9911796707
TMI Blog2014 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... O while examining the final accounts of the assessee, noticed that the assessee has debited an amount of Rs. 76,18,742 towards prior period expenses. AO noticing that assessee is following mercantile system of accounting when proposed to disallow the prior period expenses, assessee submitted that these are due to billing mistakes in respect of earlier year receipts, hence, credit notes are issued during the year in respect of the billing mistakes. AO, however, rejecting the explanation of the assessee held that as the expenditure does not pertain to the accounting year under consideration same has to be disallowed. Being aggrieved of such disallowance, assessee preferred appeal before the CIT(A). 4. The CIT(A) following his order passed on similar issue for the preceding assessment year 2006-07 sustained the disallowance made by AO. 5. The learned AR submitted before us that out of the total prior period expenses of Rs. 76,18,742, an amount of Rs. 53,45,145 does not represent any expenditure but represents only write off of excess amount considered as income in earlier years. It was submitted since the mistakes were pointed out by the customers during the year and subsequent to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng finding: "We have considered the rival submissions and perused the orders of the lower authorities. Though in principle, we are agreement with the disallowance made by the revenue authorities, we find merit in the alternative contention of the assessee. In as much as if an amount of Rs. 2,11,34,759 out of total amount of Rs. 2,38,85,000 was already offered to tax in the earlier years, the prior period adjustment made in that behalf by the assessee, on account of the concerned parties declining to make the payments due to discrepancies in the billing, the same should be allowed as deduction as bad debts. We, therefore, set aside the impugned order of the CIT(A) and direct the AO accordingly to restrict the disallowance made. Assessee's grounds on this issue are partly allowed." 8. As facts and issue in dispute is materially same respectfully following the aforesaid decision of the coordinate bench, we hold that as the assessee has offered the amount as income in the earlier assessment years and has actually written off during the year under consideration, assessee will be entitled for deduction u/s 36(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are inclined to remit the matter back to the file of the AO with a direction to decide the same in consonance with the decision of the Hon'ble Supreme Court in case of Exide Industries Ltd. (supra). This ground is allowed for statistical purposes. 15. In ground No. 5 to 8, assessee has challenged the disallowance of depreciation claimed amounting to Rs. 83,75,00,000 on noncompete fee. In ground No. 9, assessee has raised an alternative claim that non-compete fee paid by assessee is to be allowed as revenue expenditure u/s 37(1) of the Act. 16. Facts in brief relating to the aforesaid issue are, AO noted that assessee has acquired Usha Kiran Television (UKT) and Usha Kiran Movies - Television Division (UKM) in AY 2007-08. However, in the impugned AY, assessee has entered into a non-compete agreement on 30/01/2008 with UKT and UKM for non-competing in the business directly or indirectly for a period of five years from the date of agreement. Accordingly, in the previous year relevant to AY under consideration, assessee has paid an amount of Rs. 670 crores towards non-compete fee and claimed depreciation of Rs. 83,75,00,000. AO noted that as per the agreement non-compete fee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid items cannot be treated as intangible assets eligible for depreciation. AO relying upon some decisions as noted in assessment order, finally disallowed assessee's claim of depreciation on non-compete fee and added back the amount of Rs. 83,75,00,000 to the income for the impugned assessment year. Being aggrieved of the disallowance made by the AO, assessee challenged the same before the CIT(A). 17. Before the CIT(A) also, though, assessee reiterated its claim for allowance of depreciation on non-compete fee, CIT(A) after considering the submissions of the assessee in the light of ratio laid down in some of the decisions of the Hon'ble Supreme Court as well as Hon'ble High courts opined that for deciding the issue whether a particular amount paid is in the nature of non-compete fee would depend on the nature of non-compete agreement and the reasons for which such non-compete fee is paid. CIT(A) observed that assessee and the concerns to which the non-compete fee was paid are part of the same group. As Shri Ramoji Rao, who is the Chairman of the assessee company as well as proprietor of two units UKT and UKM, the fee paid is to a related party. CIT(A) observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibrary, programming library, etc. of UKT and UKM for a consideration of Rs. 775 crores (Clause 3(a)(iii)(4) of the subscription agreement dated 28 January 2007) [Refer page 134 of the paper book]; - Execution of a non-compete agreement between the appellant company, promoters and the investor, in a form and manner acceptable to the investor. (Clause 3(a)(iii)(5) of the subscription agreement dated 28 January 2007). [Refer page 134 of the paper book] and Foreign Investor obtaining all the necessary Government approvals or any applicable waiting periods in respect of any such Government approvals (Clause 3(b)(1) of the subscription agreement dated 28 January 2007). Refer page 138 of the paper book." 19. As per foreign exchange regulation applicable for the year 2007, foreign direct investment (FDI) into print and TV media was allowed upto 26% subject to the approval of the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance, Govt. of India. Accordingly, the foreign investor also made an application to the FIPB in February, 2007. Further, any FDI exceeding Rs. 600 crores required clearance of the cabin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company. 20. Strongly, refuting the allegations of the AO as well as CIT(A) that the transaction entered into between assessee and UKT and UKM for payment of non compete fee is a sham transaction and there is no necessity to pay such non-compete fee as Shri Ramoji Rao is exercising control over all the entities, the learned AR submitted that UKT and UKM are one of the earliest production houses with large base of satellite rights in feature films and television software and, thus, have a strong foothold in the TV market. In TV industry content is the king and as long as the channel telecast programmes catering to different categories of viewers and the programmes are popular, the channel position in the market will be strong. It was submitted that regional channels in the ETV net work stood among the top three channels in the market, mainly, due to the qualitative content produced by UKT and UKM over 12 years and this helped the assessee in earning substantial revenues as one of the three top channels. It was submitted that assessee's advertisement revenue attributable to the programmes produced by UKT and UKM ranged between 45% and 60% of the total advertisement rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R submitted that AO has failed to appreciate the fact that the HUF concerns of Shri Ramoji Rao and assessee company are two distinct legal entities, which are assessed to tax separately. The non-compete was offered to tax as business income in the hands of HUF and the brought forward losses were adjusted in accordance with the statutory provisions. The learned AR submitted that this particular transaction of payment of non-compete was scrutinized by the JCIT, who is the AO of Shri Ramoji Rao, HUF while completing the assessment u/s 143(3) of the Act and after thorough investigation he accepted the transaction. Therefore, the allegation of the AO that the transaction was drawn to cover up the brought forward losses of HUF concern is not tenable in law. For substantiating the aforesaid argument, the learned AR submitted a copy of the assessment order passed u/s 143(3) of the Act in case of Shri Ramoji Rao, HUF, copy of IT return for AY 2008-09 in case of Shri Ramoji Rao HUF and P&L account for the year ending 31/03/08 along with the schedule. The learned AR also filed a petition under Rule 29 of the ITAT Rules, 1963 requesting for admission of the aforesaid documents as additional ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral likeness, hence, a business or a commercial right will be covered only if it is corresponding to or resembling to any one of the preceding assets in many respects. Further, the learned AR relied upon decision of Madras High Court in case of Penta Soft Technologies Vs. DCIT 264 CTR 187 wherein it is held that non-compete fee paid to the transferor under a composite agreement inter-alia involved transfer of trade names, trade marks, service marks, patents, copy rights, confidential information, computer programmes and all other intangible rights of software together with associated goodwill of the identified business division and hence is eligible for depreciation u/s 32 of the Act. In this context, the learned AR also relied upon some decision of different benches of Tribunal also, which are as under: 1. M/s Saint Gobain Vetrotechs, ITA No. 439/Hyd/04, dated 29/5/09. 2. ITO Vs. Medicorp technologies India Ltd., 122 TTJ 394 3. ACIT Vs. Real Image tech P. Ltd., 14 DTR 138 22. The learned AR also relied upon a recent judgment of the Hon'ble Karnata High Court in case of CIT Vs. Ingersollrand International India Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk out the valuation. It was submitted that AO cannot rewrite the agreement entered into between the parties. 24. The learned DR Shri D. Sudhakar Rao, on the other hand, placing strong reliance on the observations made by the AO and CIT(A) submitted that there is no reason to pay the non-compete fee as the transactions is between related parties. It was submitted that while Shri Ramoji Rao in his capacity as Kartha of HUF is the owner of UKT and UKM, in his individual capacity is the Chairman of the assessee company. Therefore, in effect, Shri Ramoji Rao is the owner of not only the assessee company, but, other two entities. In this situation, there cannot be a competition between the assessee company with UKT and UKM as they are owned by the same person. The learned DR submitted that even the value of non-compete fee is not on the basis of any scientific method, therefore, the same cannot be accepted. The learned DR submitted that even assuming that payment of non-compete fee to be genuine no depreciation can be allowed on the same as it is not an intangible asset as per section 32(2)(ii) of the Act. In this context, the learned DR relied upon the decision of the Hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cannot be allowed. In this context, it is to be noted that assessee on 25/01/2008 has entered into subscription agreement and share purchase agreement with a domestic company, Viz.; Equator Trading Enterprises Pvt. Ltd. as per which the said domestic company agreed to make substantial investment in purchase of equity shares of the assessee company. However, as a precondition for making such investment, the said domestic company required the assessee company to enter into a non-compete agreement with UKT and UKM. Though, copies of the share purchase agreement and subscription agreement are not available on record before us, however, on perusal of the closing agreement dated 30/01/08 between assessee and M/s Equator Trading Enterprises Pvt. Ltd. a copy of which is at page 220 of paper book, we find a reference to such precondition in clause 2(a). Further, as it appears from the fact on record and which remains uncontroverted in pursuance to the condition imposed by the domestic investor assessee has entered into the non compete agreement with UKT and UKM for a period of 5 years on payment of non-compete fee of Rs. 670 crores, which is also approved by the domestic investor. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examining the impact of investment made in equity shares to the extent of 39% by the domestic investor and condition imposed by it, the conclusion drawn by the CIT(A) that there is no necessity of payment of non-compete fee as the same person is controlling the assessee company as well as UKT and UKM, in our view, is without proper appreciation of facts and evidences brought on record, hence, cannot be sustained. 28. Even though the AO in the assessment order has also raised the issue of payment of non-compete fee for the purpose of setting off the loss sustained by the HUF and also has questioned the value of non-compete fee but the learned CIT(A) has not at all dealt with these issues. Be that as it may, it needs to be observed that so far as valuation of non-compete fee is concerned, in course of assessment proceeding, assessee has submitted a valuation report of a CA firm in support of the valuation made by it. Therefore, if the AO had any doubt with regard to the valuation made, he should have got it valued through an independent valuer in stead of rejecting the valuation by simply observing that the method adopted is not correct or scientific. It is also alleged by the AO th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has raised an alternative contention for allowing noncompete fee as deferred revenue expenditure. Though the learned AR at the time of hearing has also advanced arguments in respect of the aforesaid issue, however, considering the fact that we have remitted the issue relating to genuineness and necessity of payment of noncompete fee and assessee's claim of depreciation on it, we are not inclined to go into the issue at this stage. However, it is open for the assessee to raise such issue before the AO at the time reassessment proceedings. If the assessee raises such an issue, AO must have to decide the same after considering the facts and materials brought on record and in accordance with law. 30. In the result, assessee's appeal is partly allowed for statistical purposes. ITA No. 100/Hyd/12 by revenue 31. In this appeal, the department has raised the following effective grounds: "2. The Hon'ble CIT(A) erred in directing to delete the addition made towards commission paid on sale of space for advertisement in newspapers and television time slots. The learned CIT(A) should have appreciated that the above payment attracts provisions of sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 1,01,63,14,378. Being aggrieved of such disallowance, assessee challenged it in the appeal preferred before the CIT(A). 34. The CIT(A) deleted the addition by following the order passed by him earlier in assessee's own case for AY 2006-07. 35. We have heard the parties and perused the orders of revenue authorities as well as other materials on record. At the outset, both the learned AR and learned DR agreed that the issue in dispute is squarely covered by the decisions of the ITAT, Hyderabad in assessee's own case for AYs 2004-05, 2005-06, 2006-07 and 2007-08. On a perusal of the order passed by the ITAT in ITA No. 1706 to 1708/Hyd/2008 dated 22/03/2012, it is observed that for AY 2004-05 to 2006-07 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 assessee challenged the same before CIT(A). After the CIT(A) deleted the demand raised u/s 201 and 201(1A), the department came in appeal before the tribunal. The Tribunal, however, upheld the decision of the CIT(A) by holding that there is no liability on the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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