incidental to such transfer of the Glass Division of the Company as aforesaid and to do and perform all such acts, deeds, matters and things as they may deem necessary, desirable or appropria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible asset and eligible for depreciation. It is important to observe that the Hon'ble Apex Court was seized with the issue of goodwill only. 46 In the synopsis filed by the assessee, the Senior Counsel referred to a number of decisions of the various coordinate benches, which included the decision of Tecumseh India (P) Ltd. vs ACIT, rendered by the Special Bench at Delhi (supra), wherein the issue was with regard to the expenditure incurred on account of non compete fee being capital or revenue. In the instant case, the case referred by the coordinate Bench in the original proceedings of Paper Products Ltd. (supra) is on a different premise, i.e. whether the capital expenditure incurred for acquiring a capital asset, eligible for the claim of depreciation. Decision in the case of Tecumseh India (supra) is the closest in so far as the decision rendered by a bench of equal strength. Since all the other decisions rendered by the coordinate Benches are by the regular benches, cannot be relied upon. 47. We find that the issue in reference is dealt with only by the Third Member decision in the case of paper Products Limited (supra). 48. When we take into consideration, DR's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ildings, patents and trademarks, and good will, it may be described as a "capital asset" while it is retained by a manufacturer for his own purposes, but, unlike these, its supply to another is not a transfer of a fixed capital asset because it is not lost to supplying manufacturer (Rolls- Royce v. Jeffrey; Rolls-Royce v. I.R.C., [1962] 1 All ER 801 (HL). In Sections 530 and 531 [disposal of know-how] 'know-how' means any industrial information and techniques likely to assist in the manufacture or processing of goods or materials, or in the working of a mine, oil-well or other source of mineral deposits (including the searching for, discovery or testing of deposits or the winning of access thereto), or in the carrying out of any agricultural, forestry or fishing operations. [(English) Income and Corporation Taxes, 1988. S. 533(7)] ['know-how' seems to me to indicate something essentially different from secret and confidential information. It indicates the way in which a skilled man does his job, and is an expression of his individual skill and experience" per Evershed Mr., in Stevenson Jordon and Harrison v. Macdonald and Evans, (1952) 1 TLR 101." 49. The expression non compe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to refrain the Piramal Group of companies from undertaking any competing business in any manner which, by its very nature, is capital expenditure. 2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to consider the fair value of the depreciable assets acquired on lump sump sale from Nicholas Piramal India Ltd. (NPIL) as actual cost for the purpose of computation of allowable depreciation without giving any reasons for the same and without appreciating the decisions reported in 109 ITR 324, 109 ITR 739, 156 ITR 360, 199 ITR 299 as relied upon by the Assessing Officer." 56. The appeal, though decided in the original round, also was recalled because of the ground recalled in ITA no. 4842/Mum/2004. 57. In the impugned order of CIT(A), it was found that the CIT(A) allowed the spread over of Rs. 18,00,00,000/- over a period of 18 years, i.e. the tenor period of non compete applicability. 58. Since we have held the payment of Rs. 18,00,00,000/- to be a capital expenditure cannot be allowed as an expense and we have also held that non compete fee is not an asset, depreciation cannot be allowed, we therefore, allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
