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Income Tax Appellate Tribunal, “C” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)- 1, Chennai in 1/2013-14 New No. 326/13-14 dated 06.02.2017 and 100/CIT(A)-1/2014-15 New No. 179/14-15 dated 06.02.2017 for assessment years 2009-10 & 2010- 11, respectively.
:-2-: & 1051/Mds/2017
M/s. Arkema Peroxides India Pvt. Ltd., the assessee, is engaged in the manufacture and sale of organic peroxides. It claimed depreciation at the rate of 25% for the non-compete fee paid. The AO was of the view that non-compete fee cannot be construed as forming part of any other commercial rights of similar nature as spelt out in sec. 32(1)(iii). When it is not a right then there is no question of allowing depreciation on it. As a result, he disallowed the depreciation claimed by the assessee for both the assessment years 2009-10 & 2010-11, respectively. Aggrieved against these orders, assessee filed appeals before the CIT(A).
The CIT(A) relying on this tribunal order in 2040 & 2041/Mds/2017 dated 30.11.2014 upheld the action of the AO. Aggrieved, the assessee filed these appeals with the following grounds:
“1. The order of the Learned CIT(A) is contrary to law, facts and circumstances of the case. 2. The learned CIT(A) erred in upholding the disallowance of the claim for depreciation on non-compete fees on the basis that the said right does not constitute the intangible assets. 3. He ought to have appreciated that the non-compete right for a definite period obtained in the agreement constitute a favourable commercial rights and accordingly would qualify.”
We heard the rival submissions, and gone through the order of this tribunal in 2040 & 2041/Mds/2017. The relevant portion is extracted as under:
:-3-: & 1051/Mds/2017
“11. We find that in the instant case it is not in dispute that the assessee had incurred expenditure of Rs. 3,62,85,000/- on account of non-compete fee. The assessee’s claim for depreciation on the above expenditure was disallowed by the Assessing Officer and such disallowance was confirmed by the ld. CIT(A). The reasoning given by the ld. CIT(A) is stated above in this order. We find that the issue in the instant appeal is squarely covered by the decision of the Delhi Bench of the Tribunal in the case of M/s Sharp Business Systems [India] Ltd [supra] wherein it has been held as under: “11. We have heard both the parties and gone through the material available on record. In the case before us there is no dispute that before formation of joint venture by L&T Ltd. and Sharp Corporation, Japan, L&T Ltd. was engaged in the business of developing, manufacturing, marketing, distributing and selling among other things, various electronic equipments and products in India and had a well established country-wide sales network. L&T Ltd. by entering into agreement with the assessee had undertaken not to set up any undertaking or assist in setting up, undertaking any business in India of selling/marketing and trading of electronic office products for a period of 7 years in lieu of which payment of Rs. 3 crores had been received. The business of joint venture is of importing, marketing and selling in India certain electric and electronic office products. Though, the business of joint venture i.e. Sharp Business Systems (India) Ltd. appears similar to that of L&T Ltd. but payment of Rs. 3,00,00,000 has been made in lieu of the latter, not setting up undertaking/assisting in setting up, undertaking any business in India of selling, marketing and trading of electronic office products for a period of 7 years. There is no dispute about the fact that L&T Ltd. was having well established country-wide network in developing, manufacturing, marketing, distributing and selling various electronic equipments and products in India. The joint venture would have faced tough competition if L&T Ltd. had set up any undertaking or assisted in setting up, undertaking any business in India of selling/marketing and trading of electronic office products. To ward off that competition, the assessee company had paid Rs. 3 crores to L&T Ltd. Therefore, by payment of non-compete fee to L&T Ltd. the competition for a period of 7 years has been eliminated. The period of 7 years is quite long during which any new company can establish its reputation and a reasonable market share would have been acquired. Therefore, the payment made by the assessee to L&T Ltd. is not to increase the profitability, but to establish itself in the market and acquire market share. By keeping away L&T Ltd. from the same business, the assessee had visualized to acquire a good market share. The contention of the assessee that after a period of 7 years L&T Ltd. would have entered in the same trade and, therefore, the expenditure should be treated as revenue in nature, we are not in agreement with this arguments of the assessee. The payment has been made to ward off the competition for a period of 7 years
:-4-: & 1051/Mds/2017 during which any company could have set up its products and reputation in the market. Therefore, the expenditure cannot be treated to have been incurred in revenue field.
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 monopoly rights. Hon’ble Supreme Court in the case of Punjab State Industrial Development Corporation Ltd. vs. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) has held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to capital expenditure incurred by the company and although incidentally that would certainly help in the business of the company and may also help in profit making, it still retains the character of capital expenditure since the expenditure was directly related to the expansion of capital base of the company and thus it was not an expense in the nature of revenue. Hon’ble Delhi High
:-5-: & 1051/Mds/2017 Court in the case of CIT vs. J.K. Synthetics Ltd. (2009) 222 CTR (Del) 339 : (2009) 17 DTR (Del) 134 : (2009) 309 ITR 371 (Del) had held that the basic test to determine the nature of an expenditure remains same even in the context of modern situation and these tests are the test of (i) initial outlay of the business, (ii) the aim and objects of the expenditure, (iii) enduring benefit test, and (iv) the test of fixed and circulating capital. In the case of assessee the payment of Rs. 3 crores to L&T Ltd. has been made at the start of business of joint venture. Therefore, assessee’s case will fall under the first test laid down in CIT vs. J.K. Synthetics Ltd. (supra) which describes that if expenditure is made for initial outlay or for the extension of business or a substantial replacement of equipment then it will fall under the capital expenditure.
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 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.
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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. 18. 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 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
:-7-: & 1051/Mds/2017 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 into existence by experience and :-8-: & 1051/Mds/2017 reputation. The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copyrights, trademarks, licenses, franchises etc. Therefore, in view of decision of Hon’ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P) Ltd. (supra) non- compete agreement would not create an asset of intangible nature eligible for depreciation under s. 32(1)(ii) of the Act. The decision of the Tribunal, Chennai Bench in the case of ITO vs. Medicorp Technologies (India) Ltd. (supra) was rendered prior to the decision of Hon’ble Delhi High Court in the case of Hindustan Coca Cola Beverages (P) Ltd. (supra). Hence it renders no help to the assessee. Therefore, we are not in agreement with the arguments of the assessee that non-compete fee is an intangible asset to which provisions of s. 32(1)(ii) of the Act are applicable. Therefore, in our considered opinion, the depreciation cannot be allowed on amount of non-compete fee. We accordingly dismiss this contention of the assessee.
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 Hon’ble Supreme Court it was held that liability to :-9-: & 1051/Mds/2017
pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purpose of its business in order to generate funds for its business activities. It was, therefore, expenditure. The assessee had in its return correctly claimed a deduction only in respect of proportionate part of the discount of Rs. 12,500 over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the "discount on debenture account" which was written off over the period of debentures. The assessee was entitled to deduct a sum of Rs. 12,500 out of discount of Rs. 3 lakhs in the relevant assessment year. Hon’ble Supreme Court also held that ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures. From the decision of Hon’ble Supreme Court it is clear that expenditure which is revenue in nature and is incurred to secure a benefit over a number of years can be spread over the period of benefit derived by an assessee. However, where the expenditure incurred is in the nature of capital expenditure, the spread over cannot be allowed. Since we have held that the expenditure incurred by way of non- compete fee is capital in nature, it cannot be allowed to be spread over for the period of seven years. Therefore, the claim of the assessee for spread over of the expenditure cannot be entertained. Accordingly, this ground of appeal raised by the assessee is also dismissed.”
12. We respectfully following the above decision of the Tribunal, do not find any merits on this issue in the appeal of the assessee. Hence this ground of appeal of the assessee is dismissed.”
5. Respectfully following the above decision of the Coordinate Bench of this Tribunal in assessee’s own case for the assessment year 2003-04, the :-10-: & 1051/Mds/2017 common ground raised in the assessment years 2009-10 & 2010-11 are dismissed.
In the result, the assessee’s appeals in & 1051/Mds/2017 are dismissed.
Order pronounced on Thursday, the 05th day of October, 2017 at Chennai.