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TMI Blog2019 (10) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... -O. Thereafter, the question of allocation of expenditure against the same may be adjudicated as per factual matrix including the basis of allocation mechanism devised / adopted in earlier years. Accordingly, this ground of appeal stands allowed for statistical purposes. Disallowance of entertainment expenditure - HELD THAT:- We no infirmity in the order of first appellate authority in restricting the same to 50% and therefore, confirm the same. Similarly, no serious arguments have been advanced with respect to disallowance of local travelling expenses u/r 6D and therefore, we confirm the order of Ld. AO, in this regard. Ground Nos. 3 4 stand dismissed. Deduction non-compete fees - HELD THAT:- It is quite evident from records that the assessee has paid a sum of ₹ 8 Crores to DSP primarily as non-compete fees under an agreement. In its books of accounts, the assessee has written-off the same in 5 equal installments and accordingly, the assessee had debited a sum of ₹ 1.60 Crores in the Profit Loss Account during the year under consideration. The said write-off was suo-moto disallowed and added back by the assessee while computing the income for year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial value. This would also negate the arguments of Ld. AR that the assessee would receive immediate benefit by avoiding possible competition from DSP and the benefit would not endure for a longer period of time. If that be so, there would have been no necessity for the assessee to put restrictions on competitor in perpetuity rather the benefits were perceived to have accrued to the assessee over longer period of time. Therefore, we find the arguments of Ld. AR to be contradictory to the terms of the agreement. Moreover, nothing emanates as well as nothing has been brought on record by the assessee to fortify the submissions of immediate benefit and therefore, this argument could not be termed as more than mere submissions. Therefore, we do not find much force in the theory of immediate benefit as advanced by Ld. AR before us. Rather, we are of the considered opinion, that by entering into the said agreement, the assessee acquired valuable business right in perpetuity which was designed to bring enduring benefits to the assessee over indefinite period of time. The same was the perception while entering the said agreement. It is also noted that the assessee had recently acquired t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Appeals) erred in law in upholding the action of the learned Joint Commissioner of Income-tax in not allowing the claim for deduction under Section 80-O of the Act on the convertible foreign exchange brought into India by the appellant. The appellant submits that the learned Commissioner of Income-tax (Appeals) ought to have directed the learned Joint Commissioner of Income-tax not to reduce the expenses from the convertible foreign exchange brought into India by the appellant. d) The learned Commissioner of Income-tax (Appeals) erred in law in upholding the action of the learned Joint Commissioner of Income-tax in deducting the indirect expenses while calculating the deduction under Section 80-O of the Act. e)Without prejudice to what is stated above, the appellant submits that the learned Commissioner of Income-tax (Appeals) erred in law in upholding the action of the learned Joint Commissioner of Income-tax in apportioning indirect expenses to the extent of ₹ 53,77,222/- in respect of the eligible amount of ₹ 56,92,198/- as worked out by the learned Joint Commissioner of Income-tax, ignoring the various details filed / submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me filed by the appellant; vi) to restrict the disallowance of travelling expenses to a sum of ₹ 1,12,633/- as per the return of income filed by the appellant; and to modify the assessment in accordance with the provisions of law. 6. Each of the above grounds of appeal are independent and without prejudice to each other. As evident from grounds of appeal, the assessee is primarily aggrieved on 4 counts viz- (i) Disallowance of non-compete fees for ₹ 8 Crores (ii) Quantum of Deduction u/s 80-O; (iii) Disallowance of entertainment expenditure; (iv) Disallowance of travelling expenditure u/r 6D. 2.1 Facts on record would reveal that the assessee being resident corporate assessee was assessed for year under consideration u/s 143(3) on 26/03/1999 wherein the income of the assessee was determined at ₹ 741.57 Lacs after certain additions / disallowances as against returned income of ₹ 475.76 Lacs filed by the assessee on 29/11/1996. The assessee, formerly known as DSP Financial Consultants was incorporated in the year 1975 and was engaged in the business of Merchant Banking, Broking in equity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a capital expenditure and deduction thereof was denied to the assessee. 2.3 The second issue arises out of deduction u/s 80-O which provides for deduction to the extent of 50% in respect of royalties, commission or similar payment received by eligible entities for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill provided the income was received in convertible foreign exchange. The assessee claimed such deduction for ₹ 192.69 Lacs on account of fees received from certain clients. The assessee attributed cost of ₹ 24.78 Lacs towards the same. However, during assessment proceedings, the assessee claimed higher amount of ₹ 204.75 Lacs as deductible u/s 80-O. The learned AO, after examining the nature of services rendered by the assessee in terms of CBDT Circular No. 187 dated 23/12/1975 and after perusal of respective agreements entered into by the assessee with service recipients, came to a conclusion that the eligible amount for consideration of deduction would be ₹ 56.92 Lacs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,000/- paid by DSP Merrill Lynch to DSP Co, the DSP Co. covenanted with DSP Merrill Lynch from the date of the agreement that DSP Co. will not carry on the competitive business. The competitive business was also been defined in clause 4 of the agreement which is distribution of domestic mutual funds and acting as a broker in wholesale debt market. Further, clause 2 clarifies and amplifies the meaning of will not carry on the competitive business . It says that DSP Co. will not directly or indirectly help or a as a manager as an agent or any person or company engaged, concerned or interested in the competitive business and DSP Co. will not assist, shall not part with any information or expertise they are in position of. Thus, it is very clear that these payments have been made to ward off competition in the business to a rival would constitute capital expenditure. If the object of making that payment is to derive by eliminating the competition over some length of time where every benefit is of an enduring nature but is to exhaust in a year or a short period the expenditure is of revenue in nature. It is true if the benefit is only for short period of time, the expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence the claim of the assessee that amount paid to DSP Co. should be treated as revenue expenditure is negative and the addition in this behalf is upheld. 3.2 Regarding deduction u/s 80-O, it was noted that eligible amounts were restricted by Ld. AO in case of income arising out of contracts with three entities viz. Dresdner Bank, Merryl Lynch and John Govett. The information supplied by the assessee with respect to contract with John Govett was found to be very general and vague in nature and it was noted that the assessee failed to substantiate his claim that it furnished any commercial information to that client and therefore, the disallowance, with respect to this entity was justified. Similar was the factual matrix in case of contract with Dresdner Bank wherein it was found that the assessee supplied economic and statutory information as part of industrial and commercial information and therefore, the agreement was composite in nature and hence, entire receipts could not be considered as eligible for deduction. Therefore, the stand of Ld. AO in recomputing the receipts from this entity was also upheld. Regarding contract with Merryl Lynch, although the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of services being rendered by the assessee and failed to demonstrate that the said receipts squarely fall within the ambit of Section 80-O. Nevertheless, keeping in view the submissions made, we restore this matter back to the file of Ld. first appellate authority to adjudicate the same de-novo after reappreciating the factual matrix including the stand taken by the department in earlier years. The assessee, in turn, is directed to substantiate his claim with requisite details and evidences that the receipts qualified for deduction u/s 80-O. Thereafter, the question of allocation of expenditure against the same may be adjudicated as per factual matrix including the basis of allocation mechanism devised / adopted in earlier years. Accordingly, this ground of appeal stands allowed for statistical purposes. 6. So far as the disallowance of entertainment expenditure is concerned, we find no infirmity in the order of first appellate authority in restricting the same to 50% and therefore, confirm the same. Similarly, no serious arguments have been advanced with respect to disallowance of local travelling expenses u/r 6D and therefore, we confirm the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al inconveniences in smooth carrying on of assessee s business. The Ld. AR has also asserted that since the assessee was already a member of NSE, it would receive an immediate benefit by avoiding possible competition from the DSP and therefore, it was not a benefit that would endure for a longer period of time. The exit of DSP from the Competing business would have an immediate impact on the business of the assessee and in order to protect the business interest, the assessee had paid the said amount to ward-off competition. The benefit was therefore instantaneous. Reliance has been placed on the decision of Hon ble Bombay High Court in the case of CIT V/s Six Sigma Gases India Pvt Ltd [ITA No 1259 of 2016] to submit that this case was concerned with a situation where the payment was made by the assessee with the promoter to not to engage in the same business for the period of 5 years. The Revenue contended that since the payment was made to the promoter to avoid competition for a period of 5 years, the assessee had acquired an enduring benefit. However, it was argued by the assessee that under the non-compete agreement, the assessee had received an immediate bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business remained the same and there was no new business or no new source of income, which accrue to the assessee on account of the payment of non-compete fee. The payment of the non-compete fee would only enable the existing business of the appellant to run smoothly and to remove difficulties which may arise. The payment was expected to result in synergy and in turn lead to profitability for the business. The Ld. AR further submitted that by entering into the non-compete agreement with DSP, the assessee avoided immediate competition. It was submitted that the competing business which was to be undertaken by the assessee i.e. broking of wholesale debt market and distribution of mutual funds, was a business already undertaken by various players in the market and the segment was fiercely competitive. By entering into the non-compete with one of the players (DSP), it has sought to avoid an immediate competition. The clients of DSP at that point in time may approach other service providers in the industry including the assessee. The emergence or non-emergence of DSP again in that business would be of no consequence. In future whether the assessee is able to retain its clientele wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The Ld. DR pointed out that a plain reading of the agreement would make it clear that there was no limitation period or time stipulation as to applicability of terms of the agreement and it was for perpetuity. The said agreement resulted into cessation of a particular segment of the business of DSP i.e. Broking in wholesale debt market and distribution of units of Mutual fund and the restrictive covenants would result into providing enduring benefits to the assessee and therefore the decision of Hon ble Calcutta High Court rendered in Hindustan Pilkington Glass Works [139 ITR 581 ], as relied upon by Ld. first appellate authority, would squarely apply to the factual matrix as supported by other decisions cited in the impugned order. The case laws being relied upon by Ld. AR was sought to be distinguished on facts. It was asserted that in the case of CIT V/s Six Sigma Gases India Pvt Ltd [ITA No 1259 of 2016], the period of restriction was certain. Similarly, in the case law of Everest Advertising Pvt. Ltd, the payment was made to outgoing Chairman not to provide advertisement, advisory services and financial services etc. to assessee s clients. The case law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entering into the said agreement, the assessee acquired valuable business right in perpetuity which was designed to bring enduring benefits to the assessee over indefinite period of time. The same was the perception while entering the said agreement. It is also noted that the assessee had recently acquired the membership of NSE and it was contemplating entering into a particular segment of business. This activity proposed to be carried out by the assessee was at nascent stage and the terms of the agreement led to complete annihilation of its competitor business segment forever. Therefore, we find substantial force in the arguments of Ld. DR, in this regard. 6.5 The Ld. AR has, in the course of submissions, has relied upon certain judicial pronouncements which has been distinguished by Ld. DR. As evident from the perusal of case law, the Hon ble Bombay High Court refused to entertain the question raised by revenue in CIT V/s Everest Advertising Pvt Ltd (ITA No. 6539 of 2010 04/12/2012) which dealt with a situation wherein the payment was made by the assessee to outgoing Chairman restricting him for 3 years not to enter into any relationship of any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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