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TMI Blog2014 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of the Hon'ble Calcutta High Court in case of Exide Industries Ltd. Vs. Union of India 2007 (6) TMI 175 - CALCUTTA High Court] thus, the matter is to be remitted back to the AO with a direction to decide the same in consonance with the decision of the Hon'ble Supreme Court – Decided in favour of assessee. Depreciation on non-compete fee disallowed – Revenue expenses or not u/s 37(1) – Held that:- AO has treated the agreement entered into between assessee for payment of non-compete fee as a sham transaction as Shri Ramoji Rao is not only the owner of UKT and UKM being the karta of HUF to which these concerns belong but he also in his individual capacity is the Chairman of the assessee company - assessee cannot be considered to be competing with himself – as it is an arrangement between related parties, there is no necessity for payment of noncompete fee. AO further observed that the assessee has entered into agreement for payment of non-compete fee to reduce its tax burden by allowing Shri Ramoji Rao HUF to adjust the non-compete fee against the huge brought forward losses suffered by it - assessee on 25/01/2008 has entered into subscription agreement and share purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh adjudication – Decided in favour of assessee. Commission paid to agents on sale of space for advertisement in newspapers and television time slot disallowed u/s 40(a)(ia) – TDS not deducted u/s 194H – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that when the AO raised demand u/s 201 and 201(1A) against assessee for not deducting tax at source u//s 194H on commission paid to agents on sale of space for advertisement in news papers and television time slot, the CIT(A) deleted the demand raised u/s 201 and 201(1A) - there is no liability on the assessee to deduct tax u/s 194H on such payments - while deciding the issue of disallowance made by AO u/s 40(a)(ia) for not deducting tax at source u/s 194H on commission payments made to agents upheld the order of CIT(A) in deleting the addition made by AO – the order of the CIT(A) is upheld – Decided against revenue. Rate of depreciation on computer peripherals to be 60% or not - Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that CIT(A) rightly allowed the claim of depreciation at 60% on printers, scanners and modems etc. – Deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective of its classification in the books of account. Learned AR further submitted that the CIT (A) having held that excess billing of ₹ 53,45,145 is write off of earlier years income ought to have considered the write off as bad debts deductible u/s 36(1)(vii) as the amount represents income offered in earlier years and written off in the books of account during the year. In support of such contention, assessee relied upon a decision of the coordinate bench in its own case for the AY 2007-08. Alternatively, it was contended by the learned AR that the amount in question can be allowed as a trading loss u/s 28 of the Act, since the same got crystallized during the year under consideration. So far as the balance amount of ₹ 22,73,597 is concerned, the learned AR submitted that the said amount was debited to P L a/c under the head prior period expenses being correction of valuation of stock offered as income in earlier years. It was submitted that as the amount in dispute was offered as income in earlier assessment years and actually written off in the books of account in the current assessment year, the same has to be allowed as a deduction. 6. The learned DR, thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting to the issue in dispute are, in course of assessment proceeding, AO noticed that the assessee had debited an amount of ₹ 3,42,82,009 to the P L account being provision for leave encashment. However, in the computation of income under normal provision as well as u/s 115JB, assessee has not added this amount by relying upon the decision of Hon'ble Calcutta High Court in case of Exide Industries Vs. Union of India, 292 ITR 470. AO, however, rejected assessee's claim by observing that the department has filed an SLP against the judgment of the Calcutta High Court. Assessee challenged the disallowance in the appeal preferred before the CIT(A). 11. The CIT(A) sustained the addition while noting the fact that the judgment of the Hon'ble Calcutta High court in case of Exide Industries (supra) has been stayed by the Hon'ble Supreme Court 12. The learned AR, though, made an attempt to justify its claim of deduction by contending that stay of judgment of the Hon'ble Calcutta High court by Hon'ble Supreme Court will not amount to quashing of the said judgment. It was submitted that in spite of the stay granted by the Higher court the order passed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recipient. AO noted that Sri Ramoji Rao in his individual capacity is the chairman of the assessee company and holds substantial shares. Even as per the information given in the annual report the two entities UKT and UKM are nothing but business units of Shri Ramoji Rao, HUF. Hence, both the payer and payee are related parties and exercise control or significant influence on each other. In the aforesaid context, it cannot be said that a person competes with himself. AO opined that the transaction is a sham transaction entered into between the parties to cover up the brought forward losses of HUF. Therefore, assessee being a profit making unit paid such a huge sum under the guise of non-compete fee. AO relied upon certain judicial precedents while observing that in these type of transactions the corporate veil is required to be lifted to find out the true nature of the transaction. Further, AO also raised serious doubts with regard to the method adopted for valuation of non-compete fee. AO after examining the valuation report obtained by assessee noted that the valuer has not explored any scientific method to work out the valuation. He noted that the valuer simply worked out the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of common ownership. Hence, as there is little chance of any competition, the question of paying non-compete fee will not arise. CIT(A) also observed that the payment made by assessee did not result in any asset to company, which would have given them a methodology for earning income streams. He opined that non-compete fee does not provide any asset of enduring nature, hence, it is not eligible for depreciation under any section of IT Act, as it is merely a restrictive covenant on the recipient. 18. The learned AR Shri Rajan Vohra, appearing for the assessee submitted before us, assessee prior to its business restructuring was held by Sri Ramoji Rao, HUF and his family members. Shri Ramoji Rao, HUF also owned a number of business units including Ushakiran Television (UKT) and Ushakiran Movies (UKM) which are engaged in the production and supply of software (content) for the satellite channels (ETV) of assessee on a revenue share basis. These two concerns also held satellite rights for more than 3700 feature films in different languages either perpetually or for very long periods ranging from seven years to 15 years. During the previous year 2006-07 relevant to AY 2007-08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as FIPB did not grant required approval for the proposed investment into the assessee company by 31/12/07 as per the subscription agreement. As the investment by foreign investor did not materialize, assessee negotiated with a domestic investor, namely, Equator Trading Enterprises Pvt. Ltd. for investments into the company in order to achieve its restructuring objectives. The domestic investor agreed to invest in the company subject to the condition that assessee should execute a non-compete agreement for a period of five years with the promoters of UKM and UKT with a view to ensure exclusive rights over the business acquired and to restrain the promoters continuing the same business. In this context, the learned AR referred to the agreement dated 30/01/08 between assessee and the domestic investor, a copy of which is placed at 221 of assessee's paper book. Therefore, as per the condition imposed by the domestic investor, which is also incorporated as a term in the agreement entered with the domestic investor, assessee entered into a noncompete agreement on 30/01/08 with the promoter of UKT and UKM for a total consideration of ₹ 670 crores. The learned AR submitted that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from the substantial sum of ₹ 775 croes received from sale of their business. This could have impacted the viewership of ETV channels of assessee and consequently its revenues and profitability. For this reason alone, the domestic investor to ensure that there would not be any direct or indirect competition by the promoter in his HUF capacity in the market, agreed to invest into the assessee company on the precondition that the assessee company would execute the noncompete agreement with the promoters of UKT and UKM. Thus, a non compete agreement was entered by the assessee company with the promoters of UKT and UKM at the behest of the domestic investor, who are not related in any manner to Shri Ramoji Rao. It was submitted that the conclusion drawn by AO and CIT(A) to the effect that there is no necessity for payment of non-compete fee as the promoter of both assessee company and UKT and UKM are same and as such a person cannot pay money to himself for not competing is totally irrelevant as they have failed to appreciate the fact that 39% of the assessee's shareholding is held by a domestic investor who is an unrelated party and has significant influence on the affai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns contained u/s 32(1)(ii) and explanation 3 to the said section, submitted that as per the meaning given in the said provision intangible assets are the rights available to the owner which would entitle the owner to generate income from exploitation of such rights. Payment of non-compete fee is an arrangement or agreement putting a contractual obligation on the other party, so that he or she should not carry on similar activity or trade in competition which will reduce the profitability of assessee and obligation of other party to non-compete. It was submitted that as per the definition of intangible asset, non-compete fee is not specifically mentioned. Therefore, one has to examine whether the words 'business' or 'commercial rights of similar nature' can be said to include noncompete fee. In this context, learned AR relied on a decision of Hon'ble Supreme court in case of Techno Shares and Stocks Ltd. and others Vs. CIT 327 ITR 323 wherein membership card of BSE was held to be a business or commercial right as it gives right to access the exchange and to participate therein to a non-defaulting continuing member, hence, it is in the nature of license akin to li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation u/s 32 of IT Act. In this context, the learned AR submitted that in the recent judgment in case of CIT Vs. Ingersollrand International India Ltd, (supra) the Karnataka High Court after taking into consideration the judgement of Delhi High Court in case of Sharp Business Systems Vs. CIT (supra), which is against assessee and the decision of Hon'ble Madras High Court in case of Penta Soft (supra) which is favourable to assessee allowed assessee's claim of depreciation. The learned AR submitted that if there are two or more interpretations possible, the one which is beneficial to assessee is to be followed. In this context, he relied on the following decisions: 1. CIT Vs. Vegitable products Ltd., 88 ITR 192 2. ITO Vs. Prasad Productions Ltd., [2010] 3 ITR 58 (Chennai)(SB) 23. He further submitted that when there are conflicting decisions of High Courts, the latest decision is required to be followed to maintain judicial discipline. For such proposition, he relied on a decision of ITAT, Ahemabad Bench in case of Shri Prakash vasantbhai Golwala Vs. ACIT, ITA NO. 558/Ahd/13. Thus, it was contended by the learned AR that the claim of depreciation sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decisions cited. A perusal of the assessment order as well as the order passed by CIT(A) would leave no room for doubt that assessee's claim of depreciation on non-compete fee has been rejected basically for the following two reasons: 1. Genuineness of the payment made and necessity of paying non-compete fee. 2. Non-compete fee not being in the nature of an intangible asset as defined in section 32(1)(ii), depreciation is not allowable. 26. Before examining whether non-compete fee can be considered to be an intangible asset so as to entitle the assessee to claim depreciation on it, it is necessary, at the outset, to address the issue of genuineness of payment of non-compete fee and necessity to make such payment. As can be seen from the assessment order, AO has treated the agreement entered into between assessee for payment of non-compete fee as a sham transaction as Shri Ramoji Rao is not only the owner of UKT and UKM being the karta of HUF to which these concerns belong but he also in his individual capacity is the Chairman of the assessee company. As such, assessee cannot be considered to be competing with himself. As it is an arrangement between related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akeholder in assessee company. As can be seen from the assessment order as well as order passed by the CIT(A) before coming to their respective conclusion that the transaction entered into by parties for payment of noncompete fee is not genuine or there is no necessity for paying the non-compete fee as the same person is controlling both the assessee company and the two other companies acquired by the assessee, the role of M/s Equator Trading Enterprises Pvt. Ltd. in any decision taken by assessee company has not at all been considered. Neither the AO nor the CIT(A) has examined the effect of acquisition of 39% of equity shares by another entity and whether after such acquisition of shares, it can still be held that Shri Ramoji Rao is the controlling authority of assessee company and it is a transaction between related parties. Unfortunately, the assessment order and order of CIT(A) is totally silent on this aspect. Though in the remand report, AO has examined the issue of investment made by the domestic investor and has alleged that it as a sham transaction and a collusive agreement entered into between the parties to reduce the tax burden by claiming depreciation on payment of no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d documents reveal that Shri Ramoji Rao HUF for the assessment year 2008-09 has not only shown the non compete fee received by it as income but has also adjusted it against the brought forward losses of earlier years. AO i.e. JCIT, Range-16, while completing assessment in case of Shri Ramoji Rao HUF has accepted not only the income but also its adjustment against brought forward losses in an assessment order passed u/s 143(3) on 24/12/2010. Therefore, when the non-compete fee paid by assessee has been accepted at the hands of Shri Ramoji Rao HUF and allowed to be set off against the brought forward losses, it needs to be examined whether still the payment of noncompete fee made by the assessee to Shri Ramoji Rao HUF can be held to be either non-genuine or not necessary. Therefore, considering the totality of the facts and circumstances we are of the view that as the impact of acquisition of 39% of equity shares by M/s Equator Trading Enterprises Pvt. Ltd. has not at all been examined by AO at the time of assessment proceeding or by the learned CIT(A) while disposing of assessee's appeal and further as the additional evidences produced before us were not examined either by the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of deletion of an amount of ₹ 1,01,63,14,378 disallowed u/s 40(a)(ia) by the AO for non deduction of tax u/s 194H on commission paid to agents on sale of space for advertisement in news papers and television time slot. 33. Briefly the facts relating to the aforesaid issue are, in course of assessment proceeding, AO while examining the final accounts of assessee noticed that during the assessment year under consideration, assessee received advertisement revenue of ₹ 731,59,90,000. However, the aforesaid advertisement revenue shown by assessee is net of expenditure of ₹ 101,63,14,378 incurred towards commission paid to agents for sale of space for advertisement in news papers and television time slot. AO therefore required the assessee to furnish details regarding TDS on such payments. In reply assessee submitted that tax has not been deducted on such payments as the agents after deducting the commission amount pay the net amount, hence there is no occasion to deduct tax on the commission. Further, it was explained that TDS is to be deducted at the time of credit/payment of such income to the account of the payee in cash or by issue of a cheque or dra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission payments made to agents upheld the order of CIT(A) in deleting the addition made by AO. As the view taken by the learned CIT(A) in the present case is in conformity with the decisions of the tribunal in assessee's own case for preceding assessment years, we uphold the same. Accordingly, ground raised is dismissed. 36. The next issue as raised in ground No. 3 is with regard to CIT(A) upholding assessee's claim of depreciation at 60% on printers, scanners and modems etc. 37. Briefly the facts are, AO in course of assessment proceeding noticed that assessee has claimed depreciation on computer accessories like printers, scanners, modems, routers, etc. at 60% by treating them as part of computer. AO was however of the view that these items cannot be considered as part of computer, hence, depreciation @ 60% cannot be allowed. Accordingly, AO completed the assessment by restricting the depreciation @ 15% on the aforesaid items by treating them as 'plant and machinery' and in the process treated the differential amount of ₹ 23,84,929 as excess depreciation claimed which is not allowable and added it back to the income of assessee. Being aggrieved of s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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