ACG PAMPAC MACHINES P.LTD,MUMBAI vs. DCIT CEN CIR 42, MUMBAI

, however, an additional alternative ground of appeal has been filed vide letter dated 29/07/2016. The same being alternative ground which do not require appreciation of new facts is admitted in terms of judgment of Hon’ble Supreme Court rendered in NTPC Co. Ltd. Vs. CIT [229 ITR 383]. Accordingly, the original grounds and additional grounds read as under:-

Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 28/10/2014, where Ld. CIT(A) after considering assessee’s submissions and judicial pronouncements on the issue, concluded the matter against the assessee in the following manner:- Decision: 10.0 I have carefully examined the facts of the case, the stand taken by the A.O in the assessment order, the grounds of appeal and the written submissions filed by the appellant. 10.1 The appellant’s reliance placed on the Supreme Court judgments in the cases of Empire Jute Co. Ltd vs CIT [124 ITR 69] and Madras Industrial Corporation. Ltd. Vs CIT[225 ITR 802] are not directly on the issue of non-compete fee. The appellant had cited some of the decisions which are in its favour. However, there are also contrary decisions available on the matter. The Delhi High Court vide its recent judgment in the case of Sharp Business System vs CIT 133 ITD 275 dated 05.11.2012 held that non- compete fees are neither allowed as revenue expenditure nor eligible for depreciation. Depreciation is not an issue in this case and the issue involved is allowance of non- compete fee. 10.2 The issue of allowability of non-compete fee varies from case to case. The ITAT, Mumbai in the case of Ind Global Corporate Finance Private Ltd. Vs ITO (ITA No.1258/MUM/08) held that non-compete fee is not a deductible expenditure since it is capital in nature. It is also held by ITAT that non-compete right is an “intangible asset” eligible for depreciation under the IT act, 1961. The Hon’ble Tribunal further held that Non-compete agreement was valid for a period of three years which has to be considered as sufficient length of time to treat the expenditure as capital in nature. The Tribunal held that the protection acquired by the taxpayer from competition was not part of the working of the business, as held by the Hon’ble Supreme Court in the case of Assam Bengal Cement Co.Ltd. Therefore, the ITAT held that the expenditure has to be disallowed since it a capital expenditure. The Hon’ble Tribunal followed the decision of ACG Pampac Machines Private Limited Assessment Year-2010-11 Delhi Special Bench Tribunal in the case of Tecumseh India Private Ltd., wherein the provision for payment of non-compete fee was contained in the agreement for transfer of business. Since the facts are similar the ITAT, Mumbai followed the Delhi Tribunal Special Bench decision in the case of Tecumseh India Private Ltd. 10.3 The facts in the case of Tecumseh India Private Ltd. [127 ITD 1] and Ind Global Corporate Finance Pvt. Ltd. are identical to the facts in the case of the appellant company. The appellant paid non-compete fee to Indtech Systems and Manufacturing Pvt.Ltd. pursuant to the business transfer agreement dated 27.11.2009. The Indtech Systems and Manufacturing Pvt.Ltd transferred the business to the appellant company on a slump sale basis. Since the facts are identical, respectfully following the decision of the ITAT, Mumbai in the case of Ind Global Corporate Finance Pvt. Ltd. The expense incurred on account of non-compete fee are held to be capital in nature and therefore not allowed as deductible expenditure.

The Ld. Auhtorized Representative for assessee [AR], Shri Manish Shah, contesting the disallowance, submitted that in view of the conflicting decisions, a view favorable to the assessee should be taken and at least the depreciation, on the same be allowed. The same was controverted by Ld. Departmental Representative [DR], Shri Rajesh Kumar Yadav, by submitting that the assessee did not acquire any right by making the aforesaid payment and therefore, depreciation against the same could not be allowed to the assessee.

We have carefully heard the rival contentions and perused relevant material on record including case laws cited before us. The undisputed fact remain that the assessee made the aforesaid payment as non-compete fees to director of the vendor company namely Indtech Systems and Manufacturing Private Limited in terms of business transfer agreement dated 27/11/2009 wherein the assessee purchased the business of the ACG Pampac Machines Private Limited Assessment Year-2010-11 vendor on slump sale basis. There is no separate agreement with the director as such for the impugned payment which lead us to inevitable conclusion that the aforesaid payment was part and parcel of the acquisition agreement and was made in the course of acquiring new source of income i.e. business of the vendor company. Hence, the same, in our opinion, was clearly a capital expenditure in nature. The assessee’s claim, to that extent as raised in ground numbers 1 & 2 stand dismissed.

The only question that survives for our consideration is that whether the assessee could be allowed depreciation against the same or not in terms of the argument of Ld. DR that the said expenditure did not bring into existence any business or commercial right of similar nature within the meaning of Section 32(1)(ii) and rather the aforesaid payment was made for a negative covenant i.e. to restrict the director of the vendor company to compete with the assessee’s business for certain period of time. We are of the opinion that the said expenditure brought enduring benefit for the assessee in the sense that it eliminated assessee’s potential competitor in the market particularly when the payee was the director of the vendor company, whose business the assessee acquired during the year. Therefore, the same, in our view, was valuable right for the assessee and constitute an intangible asset in the hands of the assessee.

So far as the judicial pronouncements in this regard are concerned, we find that there are contrary decisions by the Tribunal as well as Hon’ble ACG Pampac Machines Private Limited Assessment Year-2010-11 High Courts in this regard. The decisions by Hon’ble High Courts which stood in assessee’s favor could be tabulated in the following manner:-