DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-6(1)(1), BANGALORE vs. M/S SAPA EXTRUSION INDIA PVT LTD, BANGALORE

This appeal by Revenue is directed against the order of CIT(Appeals)-6, Bengaluru, dated 09.03.2018 for assessment year 2012-13.

2.1 The assessee, a company engaged in the manufacture and distribution of aluminium extrusion profiles, filed its return for Assessment Year 2012-13 on 29.11.2012 declaring loss of (-)Rs.40,28,03,386/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny for this Assessment Year. The assessment was concluded under section 143(3) r.w.s. 144C of the Act vide order dated 11.05.2016 wherein the assessee’s loss was determined at (-)Rs.31,49,38,785/- in view of the following additions / disallowances:-

(i) TP adjustment - Rs.3,76,94,738/- (ii) Disallowance of depreciation claimed on non-compete fee - Rs.5,01,69,863/- 2.2 On appeal, the CIT(A)-6, Bengaluru vide the impugned order dated 09.03.2018 for Assessment Year 2012-13, allowed the assessee’s appeal.

3.1 Aggrieved by the order of CIT(A)-6, Bengaluru, dated 09.03.2018 for Assessment Year 2012-13, Revenue has preferred this appeal, wherein it has raised the following grounds:

The learned DR for Revenue was heard in support of the grounds raised (supra) and contends that the CIT(A) erred in following the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Ingersoll Rand International Ltd., reported in (2014) 48 taxmann.com 349 (Karnataka) instead of following the decision of the Hon’ble Delhi High Court in the case of Sharp Business Systems. It is submitted that the Department has not accepted the decision of the Hon’ble Karnataka High Court (supra).

3.2 Per contra, the learned AR for the assessee submitted that there was no error in the impugned order of the CIT(A) in allowing the assessee’s claim of depreciation on non-compete fee, by following the binding decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Ingersoll Rand International Ltd., (supra).

3.3.1 We have considered the rival submissions and perused the material on record; including the judicial pronouncements cited. The only issue for consideration in this appeal is the allowability or otherwise of the claim for being allowed depreciation on Non-compete Fee. The facts of the matter on this issue as emerge from the record is that the assessee company had purchased the Aluminium Extrusion Business of Alufit (India) Pvt. Ltd., (Alufit) including factory and building in the year 2011 and entered into a Non-compete Fee agreement with Alufit (India) Pvt. Ltd., for a period of 5 years and paid an amount of Rs.28 Crores as Non-compete Fees; thereby prohibiting it from competing in this business within a specified territory in the stipulated period. According to the learned AR, this gives the assessee a commercial right to carry on manufacturing activity to the exclusion of ‘Alufit’ so that the assessee’s business can be carried on in a more efficient manner by avoiding competition from ‘Alufit’ during the stipulated period. On payment of Non-compete Fee, the assessee acquired a bundle of rights such as; restricting the receiver from directly or indirectly participating in a business which is similar to the business being acquired. The assessee submits that the commercial right so acquired falls under the category of Intangible assets and consequently the assessee has to be allowed depreciation under section 32(1)(ii) of the Act.

3.3.2 We find that the issue of the assessee’s claim of depreciation on Non- complete Fee is no longer res integra. The decision of Hon’ble Karnataka High Court in the case of CIT Vs. Ingersoll Rand International India Ltd., (2014) 48 taxmann.com 349 (Karn.), in our view, squarely covers this issue in favour of the assessee and against Revenue. In this above cited decision (supra), the Hon’ble Karnataka High Court held that the payment of Non-compete Fee confers on the assessee a business right which is similar in nature to know how, patents, copyrights, trade marks, licences, franchises and the commercial right so acquired by the assessee clearly falls in the category of an intangible asset and consequently depreciation thereon is to be allowed. Respectfully following the binding decision of the Hon’ble Karnataka High Court in the case of Ingersoll Rand International India Ltd., (supra), we uphold the impugned order of the CIT(A) in allowing the assessee’s claim for depreciation on payment of Non-compete Fees to Alufit (India) Pvt. Ltd. Consequently, finding no merit in the grounds raised by Revenue, the same are dismissed.

Order pronounced in the open court on this 3rd day of April, 2019.