Arkema Peroxides India Private Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1050/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6020 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 28-04-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ASISH TRIPATHI JCIT
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI ... , , # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NOS. 1050 & 1051/MDS/2017 / ASSESSMENT YEARS : 2009-10 & 2010-11 M/S. ARKEMA PEROXIDES INDIA PRIVATE LTD., 1 ST FLOOR, BALMER LAURIE HOUSE, 628, ANNA SALAI, TEYNAMPET, CHENNAI 18. [PAN: AAACE 1713F] VS. DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(1), CHENNAI. ( / APPELLANT) ( / RESPONDENT) % & / APPELLANT BY : SHRI. SAROJ KUMAR PARIDA, ADVOCATE )*% & / RESPONDENT BY : SHRI. ASISH TRIPATHI, JCIT & /DATE OF HEARING : 13.07.2017 & /DATE OF PRONOUNCEMENT : 05.10.2017 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE ASSESSEE FILED THESE APPEALS AGAINST THE ORD ERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)- 1, CHENNAI IN ITA NOS. 207/CIT(A)- 1/2013-14 NEW NO. 326/13-14 DATED 06.02.2017 AND 10 0/CIT(A)-1/2014-15 NEW NO. 179/14-15 DATED 06.02.2017 FOR ASSESSMENT Y EARS 2009-10 & 2010- 11, RESPECTIVELY. :-2-: ITA NOS. 1050 & 1051/MDS/2017 2. M/S. ARKEMA PEROXIDES INDIA PVT. LTD., THE ASSE SSEE, 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 PAR T 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 D EPRECIATION ON IT. AS A RESULT, HE DISALLOWED THE DEPRECIATION CLAIMED BY T HE ASSESSEE FOR BOTH THE ASSESSMENT YEARS 2009-10 & 2010-11, RESPECTIVELY. AGGRIEVED AGAINST THESE ORDERS, ASSESSEE FILED APPEALS BEFORE THE CIT(A). 3. THE CIT(A) RELYING ON THIS TRIBUNAL ORDER IN ITA NO. 2039, 2040 & 2041/MDS/2017 DATED 30.11.2014 UPHELD THE ACTION OF THE AO. AGGRIEVED, THE ASSESSEE FILED THESE APPEALS WITH THE FOLLOWIN G 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 DISALL OWANCE OF THE CLAIM FOR DEPRECIATION ON NON-COMPETE FEES ON THE B ASIS THAT THE SAID RIGHT DOES NOT CONSTITUTE THE INTANGIBLE ASSETS. 3. HE OUGHT TO HAVE APPRECIATED THAT THE NON-COMPET E RIGHT FOR A DEFINITE PERIOD OBTAINED IN THE AGREEMENT CONSTITUT E A FAVOURABLE COMMERCIAL RIGHTS AND ACCORDINGLY WOULD QUALIFY. 4. WE HEARD THE RIVAL SUBMISSIONS, AND GONE THROUGH THE ORDER OF THIS TRIBUNAL IN ITA NO. 2039, 2040 & 2041/MDS/2017. TH E RELEVANT PORTION IS EXTRACTED AS UNDER: :-3-: ITA NOS. 1050 & 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 ACCOU NT OF NON-COMPETE FEE. THE ASSESSEES CLAIM FOR DEPRECIATION ON THE ABOVE EXPE NDITURE WAS DISALLOWED BY THE ASSESSING OFFICER AND SUCH DISALLOWANCE WAS CON FIRMED BY THE LD. CIT(A). THE REASONING GIVEN BY THE LD. CIT(A) IS STATED ABO VE IN THIS ORDER. WE FIND THAT THE ISSUE IN THE INSTANT APPEAL IS SQUARELY CO VERED BY THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF M/S SHAR P BUSINESS SYSTEMS [INDIA] LTD [SUPRA] WHEREIN IT HAS BEEN HELD AS UNDER: 11. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H 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 CO RPORATION, JAPAN, L&T LTD. WAS ENGAGED IN THE BUSINESS OF DEVELOPING, MANUFACTURING, MARKETING, DISTRIBUTING AND SELLING AMONG OTHER THI NGS, VARIOUS ELECTRONIC EQUIPMENTS AND PRODUCTS IN INDIA AND HAD A WELL ESTABLISHED COUNTRY-WIDE SALES NETWORK. L&T LTD. BY ENTERING IN TO AGREEMENT WITH THE ASSESSEE HAD UNDERTAKEN NOT TO SET UP ANY UNDER TAKING OR ASSIST IN SETTING UP, UNDERTAKING ANY BUSINESS IN INDIA OF SE LLING/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. TH E BUSINESS OF JOINT VENTURE IS OF IMPORTING, MARKETING AND SELLING IN I NDIA CERTAIN ELECTRIC AND ELECTRONIC OFFICE PRODUCTS. THOUGH, THE BUSINES S 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 LIE U OF THE LATTER, NOT SETTING UP UNDERTAKING/ASSISTING IN SETTING UP, UND ERTAKING ANY BUSINESS IN INDIA OF SELLING, MARKETING AND TRADING OF ELECT RONIC 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 DEV ELOPING, 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 UNDERT AKING OR ASSISTED IN SETTING UP, UNDERTAKING ANY BUSINESS IN INDIA OF SE LLING/MARKETING AND TRADING OF ELECTRONIC OFFICE PRODUCTS. TO WARD OFF THAT COMPETITION, THE ASSESSEE COMPANY HAD PAID RS. 3 CRORES TO L&T LTD. T HEREFORE, BY PAYMENT OF NON-COMPETE FEE TO L&T LTD. THE COMPETIT ION 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, T HE PAYMENT MADE BY THE ASSESSEE TO L&T LTD. IS NOT TO INCREASE THE P ROFITABILITY, BUT TO ESTABLISH ITSELF IN THE MARKET AND ACQUIRE MARKET S HARE. BY KEEPING AWAY L&T LTD. FROM THE SAME BUSINESS, THE ASSESSEE H AD 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 REV ENUE IN NATURE, WE ARE NOT IN AGREEMENT WITH THIS ARGUMENTS OF THE ASS ESSEE. THE PAYMENT HAS BEEN MADE TO WARD OFF THE COMPETITION FOR A PER IOD OF 7 YEARS :-4-: ITA NOS. 1050 & 1051/MDS/2017 DURING WHICH ANY COMPANY COULD HAVE SET UP ITS PROD UCTS AND REPUTATION IN THE MARKET. THEREFORE, THE EXPENDITUR E CANNOT BE TREATED TO HAVE BEEN INCURRED IN REVENUE FIELD. 12. THE NEXT CONTENTION OF THE LEARNED AUTHORISED R EPRESENTATIVE OF THE ASSESSEE THAT THE PAYMENT OF NON-COMPETE FEE HAS NO T CREATED ANY ASSET OR ADVANTAGE IN THE CAPITAL FIELD AND, THEREF ORE, IT SHOULD BE REVENUE IN NATURE. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MADRAS AUTO SERVICES (P) LTD. (SUPRA) CANNOT BE APP LIED TO THE FACTS OF THE CASE BEFORE US. IN THAT CASE THE ASSESSEE HAD T AKEN THE PREMISES FOR 39 YEARS ON LEASE AND INVESTED IN THE CONSTRUCT ION OF BUILDING. THE BUILDING DID NOT BELONG TO THE ASSESSEE AND THE ASS ESSEE WAS PAYING NOMINAL RENT FOR A PERIOD OF 39 YEARS. UNDER THESE CIRCUMSTANCES, HONBLE SUPREME COURT HELD THAT NO ASSET OF ENDURIN G NATURE WAS CREATED AND, THEREFORE, THE EXPENDITURE WAS TO BE T REATED AS REVENUE IN NATURE. THE RATIO OF THIS DECISION IS OF NO AVAIL I N THE CASES OF NON- COMPETE PAYMENTS AS IN THAT CASE THE INCURRING OF E XPENSES DID NOT CREATE ANY ASSET AS AGAINST THAT IT HAS BEEN CLEARL Y HELD BY THE HONBLE 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 E NSURED FOR THE BENEFIT OF THE WHOLE OF THE BUSINESS. THE DECISION OF HONBLE GUJARAT HIGH COURT RELIED UPON BY ASSESSEE IS NOT APPLICABL E TO THE FACTS OF THE CASE AS IN THAT CASE THE ASSESSEE PAID AMOUNT FOR L AYING OF CABLES BY THE ELECTRICITY BOARD TO ENSURE THE REGULAR SUPPLY OF ELECTRICITY. IN THE CASE BEFORE US, EXPENDITURE HAS NOT BEEN LAID FOR C REATION OF ANY ASSET WHICH DID NOT BELONG TO THE ASSESSEE, BUT HAS BEEN PAID TO WARD OFF THE COMPETITION. THE AFORESAID DECISION OF HONBLE SUPR EME COURT IN THE CASE OF ASSAM BENGAL CEMENT COMPANY VS. CIT (SUPRA) HAS BEEN REFERRED IN ALMOST ALL THE CASES TOUCHING THIS ISSU E AND TILL THE DATE THE SAID DECISION HAS NOT BEEN OVERRULED. 13. HONBLE SUPREME COURT IN THE CASE OF CIT VS. CO AL 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 CON STITUTE CAPITAL EXPENDITURE AND TO HOLD THEM CAPITAL EXPENDITURE IT IS NOT NECESSARY THAT NON-COMPETE FEE IS PAID TO CREATE MONOPOLY RIG HTS. HONBLE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIA L DEVELOPMENT CORPORATION LTD. VS. CIT (1997) 140 CTR (SC) 594 : (1997) 225 ITR 792 (SC) HAS HELD THAT THE FEE PAID TO THE REGISTRAR FO R EXPANSION OF THE CAPITAL BASE OF THE COMPANY WAS DIRECTLY RELATED TO CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND ALTHOUGH INCIDENTALLY T HAT WOULD CERTAINLY HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HE LP IN PROFIT MAKING, IT STILL RETAINS THE CHARACTER OF CAPITAL EXPENDITU RE SINCE THE EXPENDITURE WAS DIRECTLY RELATED TO THE EXPANSION OF CAPITAL BA SE OF THE COMPANY AND THUS IT WAS NOT AN EXPENSE IN THE NATURE OF REVENUE . HONBLE DELHI HIGH :-5-: ITA NOS. 1050 & 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 EXPEND ITURE REMAINS SAME EVEN IN THE CONTEXT OF MODERN SITUATION AND THESE T ESTS ARE THE TEST OF (I) INITIAL OUTLAY OF THE BUSINESS, (II) THE AIM AN D OBJECTS OF THE EXPENDITURE, (III) ENDURING BENEFIT TEST, AND (IV) THE TEST OF FIXED AND CIRCULATING CAPITAL. IN THE CASE OF ASSESSEE THE PA YMENT OF RS. 3 CRORES TO L&T LTD. HAS BEEN MADE AT THE START OF BUSINESS O F JOINT VENTURE. THEREFORE, ASSESSEES CASE WILL FALL UNDER THE FIRS T TEST LAID DOWN IN CIT VS. J.K. SYNTHETICS LTD. (SUPRA) WHICH DESCRIBES TH AT IF EXPENDITURE IS MADE FOR INITIAL OUTLAY OR FOR THE EXTENSION OF BUS INESS OR A SUBSTANTIAL REPLACEMENT OF EQUIPMENT THEN IT WILL FALL UNDER TH E CAPITAL EXPENDITURE. 14. TRIBUNAL DELHI SPECIAL BENCH IN THE CASE OF TEC UMSEH 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 SAM E FROM THE RISK OF COMPETITION. THIS CONTENTION OF ASSESSEE HAS BEEN R EJECTED AFTER DETAILED DISCUSSION KEEPING IN VIEW THE JUDICIAL PR ONOUNCEMENTS. IT HAS BEEN HELD THAT WHEN EXPENDITURE IS MADE FOR INITIAL OUTLAY OR FOR EXPANSION OF BUSINESS OR FOR A SUBSTANTIAL REPLACEM ENT OF EQUIPMENT, THEN IT WOULD FALL UNDER CAPITAL EXPENDITURE. THE P AYMENT OF NON- COMPETE FEE FOR ACQUISITION OF BUSINESS HAS BEEN HE LD AS CAPITAL EXPENDITURE AS THE SAME WAS INCURRED FOR INITIAL OU TLAY 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 BUSIN ESS. ACCORDINGLY THE ASSESSEES 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 TRE ATED CAPITAL IN NATURE. 15. 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 C ASH OR KIND, UNDER AN AGREEMENT FOR NOT CARRYING OUT ANY ACTIVITY IN R ELATION TO ANY BUSINESS WILL BE CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN THE APPEAL BEFORE US TH E ASSESSMENT YEAR INVOLVED IS 2001-02. IT IS NOT THE CASE OF THE ASSE SSEE THAT L&T LTD. HAD TREATED THE PAYMENTS RECEIVED BY IT AS BUSINESS INC OME AND HENCE AS A COROLLARY TO THE AMENDED PROVISIONS OF S. 28(VA) TH E PAYMENT MADE WILL BE TREATED AS REVENUE EXPENDITURE. HENCE, IT IS NOT POSSIBLE TO TREAT THE PAYMENT OF NON-COMPETE FEE AS REVENUE EXPENDITURE I N THE HAND OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N. :-6-: ITA NOS. 1050 & 1051/MDS/2017 16. IN VIEW OF THE ABOVE IT IS HELD THAT THE NON-CO MPETE FEE PAID BY THE ASSESSEE TO WARD OFF COMPETITION FROM L&T LTD. IS CA PITAL IN NATURE AND AS SUCH, IT CANNOT BE ALLOWED AS REVENUE EXPENDITUR E. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY TH E LEARNED CIT(A) CONFIRMING THE ADDITION MADE BY THE AO. 17. ALTERNATIVELY, IT HAS BEEN ARGUED THAT IN CASE THE EXPENDITURE IS TREATED AS CAPITAL IN NATURE, IN VIEW OF THE DECISI ON OF TRIBUNAL IN THE CASE OF ITO VS. MEDICORP. TECHNOLOGIES INDIA LTD. ( SUPRA) DEPRECIATION SHOULD BE ALLOWED AS NON-COMPETE FEE IS AN INTANGIB LE ASSET. UNDER S. 32 (1)(II) DEPRECIATION IN RESPECT OF KNOW-HOW, PAT ENT, 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 ASSESSE E 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)(I I) IT IS CLEAR THAT (I) THE ASSET SHOULD BE AN INTANGIBLE ASSET; (II) SHOUL D BE WHOLLY OR PARTLY OWNED BY THE ASSESSEE; AND (III) USED FOR THE PURPO SES 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 I N 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, LI CENSES/FRANCHISES BELONG. THEREFORE, THE EXPRESSION 'ANY OTHER BUSINE SS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' WOULD MEAN THAT THE BUSIN ESS OR COMMERCIAL RIGHT SHOULD BE IN THE NATURE OF KNOW-HOW, PATENTS, COPYRIGHTS, TRADE- MARKS, LICENSES OR FRANCHISES. BY NO STRETCH OF IMA GINATION, THE NON- COMPETE FEE CAN BE TREATED TO HAVE BELONGED THE SAM E 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 DISPUT E THAT KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES/FRANCHISE S ETC. ARE INTELLECTUAL PROPERTY RIGHTS, WHICH CAN BE TRANSFERRED/ASSIGNED/ LEASED OUT TO ANY OTHER PARTIES FOR A PRICE. NON-COMPETE AGREEMENT BE TWEEN TWO PARTIES IS LIKE PERSONAL SERVICES CONTRACT WHICH IS UNASSIG NABLE. PERSONAL SERVICES CONTRACT CANNOT SURVIVE ON THE DEMISE OF E ITHER OF THE PARTIES. SIMILARLY THE NON-COMPETE AGREEMENT BETWEEN TWO PAR TIES WILL COME TO AN END ON THE DEMISE OF EITHER OF THE PARTIES. WHIL E INTANGIBLE ASSETS LIKE KNOW-HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LIC ENSES/ FRANCHISES ETC. CAN BE SOLD/ASSIGNED TO ANY OTHER PERSON FOR A VALU E BUT NON-COMPETE RIGHT ACQUIRED ON PAYMENT CANNOT BE TRANSFERRED FOR A PRICE. NO THIRD :-7-: ITA NOS. 1050 & 1051/MDS/2017 PARTY CAN BE ROPED IN, IN THE AGREEMENT FOR NON-COM PETE 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 T HE CATEGORY OF INTANGIBLE ASSETS. 19. NON-COMPETE FEE OF RS 3,00,00,000 HAS BEEN PAID TO WARD OFF THE COMPETITION FROM L&T LTD. HONBLE DELHI HIGH COURT I N THE CASE OF CIT VS. HINDUSTAN COCA COLA BEVERAGES (P) LTD. (2011) 2 38 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 CONST ITUTE AN INTANGIBLE ASSET, CERTAIN ASPECTS, LIKE THE NATURE OF GOODWILL INVOLVED, HOW THE GOODWILL HAS BEEN GENERATED, HOW IT HAS BEE N VALUED, AGREEMENT UNDER WHICH IT HAS BEEN ACQUIRED, WHAT IN TANGIBLE ASSET IT REPRESENTS, NAMELY, TRADEMARK, RIGHT, PATENT ETC. A ND FURTHER WHETHER IT WOULD COME WITHIN THE CLAUSE, NAMELY, ANY OTHER BU SINESS OR COMMERCIAL RIGHTS WHICH ARE OF SIMILAR NATURE ARE TO BE BORNE IN MIND.' HONBLE DELHI HIGH COURT IN PARA 24 EXPLAINED THE M EANING OF 'BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE' IN THE FOLLO WING WORDS : '24. IT IS WORTH NOTING THAT THE MEANING OF BUSINE SS OR COMMERCIAL RIGHTS OF SIMILAR NATURE HAS TO BE UNDERSTOOD IN T HE BACKDROP OF S. 32(1)(II) OF THE ACT. COMMERCIAL RIGHTS ARE SUCH RI GHTS WHICH ARE OBTAINED FOR EFFECTIVELY CARRYING ON THE BUSINESS A ND COMMERCE, AND COMMERCE, AS IS UNDERSTOOD, IS A WIDER TERM WHICH E NCOMPASSES IN ITS FOLD MANY A FACET. STUDIED IN THIS BACKGROUND, ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINESS WITH EFFECTIV ENESS IS LIKELY TO FALL OR COME WITHIN THE SWEEP OF MEANING OF INTANGIBLE A SSET. THE DICTIONARY CLAUSE CLEARLY STIPULATES THAT BUSINESS OR COMMERCI AL RIGHTS SHOULD BE OF SIMILAR NATURE AS KNOW-HOW, PATENTS, COPYRIGHTS, TR ADEMARKS, 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 COMMERCIA L WORLD AS THEY REPRESENT A SIMILAR BENEFIT OR ADVANTAGE OR REPUTAT ION BUILT OVER A CERTAIN SPAN OF TIME AND THE CUSTOMERS ASSOCIATE WI TH SUCH ASSETS.'. 20. THUS FROM THE DECISION OF HONBLE DELHI HIGH CO URT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES (P) LTD. (SUPRA) IT I S CLEAR THAT 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' ARE NOT MAN UFACTURED OR PRODUCED OVER-NIGHT, BUT ARE BROUGHT INTO EXISTENCE BY EXPERIENCE AND :-8-: ITA NOS. 1050 & 1051/MDS/2017 REPUTATION. THE NON-COMPETE FEE IS OUTCOME OF AN AG REEMENT 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 H ONBLE DELHI HIGH COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES (P) LT D. (SUPRA) NON- COMPETE AGREEMENT WOULD NOT CREATE AN ASSET OF INTA NGIBLE 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. MEDI CORP TECHNOLOGIES (INDIA) LTD. (SUPRA) WAS RENDERED PRIOR TO THE DECI SION OF HONBLE DELHI HIGH COURT IN THE CASE OF HINDUSTAN COCA COLA BEVER AGES (P) LTD. (SUPRA). HENCE IT RENDERS NO HELP TO THE ASSESSEE. THEREFORE, WE ARE NOT IN AGREEMENT WITH THE ARGUMENTS OF THE ASSESSEE THA T 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, T HE DEPRECIATION CANNOT BE ALLOWED ON AMOUNT OF NON-COMPETE FEE. WE ACCORDI NGLY DISMISS THIS CONTENTION OF THE ASSESSEE. 21. 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 DE CISION OF THE TRIBUNAL, CHENNAI BENCH IN THE CASE OF ORCHID CHEMI CALS & PHARMACEUTICALS LTD. VS. ASSTT. CIT (2011) 137 TTJ (CHENNAI) 373 : (2010) 48 DTR (CHENNAI) 441 WHEREIN IT HAS BEEN HEL D THAT PAYMENT OF NON-COMPETE FEE SHOULD BE SPREAD OVER IN THE LIGHT OF DECISION OF HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTR IAL INVESTMENT CORPORATION LTD. VS. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). WE HAVE CONSIDERED THE SUBMISSIONS MADE BY TH E ASSESSEE. WE FOLLOWING THE DECISION OF SPECIAL BENCH, DELHI IN T HE CASE OF TECUMSEH INDIA (P) LTD. (SUPRA) HAVE HELD THAT PAYMENT OF NO N-COMPETE FEE IS CAPITAL EXPENDITURE. IN MADRAS INDUSTRIAL INVESTMEN T CORPORATION LTD. (SUPRA) THE ASSESSEE ISSUED DEBENTURES IN DECEMBER, 1966 AT A DISCOUNT. THE TOTAL DISCOUNT ON ISSUE OF RS. 1.5 CR ORES AMOUNTED TO RS. 3 LAKHS. FOR ASST. YR. 1968-69 THE ASSESSEE WROTE O FF RS. 12,500 OUT OF THE TOTAL DISCOUNT OF RS. 3 LAKHS BEING THE PROPORT IONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS ENDING WITH 3 0TH JUNE, 1967, TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WHICH WA S 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 A LLOWED DEDUCTION OF RS. 12,500. ON FURTHER APPEAL THE TRIBUNAL HELD THA T THE ENTIRE EXPENDITURE OF RS. 3 LAKHS WAS ALLOWABLE AS EXPENDI TURE INCURRED FOR THE PURPOSE OF THE BUSINESS. ON REFERENCE THE HIGH COUR T 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. HE NCE 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 HONBLE SUPREME COURT IT WAS HELD THAT LIABILITY TO :-9-: ITA NOS. 1050 & 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 BUSINES S ACTIVITIES. IT WAS, THEREFORE, EXPENDITURE. THE ASSESSEE HAD IN ITS RET URN CORRECTLY CLAIMED A DEDUCTION ONLY IN RESPECT OF PROPORTIONATE PART O F THE DISCOUNT OF RS. 12,500 OVER THE RELEVANT ACCOUNTING PERIOD IN QUEST ION. THIS WAS ALSO IN CONFORMITY WITH THE ACCOUNTING PRACTICE OF SHOWING THE DISCOUNT IN THE 'DISCOUNT ON DEBENTURE ACCOUNT' WHICH WAS WRITTEN O FF 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 ASSE SSMENT YEAR. HONBLE SUPREME COURT ALSO HELD THAT ORDINARILY, REVENUE EX PENDITURE 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 JUST IFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SP READ AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE EN TIRE EXPENDITURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PRO FITS OF A PARTICULAR YEAR. ISSUING DEBENTURES IS AN INSTANCE WHERE, ALTH OUGH THE ASSESSEE HAS INCURRED THE LIABILITY TO PAY THE DISCOUNT IN T HE 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 TH E COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THEREFORE, BE SPREAD OVER THE PERIOD OF DEBENTURES. FROM THE DECISION OF HONBLE 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 T HE PERIOD OF BENEFIT DERIVED BY AN ASSESSEE. HOWEVER, WHERE THE EXPENDIT URE 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 ALLO WED TO BE SPREAD OVER FOR THE PERIOD OF SEVEN YEARS. THEREFORE, THE CLAIM OF THE ASSESSEE FOR SPREAD OVER OF THE EXPENDITURE CANNOT BE ENTERTAINE D. ACCORDINGLY, THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALSO DIS MISSED. 12. WE RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE TRIBUNAL, DO NOT FIND ANY MERITS ON THIS ISSUE IN THE APPEAL OF THE ASSES SEE. HENCE THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 5. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESS MENT YEAR 2003-04, THE :-10-: ITA NOS. 1050 & 1051/MDS/2017 COMMON GROUND RAISED IN THE ASSESSMENT YEARS 2009-1 0 & 2010-11 ARE DISMISSED. 6. IN THE RESULT, THE ASSESSEES APPEALS IN ITA NO. 1050 & 1051/MDS/2017 ARE DISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 05 TH DAY OF OCTOBER, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) ! ' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 0 /DATED: 05 TH OCTOBER, 2017 JPV & )12 32 /COPY TO: 1. %/ APPELLANT 2. )*% /RESPONDENT 3. 4 ( )/CIT(A) 4. 4 /CIT 5. 2 ) /DR 6. 7 /GF