Arkema Peroxides India Private Limited, CHENNAI V. DCIT Corporate Circle 1(1), CHENNAI

ITA 1319/CHNY/2018

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5174 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2013-2014
• Appeal Filed On: 19-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• 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. 1318 & 1319/CHNY/2018 /ASSESSMENT YEARS : 2006-07 & 2013-14 M/S. ARKEMA PEROXIDES INDIA PVT. LTD., 1 ST FLOOR, BALMER LAWRIE HOUSE, NO. 628, ANNA SALAI, TEYNAMPET, CHENNAI 600 018. [PAN: AAACE 1713F] VS. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1(1), CHENNAI. ( /APPELLANT) ( /RESPONDENT) ASSESSEE BY : SHRI. SANJAY KUMAR, ADVOCATE REVENUE BY : SHRI. CLEMENT RAMESH KUMAR, JCIT $ /DATE OF HEARING : 24.09.2018 $ /DATE OF PRONOUNCEMENT : 04.10.2018 / 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)-3, CHENNAI IN ITA NOS. 31/0 8-09/A-1 AND 189/16- 17/A-1 DATED 30.01.2018 FOR ASSESSMENT YEARS 2006-0 7 & 2013-14, RESPECTIVELY. :- 2 -: ITA NOS. 1318 & 1319/CHNY/2018 2. M/S. ARKEMA PEROXIDES INDIA P. LTD., THE ASSESSE E, IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF POLYMERIZATION INITIATORS AND CROSS LINKING AGENTS. THE ASSESSEE CLAIMED DEPRECIATION ON NON-COMPETING FEES FOR ITS RETURN IN ASSESSMENT YEARS 2006-07 & 2013-14. WHILE COMPLETING THE ASSESSMENTS FOR RESPECTIVE ASSESSMENT YEARS, THE AS SESSING OFFICER HELD THAT THE ASSESSEES SIMILAR CLAIM MADE IN ASSESSMENT YEA R 2003-04 WAS DISALLOWED AND THE LD. CIT(A) HAS CONFIRMED SUCH DISALLOWANCE AND HENCE, HE DISALLOWED THE ASSESSEES CLAIM. AGGRIEVED, THE ASSESSEE FILE D AN APPEALS BEFORE THE LD. CIT(A). BEFORE THE LD. CIT(A), THE AR HAS FAIRLY C ONCEDED THAT THE ISSUE HAS BEEN DECIDED BY THE HONBLE ITAT, CHENNAI AGAINST T HE ASSESSEE VIDE ITS ORDERS IN ITA NOS. 2039, 2040 & 2041/MDS/2012 FOR A SSESSMENT YEARS 2004- 05, 2005-06 & 2007-08, RESPECTIVELY. FOLLOWING THE M, HE SUSTAINED THE ADDITIONS MADE BY THE AO FOR BOTH THE ASSESSMENT YE ARS. FURTHER, IN THE ASSESSMENT MADE FOR ASSESSMENT YEAR 2006-07, FOLLO WING THE DECISION TAKEN IN EARLIER YEARS, THE AO HAS RESTRICTED THE ASSESSE ES DEPRECIATION CLAIM FROM 50% IN RESPECT OF CERTAIN VEHICLES TO 20%. AGGRIE VED, THE ASSESSEE FILED APPEAL. FOLLOWING THE EARLIER DECISIONS, THE LD. CI T(A) SUSTAINED SUCH ADDITION. 3. AGGRIEVED AGAINST THOSE ORDERS, THE ASSESSEE FIL ED THESE APPEALS. BEFORE US, THE AR FAIRLY CONCEDED THAT ON SIMILAR I SSUE, THIS TRIBUNAL IS AGAINST THE ASSESSEE AND THE ASSESSEE HAS FILED AN APPEAL B EFORE THE HONBLE JURISDICTIONAL HIGH COURT. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS PASSED BY THE TRIBUNAL. THE RELEVANT PO RTION OF THE ORDER IN THE :- 3 -: ITA NOS. 1318 & 1319/CHNY/2018 ASSESSEES CASE IN ITA NOS. 2039, 2040 & 2041/MDS/2 012 DATED 30.10.2014 ARE EXTRACTED AS UNDER: 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE COMMON ISSUE O F ALLOWANCE OF DEPRECIATION ON NON- COMPLETE FEES INVOLVED IN THESE APPEALS WAS CONSIDE RED BY THE ITAT IN I.T.A. NO. 2212/MDS/2006 DATED 13.01.2012 FOR THE ASSESSMENT Y EAR 2003-04 AND DECIDED THE ISSUED AGAINST THE ASSESSEE. THE RELEVANT PORTION O F THE ORDER IS EXTRACTED AS UNDER: 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 A CCOUNT OF NON-COMPETE FEE. THE ASSESSEES CLAIM FOR DEPRECIATION ON THE ABOVE EXPENDITURE 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 ABOVE I N 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 S YSTEMS [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 T HAT 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, D ISTRIBUTING AND SELLING AMONG OTHER THINGS, VARIOUS ELECTRONIC EQUIPMENTS AND PRO DUCTS 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 UNDER TAKING OR ASSIST IN SETTING UP, UNDERTAKING ANY BUSINESS IN INDIA OF SELLING/MARKET ING 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 PRO DUCTS. THOUGH, THE BUSINESS OF JOINT VENTURE I.E. SHARP BUSINESS SYSTEMS (INDIA) L TD. APPEARS SIMILAR TO THAT OF L&T LTD. BUT PAYMENT OF RS. 3,00,00,000 HAS BEEN MA DE IN LIEU OF THE LATTER, NOT SETTING UP UNDERTAKING/ASSISTING IN SETTING UP, UND ERTAKING 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. WA S 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 Y EARS HAS BEEN ELIMINATED. THE :- 4 -: ITA NOS. 1318 & 1319/CHNY/2018 PERIOD OF 7 YEARS IS QUITE LONG DURING WHICH ANY NE W 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 M ARKET SHARE. BY KEEPING AWAY L&T LTD. FROM THE SAME BUSINESS, THE ASSESSEE HAD V ISUALIZED TO ACQUIRE A GOOD MARKET SHARE. THE CONTENTION OF THE ASSESSEE THAT A FTER A PERIOD OF 7 YEARS L&T LTD. WOULD HAVE ENTERED IN THE SAME TRADE AND, THER EFORE, THE EXPENDITURE SHOULD BE TREATED AS REVENUE IN NATURE, WE ARE NOT IN AGRE EMENT WITH THIS ARGUMENTS OF THE ASSESSEE. THE PAYMENT HAS BEEN MADE TO WARD OFF THE COMPETITION FOR A PERIOD OF 7 YEARS DURING WHICH ANY COMPANY COULD HA VE SET UP ITS PRODUCTS 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 NOT CREATED ANY ASSET OR ADVANTAGE IN THE CAPITAL FIELD AND, THEREFORE, IT SHOULD BE REVE NUE IN NATURE. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MADRAS AUTO SE RVICES (P) LTD. (SUPRA) CANNOT BE APPLIED TO THE FACTS OF THE CASE BEFORE US. IN T HAT 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 CIRCUMST ANCES, HONBLE SUPREME COURT HELD THAT NO ASSET OF ENDURING NATURE WAS CREATED A ND, THEREFORE, THE EXPENDITURE WAS TO BE TREATED AS REVENUE IN NATURE. THE RATIO O F THIS DECISION IS OF NO AVAIL IN THE CASES OF NON-COMPETE PAYMENTS AS IN THAT CASE T HE INCURRING OF EXPENSES DID NOT CREATE ANY ASSET AS AGAINST THAT IT HAS BEEN CL EARLY 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 ASSESSE E HAD ACQUIRED AN ADVANTAGE OF AN ENDURING NATURE WHICH ENSURED FOR THE BENEFIT OF THE WHOLE OF THE BUSINESS. THE DECISION OF HONBLE GUJARAT HIGH COURT RELIED U PON 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 LAI D 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 HONBLE SUPR EME COURT IN THE CASE OF ASSAM BENGAL CEMENT COMPANY VS. CIT (SUPRA) HAS BEEN REFE RRED IN ALMOST ALL THE CASES TOUCHING THIS ISSUE AND TILL THE DATE THE SAID DECI SION 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 W ARD OFF COMPETITION IN BUSINESS TO A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE AND TO HOLD THEM CAPITAL EXPENDITURE IT IS NOT NECESSARY THAT NON-CO MPETE FEE IS PAID TO CREATE :- 5 -: ITA NOS. 1318 & 1319/CHNY/2018 MONOPOLY RIGHTS. HONBLE 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 REGISTRA R FOR EXPANSION OF THE CAPITAL BASE OF THE COMPANY WAS DIRECTLY RELATED TO CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND ALTHOUGH INCIDENTALLY THAT WOULD CERTAI NLY HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELP IN PROFIT MAKING, IT STIL L RETAINS THE CHARACTER OF CAPITAL EXPENDITURE SINCE THE EXPENDITURE WAS DIRECTLY RELA TED TO THE EXPANSION OF CAPITAL BASE OF THE COMPANY AND THUS IT WAS NOT AN EXPENSE IN THE NATURE OF REVENUE. HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. J.K . SYNTHETICS LTD. (2009) 222 CTR (DEL) 339 : (2009) 17 DTR (DEL) 134 : (2009) 309 IT R 371 (DEL) HAD HELD THAT THE BASIC TEST TO DETERMINE THE NATURE OF AN EXPENDITUR E 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 EXPENDITU RE, (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 A T THE START OF BUSINESS OF JOINT VENTURE. THEREFORE, ASSESSEES CASE WILL FALL UNDER THE FIRST TEST LAID DOWN IN CIT VS. J.K. SYNTHETICS LTD. (SUPRA) WHICH DESCRIBES THAT I F EXPENDITURE IS MADE FOR INITIAL OUTLAY OR FOR THE EXTENSION OF BUSINESS OR A SUBSTA NTIAL REPLACEMENT OF EQUIPMENT THEN IT WILL FALL UNDER THE 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 TH E 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 EXPENDIT URE IS MADE FOR INITIAL OUTLAY OR FOR EXPANSION OF BUSINESS OR FOR A SUBSTANTIAL R EPLACEMENT OF EQUIPMENT, THEN IT WOULD FALL UNDER CAPITAL EXPENDITURE. THE PAYMENT O F NON-COMPETE FEE FOR ACQUISITION OF BUSINESS HAS BEEN HELD AS CAPITAL EX PENDITURE 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 O F 7 YEARS AT THE START OF THE BUSINESS AND HENCE WILL FORM PART OF INITIAL OUTLAY OF THE BUSINESS. 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 TREATED 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 CASH OR KIND, UNDER AN A GREEMENT FOR NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS WILL BE CH ARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN T HE APPEAL BEFORE US THE :- 6 -: ITA NOS. 1318 & 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 BUS INESS INCOME 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 T O TREAT THE PAYMENT OF NON- COMPETE FEE AS REVENUE EXPENDITURE IN THE HAND OF T HE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. 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 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 A DDITION 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 DECISION OF TRIBU NAL IN THE CASE OF ITO VS. MEDICORP. TECHNOLOGIES INDIA LTD. (SUPRA) DEPRECIAT ION 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 BEI NG INTANGIBLE ASSETS ACQUIRED ON OR AFTER 1ST DAY OF APRIL, 1998, OWNED WHOLLY AND P ARTLY 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 I S CLEAR THAT (I) THE ASSET SHOULD BE AN INTANGIBLE ASSET; (II) SHOULD BE WHOLLY OR PARTL Y OWNED BY THE ASSESSEE; AND (III) USED FOR THE PURPOSES OF BUSINESS OR PROFESSION. AL L THREE CONDITIONS ARE CUMULATIVE AND NON-FULFILMENT OF ANY OF THE CONDITIONS WOULD D ISENTITLE 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 RESID UARY PART OF THE DEFINITION 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE'. THE INTANGIBLE ASSET FALLING IN EXPRESSION 'ANY OTHER BUSINESS OR COMMER CIAL RIGHTS OF SIMILAR NATURE' SHOULD BELONG TO SAME GENUS TO WHICH KNOW-HOW, PATE NTS, COPYRIGHTS, TRADEMARKS, LICENSES/FRANCHISES BELONG. THEREFORE, THE EXPRESSI ON 'ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' WOULD MEAN THA T THE BUSINESS OR COMMERCIAL RIGHT SHOULD BE IN THE NATURE OF KNOW-HOW, PATENTS, COPYRIGHTS, TRADE-MARKS, LICENSES OR FRANCHISES. BY NO STRETCH OF IMAGINATIO N, THE NON-COMPETE FEE CAN BE TREATED TO HAVE BELONGED THE SAME GENUS TO WHICH KN OW-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-H OW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES/FRANCHISES ETC. ARE INTELLECTU AL PROPERTY RIGHTS, WHICH CAN BE TRANSFERRED/ASSIGNED/ LEASED OUT TO ANY OTHER PARTI ES FOR A PRICE. NON-COMPETE AGREEMENT BETWEEN TWO PARTIES IS LIKE PERSONAL SERV ICES CONTRACT WHICH IS :- 7 -: ITA NOS. 1318 & 1319/CHNY/2018 UNASSIGNABLE. PERSONAL SERVICES CONTRACT CANNOT SUR VIVE ON THE DEMISE OF EITHER OF THE PARTIES. SIMILARLY THE NON-COMPETE AGREEMENT BE TWEEN TWO PARTIES WILL COME TO AN END ON THE DEMISE OF EITHER OF THE PARTIES. WHIL E INTANGIBLE ASSETS LIKE KNOW- HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES/ FRA NCHISES ETC. CAN BE SOLD/ASSIGNED TO ANY OTHER PERSON FOR A VALUE BUT N ON-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 TRAD E 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 COMMER CIAL RIGHT FALLING IN THE 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 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 P ARA 22 HELD AS UNDER : '22.TO EFFECTIVELY UNDERSTAND WHAT WOULD CONST ITUTE AN INTANGIBLE ASSET, CERTAIN ASPECTS, LIKE THE NATURE OF GOODWILL INVOLV ED, HOW THE GOODWILL HAS BEEN GENERATED, HOW IT HAS BEEN VALUED, AGREEMENT UNDER WHICH IT HAS BEEN ACQUIRED, WHAT INTANGIBLE ASSET IT REPRESENTS, NAMELY, TRADEM ARK, RIGHT, PATENT ETC. AND FURTHER WHETHER IT WOULD COME WITHIN THE CLAUSE, NA MELY, ANY OTHER BUSINESS 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 FOLLOWIN G WORDS : '24. IT IS WORTH NOTING THAT THE MEANING OF BUSINE SS 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 EFFEC TIVELY 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 TH IS BACKGROUND, ANY RIGHT WHICH IS OBTAINED FOR CARRYING ON THE BUSINESS WITH EFFEC TIVENESS IS LIKELY TO FALL OR COME WITHIN THE SWEEP OF MEANING OF INTANGIBLE ASSET. TH E DICTIONARY CLAUSE CLEARLY STIPULATES THAT BUSINESS OR COMMERCIAL RIGHTS SHOUL D BE OF SIMILAR NATURE AS KNOW- HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRA NCHISES, ETC. AND ALL THESE ASSETS WHICH ARE NOT MANUFACTURED OR PRODUCED OVER-NIGHT, BUT ARE BROUGHT INTO EXISTENCE BY EXPERIENCE AND REPUTATION. THEY GAIN S IGNIFICANCE IN THE COMMERCIAL WORLD AS THEY REPRESENT A SIMILAR BENEFIT OR ADVANT AGE OR REPUTATION 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 IS CLEAR TH AT 'BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE' ARE NOT MANUFACTURED OR PRODUCED OVER-NIGHT, BUT ARE BROUGHT :- 8 -: ITA NOS. 1318 & 1319/CHNY/2018 INTO EXISTENCE BY EXPERIENCE AND REPUTATION. THE NO N-COMPETE FEE IS OUTCOME OF AN AGREEMENT ENTERED INTO BETWEEN TWO PARTIES. IT D OES NOT REPRESENT ANY INTANGIBLE ASSET, SUCH AS, KNOW-HOW, PATENTS, COPYR IGHTS, TRADEMARKS, LICENSES, FRANCHISES ETC. THEREFORE, IN VIEW OF DECISION OF H ONBLE DELHI HIGH COURT IN THE CASE OF HINDUSTAN COCA COLA BEVERAGES (P) LTD. (SUP RA) NON-COMPETE AGREEMENT WOULD NOT CREATE AN ASSET OF INTANGIBLE NATURE ELIG IBLE 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 HONBLE DELHI HIGH COURT IN THE CASE OF HINDUSTA N 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 N ON-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 DEPRECIAT ION CANNOT BE ALLOWED ON AMOUNT OF NON-COMPETE FEE. WE ACCORDINGLY DISMISS T HIS 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 DECISION OF THE TRIBUNAL, CH ENNAI 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 BE EN HELD THAT PAYMENT OF NON- COMPETE FEE SHOULD BE SPREAD OVER IN THE LIGHT OF D ECISION OF HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT C ORPORATION 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 T HAT PAYMENT OF NON-COMPETE FEE IS CAPITAL EXPENDITURE. IN MADRAS INDUSTRIAL IN VESTMENT 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 YE ARS 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 DED UCTION OF RS. 12,500. ON FURTHER APPEAL THE TRIBUNAL HELD THAT THE ENTIRE EX PENDITURE OF RS. 3 LAKHS WAS ALLOWABLE AS EXPENDITURE INCURRED FOR THE PURPOSE O F 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 NO T CHALLENGED. HENCE THE HIGH COURT WAS CONCERNED ONLY WITH THE BALANCE AMOU NT OF RS. 2,87,500 WHICH THE HIGH COURT HELD, COULD NOT BE CONSIDERED AS EXPENDI TURE. ON FURTHER APPEAL TO THE :- 9 -: ITA NOS. 1318 & 1319/CHNY/2018 HONBLE SUPREME COURT IT WAS HELD THAT LIABILITY TO PAY THE DISCOUNTED AMOUNT OVER AND ABOVE THE AMOUNT RECEIVED FOR THE DEBENTURES WA S 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 ASS ESSEE HAD IN ITS RETURN CORRECTLY CLAIMED A DEDUCTION ONLY IN RESPECT OF PROPORTIONAT E PART OF 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 DISCOUN T IN THE 'DISCOUNT ON DEBENTURE ACCOUNT' WHICH WAS WRITTEN OFF OVER THE PERIOD OF D EBENTURES. THE ASSESSEE WAS ENTITLED TO DEDUCT A SUM OF RS. 12,500 OUT OF DISCO UNT OF RS. 3 LAKHS IN THE RELEVANT ASSESSMENT YEAR. HONBLE SUPREME COURT ALS O HELD THAT ORDINARILY, REVENUE EXPENDITURE WHICH IS INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEA R 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 SPREAD AND CLAIM IT OVER A PERIOD OF ENSUING YEARS. IN FACT, ALLOWING THE ENTIRE EXPENDI TURE IN ONE YEAR MIGHT GIVE A VERY DISTORTED PICTURE OF THE PROFITS OF A PARTICUL AR 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 T HE BUSINESS OF THE COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD, THERE FORE, BE SPREAD OVER THE PERIOD OF DEBENTURES. FROM THE DECISION OF HONBLE SUPREME CO URT IT IS CLEAR THAT EXPENDITURE WHICH IS REVENUE IN NATURE AND IS INCUR RED TO SECURE A BENEFIT OVER A NUMBER OF YEARS CAN BE SPREAD OVER THE PERIOD OF BE NEFIT DERIVED BY AN ASSESSEE. HOWEVER, WHERE THE EXPENDITURE INCURRED IS IN THE N ATURE OF CAPITAL EXPENDITURE, THE SPREAD OVER CANNOT BE ALLOWED. SINCE WE HAVE HE LD THAT THE EXPENDITURE INCURRED BY WAY OF NON-COMPETE FEE IS CAPITAL IN NA TURE, IT CANNOT BE ALLOWED TO BE SPREAD OVER FOR THE PERIOD OF SEVEN YEARS. THEREFOR E, 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 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. 7. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF TH E COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04, THE COMMON GROUND RAISED IN THE ASSESSMENT YEARS 2004-05, 2005-06 AND 2007-08 IS DISMISSED. :- 10 -: ITA NOS. 1318 & 1319/CHNY/2018 SINCE, THERE IS NO CHANGE IN THE FACTS AND LAW, RES PECTFULLY FOLLOWING THE ABOVE DECISION, THE ASSESSEES APPEALS ARE DISMISSED. 4. WE REGARD TO THE DISALLOWANCE ON CLAIM OF DEPREC IATION ON MOTOR CARS, THE AR PLEADED THAT THE LD. CIT(A) ERRED IN DISALLO WING THE CLAIM FOR DEPRECIATION @50% ON MOTOR CARS BASED ON THE TRIBUN AL DECISION IN THE ASSESSEES OWN CASE IN THE PRIOR ORDERS, WHEREIN, T HE CLAIM FOR DEPRECIATION IS DISALLOWED FOR THE REASON THAT THE ASSESSEE DOES NO T 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 ASSESSEES PROPOSAL, SUBMITTED WITHOUT PREJUDICE TO ITS PLEA, THAT THE A SSESSEE SHOULD BE ALLOWED A HIGHER DEPRECIATION AS THE WRITTEN DOWN VALUE IS HI GHER DUE TO THE DISALLOWANCE CLAIM MADE AT 50% IN THE EARLIER YEARS . 5. WE HEARD THE RIVAL SUBMISSIONS AND UPHOLD THE RE STRICTION ON THE DEPRECIATION CLAIM @ 20% ON THE IMPUGNED VEHICLES F OR THE REASON THAT THE ASSESSEE DID NOT CARRY THE BUSINESS OF PLYING THE V EHICLES ON HIRE. HOWEVER, WE DIRECT THE AO TO VERIFY AND ALLOW THE DEPRECIATI ON @ 20% ON THE ENHANCED WRITTEN DOWN VALUE DUE TO THE DISALLOWANCES OF DEPR ECIATION CLAIM MADE IN THE EARLIER YEARS. TO THIS EXTENT, THE ASSESSEES APPE AL FOR ASSESSMENT YEAR 2006- 07 IS PARTLY ALLOWED. :- 11 -: ITA NOS. 1318 & 1319/CHNY/2018 6. IN THE RESULT, THE ASSESSEES APPEAL FOR THE ASS ESSMENT YEAR 2006-07 IS PARTLY ALLOWED AND FOR ASSESSMENT YEAR 2013-14 IS D ISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 04 TH DAY OF OCTOBER, 2018 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) /ACCOUNTANT MEMBER /CHENNAI, ) /DATED: 04 TH OCTOBER , 2018 JPV $*+,-, /COPY TO: 1. / /APPELLANT 2. *0/ /RESPONDENT 3. 1 ) ( /CIT(A) 4. 1 /CIT 5. ,* /DR 6. 4 /GF