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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
PER G. MANJUNATHA, AM:
This appeal filed by the assessee is directed against
order of the learned Commissioner of Income Tax (Appeals)-1,
Chennai dated 07.09.2020 and pertains to assessment year
2016-17.
The assessee has raised following grounds of appeal:-
“1. The order of the Learned CIT (Appeals) is contrary to law, facts and circumstances of the case 2. The Learned CIT (A) should have desisted from disallowing the claim for depreciation on non-compete fees based on the tribunal's decision in the appellant's own case in the prior years, wherein the claim for depreciation is disallowed
ITA No. 897/Chny/2020 on the basis that the said right does not generate any intangible assets. 3. The Learned CIT (A) ought to have appreciated that the non-compete right obtained for a definite period of time through an agreement does constitute favourable commercial rights and accordingly would qualify for depreciation.”
Brief facts of the case are that the assessee company is
engaged in the business of manufacturing of organic peroxide
chemicals filed its return of income for the assessment year
2016-17 on 29.11.2016 admitting income of Rs.16,02,55,680/-.
During the assessment year 2003-04 M/s. Sanmar Properties
and Investments Ltd transferred its entire 49% equity
shareholding in the Company to M/s Atofina France, an entity
already holding 51% of equity shareholding of the Company.
As the Original promoters of the Company were the Sanmar
Group and they had managed the business of the Company
since then, there was a need for ensuring exclusivity and non-
competition to the business. In this context, an agreement
dated 11 October 2002 was executed between the assessee
and Sanmar, whereby a sum of Rs. 3,62,85,000/- was paid as
non-compete fees by the assessee company to Sanmar to give
ITA No. 897/Chny/2020 up their right to carry on Atofina Peroxide business in India for
5 years so that the assessee can continue enjoying its
ongoing exclusivity and non-competition in upholding and
expanding its market share in the said business. The said non-
compete fees have been considered as an intangible asset
and accordingly, the assessee has claimed depreciation @
25% thereon under section 32(1)(ii) of the Act from
assessment year 2003-04 onwards. Further, the assessee
has claimed deprecation for the assessment year 2016-17
amounting to Rs.2,51,426/- on said non-compete fee.
However, the Assessing Officer and learned CIT(A) has not
allowed the said depreciation claim under section 32(1)(ii) of
the Act, considering that the assessee has not acquired any
rights (intangible asset) by making payment of non- compete
fee.
The learned A.R for the assessee during the course of
hearing submitted that although, the issue has been decided
against the assessee by the Tribunal for earlier assessment
years, but relevant facts has not been considered. Therefore,
the learned A.R submitted the issue needs to be decided in
the year under consideration without influenced by decision
ITA No. 897/Chny/2020 rendered by the Tribunal for earlier years. In this regard, the
learned A.R. has filed detailed written submissions which are
reproduced as under:-
“ The genesis behind the non-compete covenant is that the Sanmar group which had managed the business of the Company till the date of closing of the transaction relating to share purchase and having been fully seized the finer nuances of the business of the Company do not cause any hurdle through a competing business impairing the business of the Company. The Company being incorporated in 1985, the said non-compete fees are towards continuity in enjoying the vital business rights of exclusivity and non-competition for its ongoing business through the aforesaid payment of non-compete fees and not towards initial outlay of funds for setting up of business. The same shall form pan & business apparatus of the Company and act as an aid in upholding the market share of the Company’s business and further expansion. The word ‘commercial’ is defined in Black’s Law Dictionary as ‘related to or connected with trade and commerce in general’, ‘commerce’ is defined as the exchange of goods, production or property of any kind: the buying, selling and exchanging of articles’. A right by way of non-compete is acquired essentially for trade and commerce, and therefore it will also qualify as a commercial right. A right acquired by way of non-compete can be transferred to any other person in the sense that the acquirer gets the right to enforce the performance of the terms of agreement under which a person is restrained from competing. When a businessman pays money to another businessman for restraining the other businessman from competing with the taxpayer, he gets a vested right which can be enforced under law and without that, the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his business without bothering about the competition. The definition of block of assets under section 2(11) of the Act has been re- produced below for your easy reference "(11) block of assets means a group of assets falling within a class of assets comprising- ( a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed."
ITA No. 897/Chny/2020
Non-compete fees provides the Company with a commercial / business right which is held to be similar in nature to know-how, patents, copyrights, trade-marks, licences, franchises, etc. Applying the doctrine of ejusdem generis, non-compete fees shall be considered as an intangible asset. The Apex court in the case of Smifs Securities Ltd. [2012] 210 Taxman 428 (SC) has also held the above ratio of strictly applying the principle of ejusdem generis while interpreting the aforesaid expression 'any other business or commercial rights of similar nature'. The relevant extract is re-produced below for your easy reference "4. Explanation 3 states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature......... The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b)." The Hon'ble Delhi High Court in the case of Areva T & D India Ltd. [2012] 208 Taxman 252 had the opportunity to analyse the principle of ejusdem generis with reference to section 32(1)(ii) of the Act wherein it adjudicated that the words 'business or commercial rights of similar nature' have been additionally used to incorporate other categories of intangible assets which were neither feasible nor possible to exhaustively enumerate apart from that specifically mentioned in the Act. The relevant extract of the said judgment is re-produced below for your easy reference : "Applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words shall be confined to things of the same kind, as specified for interpreting the expression 'business or commercial rights of similar nature' specified in section 32(1)(ii), it is seen that such rights need not answer the description of 'know-how, patents, trademarks, licenses or franchises' but must be of similar nature as the specified assets. On a perusal of the meaning of the categories of specific intangible assets referred in section 32(1)(ii) preceding the term 'business or commercial rights of similar nature', it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words 'business or commercial rights of similar nature' have been additionally used, clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of 'business or commercial rights' cannot be restricted to only six categories of assets, viz., know-how, patents, trademarks, copyrights, licenses or franchises. The nature of
ITA No. 897/Chny/2020 'business or commercial rights' can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business .... .[Para 13]"
In view of the above, the non-compete fees being an intangible asset, the Appellant has rightly claimed depreciation thereon under section 32(1)(ii) of the Act. The said position has been upheld by the jurisdictional Hon'ble Madras High court as emphasized below.
Jurisdictional High Court Decision rebutting judicial precedent relied upon by the Hon'ble Chennai ITAT while deciding appellant's case for AY 2003- 04.
The jurisdictional Hon'ble Madras High Court in the case of Areva T & D India Ltd. [2021] 129 taxmann.com 55 has held that non-compete fees shall be considered as an intangible asset and depreciation thereon shall be allowed under section 32(1)(ii) of the Act. The relevant extract of the said judgment is re-produced below for your easy reference
"11. The second question is as to whether the non compete fee is an asset in the nature of patents, copyrights, trademark, licence, franchises or any other business or commercial right of similar nature and as to whether the assessee is eligible to claim depreciation under section 32 of the Act.
The Tribunal took note of the decision of the High Court of Delhi in the assessee's own case for the Areva T & D India Ltd. v. Dy. CIT [2012] 20 taxmann.com 291208 Taxman 2521345 ITR 421 and allowed the appeal filed by the assessee thereby reversing the findings of the CIT(A),
Mrs. R. Hema/atha, learned Senior Standing Counsel appearing for the appellant/Revenue has placed reliance on the decision of the Delhi High Court in the case of Sharp Business System v. CIT [2012] 27 taxmann.com 501211 Taxman 576 in support of her contention that the amount paid as non compete fee did not qualify for depreciation under section 32{1){ii) of the Act.
In the decision in the case of Asianet Communications Ltd. v. CIT [2018] 96 taxmann.com 3991257 Taxman 4731407 /TR 706, a Division Bench of this Court, to which, one of us (TSSJ) was a party, had considered the same issue as to, where the non compete fee paid by the assessee was for the purpose of its business and it did not entail an enduring benefit to the assessee in its business, whether the payment of such fee was to be allowed as revenue expenditure. In this decision, the Court took note of the decision of the Delhi High Court in the case of Sharp Business System and it has been held as follows:
ITA No. 897/Chny/2020 “40. There is a marked difference in the factual position in Sharp Business System (supra) and the factual position in the case on hand where the assessee's business continues to remain the same, and this is also one more reason to hold that the decision in Sharp Business System (supra) is not applicable to the facts of the case apart from the reservation expressed by us above."
In the decision of this Court in the case of Asianet Communications Ltd., the Court distinguished the decision of the Delhi High Court in the case of Sharp Business System. We would hasten to add that the facts in the case of Sharp Business System were couched differently in the sense that a sum of Rs. 73 Crores was paid to Mis. L & T Ltd., as consideration for the latter in 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. The facts of the case of the assessee before us are entirely different. This aspect had been noted by the Tribunal in paragraph 11 of the impugned order. The Tribunal also took note of the fact that in the assessee's own case, the High Court of Delhi decided the issue in favour of the assessee.
Therefore, we find that the Tribunal rightly granted relief to the assessee. Accordingly, substantial question of law No. 2 is answered against the Revenue."
The facts in the present case as stated above are similar to that in the aforesaid case of Areva T & D India Ltd. [2021] 129 taxmann.com 55 adjudicated by the jurisdictional Hon'ble Madras High Court. The same is summarized below for your reference
a) The assessee has executed non-compete fees agreement with the party and has made payment to the other party therein; The assessee's business continues to remain the same; The payment is not in connection with initial outlay of funds for 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, unlike the facts in the case of Sharp Business System.
The aforesaid ratio has also been adjudicated by various other High courts and tribunals. Certain judgments have been cited below along with relevant extract for your Honour's easy reference a) The Hon'ble Gujarat High Court in the case of Ferromatic Milacron India (P.) Ltd. [2018] 99 taxmann.com 154 which had similar facts as the case in hand. The Hon'ble Gujarat High Court analysed the expression 'or any other business or commercial rights of similar nature' as occurring in Explanation 3 to section 32(1)(iii) of the IT Act with respect to payment of non-compete fee wherein the assessee made payment to its partner to ward-off competition.
ITA No. 897/Chny/2020
The High Court concluded that the rights acquired by assessee under said agreement would not only give enduring benefit, but protected assessee's business against competition, it could be covered under expression 'or any other business or commercial rights of similar nature' used in Explanation 3 to sub-section 32(1)(ii) and, thus, assessee was eligible for depreciation. The relevant extract is as under:
"10. In the present case, Mr Patel was erstwhile partner of the assessee. The assessee had made payments to him to ward off competence and to protect its existing business. Mr. Patel, in turn, had agreed not to solicit contract or seek business from or to a person whose business relationship is with the assessee. Mr. Patel would not solicit directly or indirectly any employee of the assessee. He would not disclose any confidential information which would include the past and current plan, operation of the existing business, trade secretes customer lists etc. 11. It can thus be seen that the rights acquired by the assessee under the said agreement not only give enduring benefit, protected the assessee's business against competence, that too from a person who had closely worked with the assessee in the same business. The expression "or any other business or commercial rights of similar nature" used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the present situation."
b) The Hon'ble Bombay High Court in the case of Piramal Glass Limited (ITA No. 556 of 2017) relying on the above Gujarat High Court judgment, above Delhi High Court judgment in the case of Areva T & D India Limited and Apex Court judgment in the case of Techno Shares & Stocks Limited [2010] 327 ITR 323 (SC) has held that no question of law sustains in connection with allowance of depreciation claim on non-compete fees.
c) The Hon'ble Karnataka High Court in the case of Ingersoll Rand International Ind. Ltd. [2014] 48 taxmann.com 349 has held that right to carry on business without competition has an economic interest and money value and whenever assessee makes payment for non-compete fee, commercial right comes into existence and, therefore, that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trade marks, licences, franchises. Commercial right so acquired by the assessee unambiguously falls in category of an 'intangible asset' and, consequently, depreciation provided under section 32(1)(ii) is to be allowed.
d) The Hon'ble Chennai ITAT in the case of Real Image Tech. (P.) Ltd. [2009] 177 Taxman 80 also held that depreciation on non-compete
ITA No. 897/Chny/2020 fees is allowed under section 32 of the Act. The relevant extract is as under :
"As regards the question as to whether such right can be termed as 'or any other business or commercial rights of similar nature' for construing the same as an intangible asset, the doctrine of ejusdem generis would come into operation. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities with other assets mentioned in clause (b) of the Explanation 3. The other assets mentioned are: know-how, patents, copyrights, trademarks, licenses, franchises, etc. In all these cases, no physical asset comes into possession of the assessee. What comes in his possession is only a right to carry on the business smoothly and successfully and even the right obtained by way of non-compete fee would also be covered by the term 'or any other business or commercial rights of similar nature', because after obtaining non-compete right, the assessee can develop and run his business without bothering about the competition." e) The Hon'ble Mumbai ITAT in the case of Ind Global Corporate Finance (P.) Ltd. [2013] 33 taxmann.com 388 held that where assessee purchased merchant banking division of other company and paid non-compete fee for restricting transferor from carrying out similar business for 36 months, same would be capital in nature. Depreciation would be allowable on non-compete expenditure incurred by assessee.
f) The Hon'ble Pune ITAT has also held that depreciation on non-compete fees is allowed under section 32(1 )(ii) of the Act in the case of Serum Institute of India Ltd. [2012] 18 taxmann.com 305 relying on the aforesaid judgment of the Hon'ble Chennai ITAT in the case of Real Image Tech. (P.) Ltd. (supra.).
The Appellant also places reliance on the following judgments
Radaan Media Works India Limited [ITA no. 2241 (Mds.) of 2006) (Chen. Trib) Medicorp Technologies India Ltd [2009) 30 SOT 506 (Chennai) Zydus Wellness Ltd [2017] 87 taxmann.com 82 (Gujarat) GE Plastics India Ltd. [2012] 23 taxmann.com 243 (Ahd.)
Principle for application of judicial precedent Further, the Hon'ble Bombay High Court in the case of Siemens India Ltd. v. K. Subramanian, ITO [1983] 13 Taxman 146 (Born.) has laid down principle with respect to applying judicial precedents while considering a legal position. The same has also been affirmed by the Apex Court in the case of Second Income-tax Officer v. Stumpp Schuele and Somappa (P.) Ltd. [1991] 187 ITR 108 (SC). The chronology of said principle is summarized below-
ITA No. 897/Chny/2020
a) Decision of the Supreme Court b) Decision of the High Court of the State within whose jurisdiction he is functioning, irrespective of the pendency of any appeal or special leave application against the judgment c) The revenue authorities would equally be bound by a decision of another High Court on the point, because not to follow that decision would be to cause grave prejudice to the assessee d) However, in the case where there is conflict of views between different High Courts, the authorities must follow the decision of the High Court within whose jurisdiction he is functioning e) The Court further added that in cases where there is a conflict between the decisions of non-jurisdictional High Courts, the authorities must take the view which is in favour of the assessee and not against him.
The Appellant's contentions are summarized below for your reference - On conjoint reading of the aforesaid facts, legal provisions and judicial precedents, it can be inferred that non-compete fees do confer the right of exclusivity to the Company.
The same shall be considered as intangible asset under the phrase commercial / business right and as such, depreciation under section 32(1)(ii) of the Act shall be allowed thereon.
The jurisdictional Madras High Court judgment in the case of Areva T & D India Ltd. [2021] 129 taxmann.com 55 (Madras) has allowed the depreciation claim on non-compete fees distinguishing the facts in the case of Sharp Business System.
The facts in the present case are on similar lines as that in the case of Areva T & D India Ltd. and hence, applying the principle for application of judicial precedent, the decision of the jurisdictional Madras high court shall prevail in the present case.
In view of the above, the Appellant humbly requests your Honour to allow the depreciation claim on non-compete fees of Rs. 2,51,426, which has been deleted by the Ld. AO while passing the impugned assessment order. Further to the above legal submission, the Appellant would like to bring to your kind attention that the Company has filed an appeal before the Hon'ble Madras High Court [TCA/793/2013] against the order of Income-tax Appellate Tribunal, Chennai for AY 2003-04 [2012] 20 ITR(T) 225 (Chennai- Trib.) wherein depreciation on non-compete fees has been disallowed.
ITA No. 897/Chny/2020 In this context, in case your Honour is not satisfied on the above ground of appeal, the Appellant humbly requests your Honour to kindly keep the proceedings in abeyance till the outcome of the Madras High Court.”
The learned DR, on the other hand, referring to order of
the Tribunal in the assessee’s own case for the assessment
year 2015-16, submitted that the issue has been decided
against the assessee, where it has been held that non-
compete fee is not intangible asset to which provisions of
section 32(1)(ii) of the Act is not applicable.
We have heard both the parties, perused material
available on record and gone through orders of the authorities
below. We find that an identical issue had been considered by
the ITAT., Chennai in the assessee’s own case for the
assessment year 2015-16 in ITA No.2572/Chny/2018 dated
04.03.2019, where the Tribunal by following its earlier order
in the assessee’s own case for the assessment year 2003-04
held that non-compete fee is not intangible asset to which
provisions of section 32(1)(ii) of the Act, has no application
and thus, the assessee cannot claim depreciation applicable
to intangible asset. The relevant findings of the Tribunal are as
under:-
ITA No. 897/Chny/2020 “4. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. We have also gone through the order of the Tribunal in assessee's own case for earlier assessment year in which, the Tribunal has held that non-compete fee is not an intangible asset to which provisions of section 32(1 )(ii) of the Act are applicable. Since the Id. Counsel for the assessee has fairly agreed that the issue is covered in favour of the Revenue, the ground raised in the appeal of the assessee stands dismissed.” 7. In this view of the matter and consistent with the view
taken by the co-ordinate Bench of this Tribunal, we are of the
considered view that there is no error in the reasons given by
the Assessing Officer as well as the learned CIT(A) to
disallow deprecation claimed on non-compete fee. Therefore,
we are inclined to uphold findings of the learned CIT(A) and
dismiss appeal filed by the assessee.
In the result, appeal filed by the assessee is dismissed. Order pronounced in the open court on 13th July, 2022 Sd/- Sd/- (वी. दुगा� राव) (जी. मंजुनाथ) (V.Durga Rao) (G.Manjunatha) �या�यक सद�य /Judicial Member लेखा सद�य / Accountant Member चे"नई/Chennai, #दनांक/Dated 13th July, 2022 DS आदेशक��%त&ल'पअ(े'षत/Copy to: 3. आयकर आयु)त (अपील)/CIT(A) Appellant 2. Respondent 4. आयकरआयु)त/CIT 5. 'वभागीय�%त%न-ध/DR 6. गाड0फाईल/GF.