ARKEMA PEROXIDES INDIA PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 1(1), CHENNAI

The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)-3, Chennai in and 189/16- 17/A-1 dated 30.01.2018 for assessment years 2006-07 & 2013-14, respectively.

Aggrieved against those orders, the assessee filed these appeals.

The next contention of the learned Authorised Representative of the assessee that the payment of non-compete fee has not created any asset or advantage in the capital field and, therefore, it should be revenue in nature. The decision of Hon’ble Supreme Court in the case of Madras Auto Services (P) Ltd. (supra) cannot be applied to the facts of the case before us. In that case the assessee had taken the premises for 39 years on lease and invested in the construction of building. The building did not belong to the assessee and the assessee was paying nominal rent for a period of 39 years. Under these circumstances, Hon’ble Supreme Court held that no asset of enduring nature was created and, therefore, the expenditure was to be treated as revenue in nature. The ratio of this decision is of no avail in the cases of non-compete payments as in that case the incurring of expenses did not create any asset as against that it has been clearly held by the Hon’ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) that the protection fee paid by the assessee had acquired an advantage of an enduring nature which ensured for the benefit of the whole of the business. The decision of Hon’ble Gujarat High Court relied upon by assessee is not applicable to the facts of the case as in that case the assessee paid amount for laying of cables by the electricity board to ensure the regular supply of electricity. In the case before us, expenditure has not been laid for creation of any asset which did not belong to the assessee, but has been paid to ward off the competition. The aforesaid decision of Hon’ble Supreme Court in the case of Assam Bengal Cement Company vs. CIT (supra) has been referred in almost all the cases touching this issue and till the date the said decision has not been overruled.

Hon’ble Supreme Court in the case of CIT vs. Coal Shipments Ltd. (supra) has held that even in a case where payment is made to ward off competition in business to a rival dealer would constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create

Tribunal Delhi Special Bench in the case of Tecumseh India. (P) Ltd. vs. Addl. CIT (supra) has examined the proposition canvassed by the assessee that the purpose of making non-compete fee is to maintain the profitability of the business by insulating the same from the risk of competition. This contention of assessee has been rejected after detailed discussion keeping in view the judicial pronouncements. It has been held that when expenditure is made for initial outlay or for expansion of business or for a substantial replacement of equipment, then it would fall under capital expenditure. The payment of non-compete fee for acquisition of business has been held as capital expenditure as the same was incurred for initial outlay of the business. In the instant case the expenditure was incurred to ward off the competition for a period of 7 years at the start of the business and hence will form part of initial outlay of the business. Accordingly the assessee’s case is squarely covered by the decision of Special Bench in the case of Tecumseh India (P) Ltd. vs. CIT (supra). Therefore, the expenditure by way of non-compete fee has to be treated capital in nature.

We are conscious of the provisions of s. 28(va) inserted in the statute by the Finance Act, 2002 w.e.f. 1st April, 2003 according to which any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business will be chargeable to tax under the head ‘profits and gains of business or profession’. In the appeal before us the :- 6 -: & 1319/Chny/2018 assessment year involved is 2001-02. It is not the case of the assessee that L&T Ltd. had treated the payments received by it as business income and hence as a corollary to the amended provisions of s. 28(va) the payment made will be treated as revenue expenditure. Hence, it is not possible to treat the payment of non- compete fee as revenue expenditure in the hand of the assessee for the assessment year under consideration.

In view of the above it is held that the non-compete fee paid by the assessee to ward off competition from L&T Ltd. is capital in nature and as such, it cannot be allowed as revenue expenditure. Accordingly, we do not find any infirmity in the order passed by the learned CIT(A) confirming the addition made by the AO.

Alternatively, it has been argued that in case the expenditure is treated as capital in nature, in view of the decision of Tribunal in the case of ITO vs. Medicorp. Technologies India Ltd. (supra) depreciation should be allowed as non- compete fee is an intangible asset. Under s. 32 (1)(ii) depreciation in respect of know-how, patent, copyright, trade-mark, licences, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after 1st day of April, 1998, owned wholly and partly by the assessee and used for the purpose of business or profession, shall be allowed at the specified rates. From plain reading of language of s. 32(1)(ii) it is clear that (i) the asset should be an intangible asset; (ii) should be wholly or partly owned by the assessee; and (iii) used for the purposes of business or profession. All three conditions are cumulative and non-fulfilment of any of the conditions would disentitle the assessee for depreciation allowance. Admittedly, the non-compete fee is not in the nature of know-how, patents, copyright, trademarks, licenses or franchises. Now, it is to be seen whether non-compete fee would fall under residuary part of the definition "any other business or commercial rights of similar nature". The intangible asset falling in expression "any other business or commercial rights of similar nature" should belong to same genus to which know-how, patents, copyrights, trademarks, licenses/franchises belong. Therefore, the expression "any other business or commercial rights of similar nature" would mean that the business or commercial right should be in the nature of know-how, patents, copyrights, trade-marks, licenses or franchises. By no stretch of imagination, the non-compete fee can be treated to have belonged the same genus to which know-how, patents, copyrights, trademarks, licences/franchises belong.

An asset whether tangible or intangible must be one for which a market value can be ascertained. There is no dispute that know-how, patents, copyrights, trademarks, licenses/franchises etc. are intellectual property rights, which can be transferred/assigned/ leased out to any other parties for a price. Non-compete agreement between two parties is like personal services contract which is :- 7 -: & 1319/Chny/2018 unassignable. Personal services contract cannot survive on the demise of either of the parties. Similarly the non-compete agreement between two parties will come to an end on the demise of either of the parties. While intangible assets like know- how, patents, copyrights, trademarks, licenses/ franchises etc. can be sold/assigned to any other person for a value but non-compete right acquired on payment cannot be transferred for a price. No third party can be roped in, in the agreement for non-compete by way of sale/assignment as it is non- saleable/unassignable. Similarly, the right to trade freely or to compete in the market is not an asset. Hence, a right arising out of an agreement of non-compete or not to trade freely will not constitute a commercial right falling in the category of intangible assets.

Non-compete fee of Rs 3,00,00,000 has been paid to ward off the competition from L&T Ltd. Hon’ble Delhi High Court in the case of CIT vs. Hindustan Coca Cola Beverages (P) Ltd. (2011) 238 CTR (Del) 1 : (2011) 50 DTR (Del) 122 while dealing with issue of depreciation on goodwill in para 22 held as under : "22…………….To effectively understand what would constitute an intangible asset, certain aspects, like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset it represents, namely, trademark, right, patent etc. and further whether it would come within the clause, namely, ‘any other business or commercial rights which are of similar nature’ are to be borne in mind." Hon’ble Delhi High Court in para 24 explained the meaning of "business or commercial right of similar nature" in the following words : "24. It is worth noting that the meaning of ‘business or commercial rights of similar nature’ has to be understood in the backdrop of s. 32(1)(ii) of the Act. Commercial rights are such rights which are obtained for effectively carrying on the business and commerce, and commerce, as is understood, is a wider term which encompasses in its fold many a facet. Studied in this background, any right which is obtained for carrying on the business with effectiveness is likely to fall or come within the sweep of meaning of intangible asset. The dictionary clause clearly stipulates that business or commercial rights should be of similar nature as know- how, patents, copyrights, trademarks, licences, franchises, etc. and all these assets which are not manufactured or produced over-night, but are brought into existence by experience and reputation. They gain significance in the commercial world as they represent a similar benefit or advantage or reputation built over a certain span of time and the customers associate with such assets………….".

Thus from the decision of Hon’ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P) Ltd. (supra) it is clear that "business or commercial rights of similar nature" are not manufactured or produced over-night, but are brought

The next contention of the assessee is that the expenditure incurred by way of non-compete fee should be allowed during the period of seven years. The reliance has been placed on the decision of the Tribunal, Chennai Bench in the case of Orchid Chemicals & Pharmaceuticals Ltd. vs. Asstt. CIT (2011) 137 TTJ (Chennai) 373 : (2010) 48 DTR (Chennai) 441 wherein it has been held that payment of non- compete fee should be spread over in the light of decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). We have considered the submissions made by the assessee. We following the decision of Special Bench, Delhi in the case of Tecumseh India (P) Ltd. (supra) have held that payment of non-compete fee is capital expenditure. In Madras Industrial Investment Corporation Ltd. (supra) the assessee issued debentures in December, 1966 at a discount. The total discount on issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For asst. yr. 1968-69 the assessee wrote off Rs. 12,500 out of the total discount of Rs. 3 lakhs being the proportionate amount of discount for the period of six months ending with 30th June, 1967, taking into account the period of 12 years which was the period of redemption and dividing the discount of Rs. 3 lakhs over the period of 12 years. The AO disallowed the claim but the AAC allowed deduction of Rs. 12,500. On further appeal the Tribunal held that the entire expenditure of Rs. 3 lakhs was allowable as expenditure incurred for the purpose of the business. On reference the High Court noted that out of the total discount of Rs. 3 lakhs an amount of Rs. 12,500 had been allowed which the Department had not challenged. Hence the High Court was concerned only with the balance amount of Rs. 2,87,500 which the High Court held, could not be considered as expenditure. On further appeal to the :- 9 -: & 1319/Chny/2018

We regard to the disallowance on claim of depreciation on motor cars, the AR pleaded that the Ld. CIT(A) erred in disallowing the claim for depreciation @50% on motor cars based on the tribunal decision in the assessee’s own case in the prior orders, wherein, the claim for depreciation is disallowed for the reason that the assessee does not carry the business of plying the vehicles on hire and hence, it would be eligible for depreciation @ 20% only. The Ld. CIT(A) ought to have considered the assessee’s proposal, submitted without prejudice to its plea, that the assessee should be allowed a higher depreciation as the written down value is higher due to the disallowance claim made at 50% in the earlier years.

We heard the rival submissions and uphold the restriction on the depreciation claim @ 20% on the impugned vehicles for the reason that the assessee did not carry the business of plying the vehicles on hire. However, we direct the AO to verify and allow the depreciation @ 20% on the enhanced written down value due to the disallowances of depreciation claim made in the earlier years. To this extent, the assessee’s appeal for assessment year 2006- 07 is partly allowed.