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Facts
The assessee company, engaged in design-to-delivery aesthetics solutions, claimed expenses of Rs. 5 crore as non-compete fees. The Assessing Officer (AO) treated these expenses as capital in nature and disallowed them. The Commissioner of Income Tax (Appeals) [CIT(A)] affirmed the AO's order.
Held
The Tribunal observed that the impugned assessment year is 2020-2021, after the insertion of Section 28(va). The Tribunal found that the judgment in the case of Sharp Business Systems might not be directly applicable due to the change in law. The case was remanded back to the AO to examine the termination agreement and the purpose of the payment in its entirety, considering the facts and Section 28(va).
Key Issues
Whether the expenses incurred by the assessee, treated as non-compete fees, are revenue or capital in nature, and whether Section 28(va) is applicable.
Sections Cited
Section 37(1) of the Income-tax Act, 1961, Section 32(1)(ii) of the Income-tax Act, 1961, Section 28(va) of the Income-tax Act, 1961
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Income Tax Appellate Tribunal, BANGALORE BENCHES “A”, BANGALORE
Before: Shri Chandra Poojari & Shri Prakash Chand Yadav
IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A”, BANGALORE Before Shri Chandra Poojari, Accountant Member & Shri Prakash Chand Yadav, Judicial Member ITA No.973/Bang/2024: Asst. Year : 2020-2021 M/s.S J S Enterprises Limited The Assistant Commissioner of SY Nos.28 P16 Agra Village Income-tax, Circle 6(1)(1) vs. 85 P6 BM Kaval Village Bangalore. Kengeri, Hobli, Thatagunj BO Bangalore South Bangalore – 560 082. PAN: AAJCS0794B. (Appellant) (Respondent) Appellant by: Sri. Rony Anthony, CA Respondent by: Ms. Neha Sahay, JCIT-DR Date of Date of Hearing : 15.07.2024 Pronouncement: 19.07.2024 O R D E R Per Prakash Chand Yadav, JM : The present appeal of the assessee is arising from the order of the learned CIT(A) dated 21st March, 2024 having DIN & Order No.ITBA/NFAC/S/250/2023-24/1063076177(1) and relates to assessment year 2020-2021.
The facts leading to the present appeal are that the assessee- company is engaged in the business of providing design-to-delivery aesthetics solutions with the ability to design, develop and manufacture a diverse product portfolio for a wide range of customers primarily in the automotive and consumer appliance industries. For the impugned year, the assessee has filed its return of income on 9th
2 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. January, 2021 declaring an income of Rs.44,47,81,240. The case of the assessee was selected for scrutiny and notices u/s.143(2) and 142(1) of the Income-tax Act, 1961 (“the Act” hereinafter) were issued to the assessee. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee has claimed expenses of Rs.5 crore as exceptional item expense, in the nature of non-compete fees. The learned AO after considering the arguments of the assessee, took a view that the expenses incurred are in the nature of non-compete fees expenses and hence they are capital in nature.
Aggrieved with the order of the AO, the assessee filed an appeal before the learned CIT(A) and contended that the assessee was paying commissions to three parties in the past years in accordance with the terms of agreement dated 24.11.2006(Original Agreement). Assessee explained that by virtue of the original agreement the commission agents were providing various services to the assessee such as a) obtaining purchase order b) collection from customers etc. Thereafter, assessee executed a termination agreement date 18.04.2018 with these parties. The assessee further contended that being a businessman, the assessee took a view that one-time settlement may be done with these three parties to run the business with more profits. However, the ld.CIT(A) could not find any force in the arguments of the assessee and affirmed the order of the AO holding that the expenses incurred are not allowable u/s.37(1) of the Act.
Aggrieved with the order of the CIT(A) the assessee has come up in appeal before us and has raised the following grounds of appeal:-
3 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited.
“1. That on the facts and in the circumstances of case, the Learned Commissioner of Income Tax Appeals - Delhi ["Ld. CIT(A)"] was not justified, rather grossly erred in upholding the disallowance of expenses under section 37 of the Income tax Act, 1961 ("the Act") amounting to INR 5,00,00,000 by treating the said expense as capital in nature. 2. That on the facts and in the circumstances of case, the Ld. CIT(A) was not justified, rather grossly erred by upholding the disallowance of the entire expense as non-compete fee without appreciating the fact the consideration was primarily for settlement towards termination of agreements. 3. That on the facts and circumstances of the case and in law in upholding disallowance of INR5,00,00,000 paid, Ld. CIT(A) erred in holding that by entering into non-competition agreement appellant acquired benefit of enduring nature and, as such, the expenditure was capital expenditure. 4. That on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified, rather grossly erred in not considering the submissions furnished by the Appellant. 5. That on the facts and circumstances of the case the Ld. CIT(A) violated the principles of natural justice by making addition to the Income without providing an opportunity of being heard. 6. Without prejudice to the above the Learned Assessing Officer ("Ld. AO") ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. Each of the above ground of appeal is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute, or amend one or more of the above grounds of appeal at any time before or at the time of proceedings so as to enable the Hon'ble Income Tax Appellate Tribunal to decide these grounds according to facts and law.”
All the grounds are interconnected. Learned Counsel for the assessee has drawn the attention of the Bench towards the synopsis filed during the course of hearing and pointed out that the assessee has made payment to three parties as under: -
4 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited.
Particulars Total amount Actual to be paid (in amount paid Rs.) in the year 2020-21 (in Rs.) Consideration paid to Delta Ram 4,00,00,000 2,00,00,000 Enterprises (as pr settlement and termination agreement) Consideration paid to SM Enterprises 1,80,00,000 90,00,000 (as per settlement and termination agreement) Consideration paid to Sirisha (as per 4,20,00,000 2,10,00,000 settlement and termination agreement) Total 10,00,00,000 5,00,00,000
The learned Counsel for the assessee further argued that after around 12 years of continuous relationship with these parties, the assessee entered into a settlement and termination agreement dated 18th April, 2018 and in pursuance to the stipulations therein, the assessee has made the impugned payments. The copy of the agreement is annexed in paper book pages 158 to 181. The Counsel of the assessee further argued that incurring of these expenses has not brought any new asset providing benefits of enduring natureto the assessee. And the step is taken on account of commercial expediency.
The learned Departmental Representative relied upon the orders of the authorities below and has also relied upon the judgment of the Hon’ble Delhi High Court in the case of Sharp Business Systems reported in 15 taxmann.com 144. The learned DR also relied upon the decision of the ITAT Delhi Benches in the case of Hindustan Coca Cola Beverages, for canvassing that the impugned amounts cannot be termed as revenue expenses.
5 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited.
We have heard the rival submissions and perused the material on record. We observe that the impugned assessment year is assessment year 2020-2021, which means after the insertion of sub- section 28(va), which sub-section is applicable with effect from 1st April, 2003. For the sake of convenience, we reproduce the provisions of section 28(va), as under:-
“[(va) any sum, whether received or receivable, in cash or kind, under an agreement for— (a) not carrying out any activity in relation to any business 11[or profession]; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:”
8.1 The Hon’ble Delhi High ITAT in the case of Sharp Business Systems 140 TTJ 0607(Del), which is affirmed by Hon’ble Delhi High Court , while interpreting the provisions of section 28(va) of the Act, in Para(15)has observed as under:-
"We are conscious of the provisions of section 28(va) inserted in the statute by the Finance Act, 2002 w.e.f. 1.4.2003 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 Larsen and Toubro Ltd had treated the payments received by it as business income and hence as a corollary to the amended provisions of section 28(va) the payment made will be treated as I. T. A.No. 4564 (Del) of 2004 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."
6 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. 8.2 The impugned year is AY 2020-21, and provisions of section,section 28(va) inserted in the statute by the Finance Act, 2002 w.e.f. 1.4.2003 are very much applicable. Therefore, there is a change in law and hence the judgment of sharp is not applicable in the facts of the present case. Further the issue of applicability of section 28(va) has not been discussed by the AO in the present case to see whether as a corollary to the amended provisions the expenses incurred by the assessee are to be treated as revenue.
8.3 The solitary dispute before us is whether expenses incurred by assessee to the tune of Rs 5 Crare revenue or capital in nature. We observe that these agents were providing the below mentioned services to the assessee for carrying out the business of assessee and assessee was paying commission prior to this one-time settlement. The services provided by the selling parties are as under: - a) obtaining purchase order/confirmed order b) collection from the customers within the credit period. c) Uncollectible risk to be borne by selling agents, in other words bad debts to be borne by selling agents. c)………. d)…………….
8.4 The original agreement stands cancelled on 30.09.2018(See Page No-160 Para 1.1 of the PB). However, before the cancellation of the same certain stipulations were to be obliged by the selling parties. The stipulations are mentioned at Page number-161 of the PB- Clause 5 of the agreement. For the sake of brevity, the terms mentioned in clause 5 are not reproduced. However, the gist of this
7 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. clause was, that it is the abundant duty of the selling parties to convince the identified employees to join the assessee company without any delay. Similarly reading of clause 5.2-5.3 -5.4 would provide that selling agents would assist the assessee Company in employing the identified shortlisted employees. Clause 5.5 of the termination agreement is very pertinent it says that with effect from 1.05.2018 till the termination date that is 30.09.2018 the salaries of the employees would be paid by the assessee and the amount paid is to be deducted from the commission payable to the selling parties under original agreement. Similarly, Clause B of the termination agreement (refer page no-159 of the PB) dated 18.04.2018 provides that the second parties to whom the payments are made would transfer their employees to the assessee Company with effect from 1.05.2018 and all the employees.
8.5 The dates mentioned in the settlement agreement and termination of the original agreement plays crucial role as evident from clause 1.2, quoted above. The assessee has made payments in accordance with these dates. The assessee contended that in AY2018-19, it has made payment of Rs 2.5 Cr and the same has been accepted by the revenue under 143(1) of the Act. However, since there is no discussion vis-à-vis nature of these payments we cannot apply consistency principle, AR also agreed to our view.
8.6 Further the Ld AR and DR has argued the case on the basis of clause 8 of the agreement. The contention of the AR is that assessee has made payment on the basis of this clause 8 and the AO and DR has interpreted this clause in a way that enduring benefits have been
8 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. arisen to the assessee. We are not in agreement with the contentions of the Ld DR since, it is settled position of law that an agreement should be read as whole and not in piecemeal.
8.7 Clause 9 of the agreement, by virtue of which the quantification of amount was to be paid to the selling agents is reproduced hereunder for the sake of reference: - “9. CONSIDERATION AND PAYMENT 9.1 In consideration for the due performance of the obligations of the Selling Parties under this Agreement, the Company shall make a payment of Rs. 8.20 Crore as mentioned in the Schedule 2 of this Agreement. The total consideration ("Total Payment") amounting to Rs. 8.20 Crore shall be paid by the Company to the Selling parties in the following manner; a) Delta Ram Enterprises -Rs. 4 Cr of consideration. b) Sirisha Enterprises -Rs. 4.20 Cr of consideration. 9.2 The Total Payment shall be made by the Company to the Selling Parties as follows: a) Payment as per Clause 9.1 of this Agreement amounting to Rs. 8.20 Crores shall be made in monthly instalments spread across 24 months starting from 1st October 2018. The monthly instalment to be paid to the Selling Parties - Delta and Sirisha would equal to an amount of be Rs. 16,66,667 and Rs. 17,50,000 respectively and the last instalment shall be payable on Ist Sep 2020. 9.3 The Total Payment is made on deferred basis and all the activities involved in transferring the Employees and Assets captured in Schedule 1 and Schedule 2 of this agreement shall be completed on the dates specified in this Agreement. The total payment is only deferred to ensure the non-compete, non-solicitation and confidentiality obligations. There is no further performance due from the Selling Parties apart from what is agreed with the Company and captured in this Agreement. 9.4 All payments to be made by Company to the Selling Parties shall be subject to deduction of tax deducted at source as per the provisions of the Income Tax Act and the Company shall bear the applicable GST taxes.
9 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. 9.5 In case there is a delay from the company on payment of the above sums as mentioned in clause above, the Company will be liable for an interest payable at the rate of 12% p.a” 8.8 Perusal of the above clause would show that the assessee was under obligation to pay an amount of Rs 8.20Cr. However, the counsel of the assessee has averted that the assessee has actually made a payment of Rs 10Cr, which difference has not been explained by the AR of the assessee either in his oral arguments or in his written submissions.
8.9 Therefore having regard to the above observations made herein above it is necessary that the matter should go back to AO to examine a fresh, for examining the purpose of termination agreement dated 18.04.2018 in entirety and not in piecemeal. Nowhere the AO has seen the facts as noted by us in previous Para(s). The AO has also failed to take note of the purport of clause (9) fixing the remuneration to the tune of Rs 8.20Cr.
9 The learned AO and CIT(A) have wrongly relied on the decisions of Hon’ble Delhi High Court in the case of Sharp Business(Supra) as that was a case where the transactions of non-compete fee was entered into between two parties who were working as jointly and had formed a joint venture. However, the present case is on different footing as evident from the fact that the transaction was not between the two related parties and it is not a case of separation of any joint venture. Accordingly, we also direct the AO to examine the present case in view of the facts mentioned hereinabove and the facts of sharp and the consequential effect of section 28(va).
10 ITA No.973/Bang/2024 (AY 2020-21) M/s.S J S Enterprises Limited. 10. In the result, the appeal filed by the assessee is allowed for statistical purposes in above terms.
Order pronounced in the open court on 19th July, 2024.
Sd/- Sd/- (Chandra Poojari) (Prakash Chand Yadav) Accountant Member Judicial Member Bangalore; Dated: 19th July, 2024 Devadas G* Copy to: 1. The Appellant. 2. The Respondent. 3. The CIT(A) Concerned. 4. The DCIT concerned. Asst.Registrar 5. The Sr. DR, ITAT, Bangalore. ITAT, Bangalore 6. Guard File.