Compass Group (India) Support Services Pvt. Ltd., Haryana V. ACIT, CHENNAI

ITA 2924/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6025 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 14-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S NATARAJA
• Keywords: Depreciation; Share purchase agreement; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI . . . , , ' # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ ITA NOS.2064 & 2924/MDS/2016 & '& / ASSESSMENT YEARS : 2010-11 & 2011-12 M/S COMPASS GROUP (INDIA) SUPPORT SERVICES PVT. LTD., (FORMERLY KNOWN AS EPICUREAN ENTERPRISES PVT. LTD.) (1) H M CENTER, 1 ST FLOOR, NO.29, NUNGAMBAKKAM HIGH ROAD, CHENNAI - 600 034. (2) 402, 4 TH FLOOR, TOWER A, SPAZE I-TECH PARK, SOHNA ROAD, SECTOR-49, GURGAON, HARYANA-122018. PAN : AADCC 9070 A V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(3), CHENNAI - 600 034. ()*/ APPELLANT) (+,)*/ RESPONDENT) )* - . / APPELLANT BY : SHRI SRIRAM SESHADRI, CA +,)* - . / RESPONDENT BY : SHRI S. NATARAJA, JCIT / - 0' / DATE OF HEARING : 05.07.2017 12' - 0' / DATE OF PRONOUNCEMENT : 04.10.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: BOTH THE APPEALS OF THE ASSESSEE ARE DIRECTED AGA INST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS) -1, CHENNAI, AND PERTAIN TO ASSESSMENT YEARS 2010-11 AN D 2011-12. 2 I.T.A. NOS.2064 & 2924/MDS/16 SINCE COMMON ISSUE ARISES FOR CONSIDERATION IN BOTH THE APPEALS, WE HEARD THE APPEALS TOGETHER AND DISPOSING OF THE SAME BY THIS COMMON ORDER. 2. THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISAL LOWANCE OF DEPRECIATION ON NON-COMPETE FEE. 3. SHRI SRIRAM SESHADRI, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE DEBITED NON-C OMPETE FEE OF ` 1,33,50,599/- FOR THE ASSESSMENT YEAR 2010-11 AND ` 1,35,86,570/- FOR THE ASSESSMENT YEAR 2011-12 IN THE PROFIT & LOS S ACCOUNT AND THE SAME WERE DISALLOWED IN THE COMPUTATION STATEME NT. HOWEVER, THE ASSESSEE CLAIMED DEPRECIATION ON THE NON-COMPET E FEE FOR THE PURPOSE OF INCOME-TAX ACT. ACCORDING TO THE LD. RE PRESENTATIVE, DURING THE ASSESSMENT YEAR 2010-11, M/S EPICUREAN E NTERPRISES PVT. LTD. HAD BEEN ACQUIRED BY COMPASS GROUP OF COM PANIES BY MEANS OF SHARE PURCHASE AGREEMENT DATED 31.03.2009. THE COMPANY ALSO ENTERED INTO A NON-COMPETE FEE AGREEME NT WITH SHRI DARAYES P. DALAL, SHRI N.S. UDAYAKUMAR AND STAMFLES FOOD MANAGEMENT PTE LTD. SINGAPORE. PURSUANT TO NON-COM PETE FEE AGREEMENT, ACCORDING TO THE LD. REPRESENTATIVE, NON -COMPETE FEE 3 I.T.A. NOS.2064 & 2924/MDS/16 WAS PAID IN THREE INSTALMENTS BASED ON ANNUAL REVEN UE OF THE COMPANY. SINCE THE PAYMENT WAS MADE AT THE TIME OF ACQUISITION OF COMPANY, ACCORDING TO THE LD. REPRESENTATIVE, IT IS IN THE NATURE OF EXPENDITURE INCURRED FOR THE PURPOSE OF ACQUISITION OF THE BUSINESS OF THE ASSESSEE, THEREFORE, NON-COMPETE FEE CANNOT BE CONSIDERED AS INTANGIBLE ASSET. THE LD. REPRESENTATIVE FURTHE R SUBMITTED THAT THE EXPENDITURE IS IN THE NATURE OF CAPITAL. HOWEVE R, THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE. ON APP EAL BEFORE THE CIT(APPEALS), THE CIT(APPEALS) FOUND THAT THE AGREE MENT WAS PURELY PERSONAL, HENCE, THE ASSESSEE IS NOT ELIGIBL E FOR DEPRECIATION. 4. PLACING RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN PENTASOFT TECHNOLOGIES LTD. V. DCIT (2014) 41 TAXMA NN.COM 120, THE LD. REPRESENTATIVE FOR THE ASSESSEE SUBMITTED T HAT WHEN THERE WAS AN AGREEMENT TRANSFERRING THE RIGHTS OVER THE B USINESS AS WELL AS FOR NON-COMPETE FEE, IN THE ABSENCE OF ANY SEGRE GATION AND DISTINCTION BETWEEN THE RIGHTS OVER THE BUSINESS AN D PAYMENT TOWARDS NON-COMPETE FEE, THE ASSESSEE IS ENTITLED F OR DEPRECIATION. REFERRING TO THE JUDGMENT OF MADRAS HIGH COURT IN P ENTASOFT TECHNOLOGIES LTD. (SUPRA), MORE PARTICULARLY PARAGR APH 21, THE LD. REPRESENTATIVE SUBMITTED THAT A SIMILAR CONTENTION RAISED BY THE 4 I.T.A. NOS.2064 & 2924/MDS/16 REVENUE WAS REJECTED BY THE MADRAS HIGH COURT. THE MADRAS HIGH COURT FOUND THAT THE NON-COMPETE FEE CLAUSE UNDER T HE AGREEMENT IS TO STRENGTHEN THE COMMERCIAL RIGHT WHICH WAS TRA NSFERRED IN FAVOUR OF THE ASSESSEE. THEREFORE, ACCORDING TO TH E LD. REPRESENTATIVE, THE ASSESSEE IS ENTITLED FOR DEPREC IATION. 5. ON THE CONTRARY, SHRI S. NATARAJA, THE LD. DEPAR TMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE CLAIMED THAT THE NON- COMPETE FEE WAS FOR A PERIOD OF THREE YEARS FROM TH E DATE OF TERMINATION OF THE EMPLOYMENT OF TWO COVENANTERS. ACCORDING TO THE LD. D.R., ONE COVENANTER SHRI DARAYES DALAL WAS TER MINATED FROM THE EMPLOYMENT OF THE COMPANY. HOWEVER, THE OTHER COVENANTER SHRI UDAYAKUMAR IS STILL CONTINUING IN THE COMPANY. THEREFORE, ACCORDING TO THE LD. D.R., THE NON-COMPETE FEE AGRE EMENT IS NOT FOR A FIXED TERM. THE ASSESSING OFFICER AFTER REFERRIN G TO THE JUDGMENT OF DELHI HIGH COURT IN SHARP BUSINESS SYSTEM IN I.T .A. NO.492/2012, FOUND THAT THE NON-COMPETE FEE IS NOT AN ALLOWABLE EXPENDITURE. ACCORDING TO THE LD. D.R., THE ASSESS ING OFFICER HAS FOUND THAT THE SO-CALLED NON-COMPETE FEE AGREEMENT IS PURELY A PERSONAL ONE. THE ALTERNATIVE CLAIM OF THE ASSESSE E THAT IT WILL BE ALLOWED AS REVENUE EXPENDITURE WAS ALSO REJECTED BY THE ASSESSING 5 I.T.A. NOS.2064 & 2924/MDS/16 OFFICER. HENCE, ACCORDING TO THE LD. D.R., THE CIT (APPEALS) HAS RIGHTLY CONFIRMED THE ORDER OF THE ASSESSING OFFICE R. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE- COMPANY EARLIER KNOWN AS EPICUREAN ENTERPRISES PVT. LTD. WAS ACQUIRED BY COMPASS GROUP OF COMPANIES BY MEANS OF SHARE PURCHASE AGREEMENT. THE ONLY ISSUE ARISES FOR CONS IDERATION IS DISALLOWANCE OF DEPRECIATION ON NON-COMPETE FEE. T HE ASSESSING OFFICER FOUND THAT NON-COMPETE FEE PAID BY THE ASSE SSEE IS NOT A RIGHT AVAILABLE TO THE COMPANY WHICH CAN BE SOLD. THE ASSESSING OFFICER FURTHER FOUND THAT BUSINESS AS WELL AS COMM ERCIAL RIGHT ARE SIMILAR NATURE. ACCORDING TO SECTION 32(1)(II) OF THE ACT, IT CANNOT BE SAID TO ARISE OVERNIGHT ON ACCOUNT OF PAYMENT OF NO N-COMPETE FEE. THE ASSESSING OFFICER ALSO FOUND THAT THE PAYMENT O F NON-COMPETE FEE DID NOT RESULT IN ANY INTANGIBLE ASSET. ACCORD INGLY, THE ASSESSING OFFICER BY PLACING RELIANCE ON THE JUDGME NT OF DELHI HIGH COURT IN HINDUSTAN COCO COLA BEVERAGES PVT. LTD. (3 31 ITR 192), FOUND THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEPRECI ATION ON THE NON- COMPETE FEE. BEFORE THIS TRIBUNAL, THE ASSESSEE IS PLACING ITS 6 I.T.A. NOS.2064 & 2924/MDS/16 RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN PE NTASOFT TECHNOLOGIES LTD. (SUPRA). 7. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF M ADRAS HIGH COURT IN PENTASOFT TECHNOLOGIES LTD. (SUPRA). IN THE CASE BEFORE MADRAS HIGH COURT, THE ASSESSEE PAID NON-COM PETE FEE BY VIRTUE OF AN AGREEMENT. THE ASSESSEE CLAIMED THE S AME AS CAPITAL EXPENDITURE AND DEPRECIATION WAS ALSO CLAIMED. THE ASSESSING OFFICER REJECTED THE CLAIM OF THE ASSESSEE. THE TR IBUNAL ALSO CONFIRMED THE ORDER OF THE ASSESSING OFFICER ON THE GROUND THAT THE NON-COMPETE FEE IS NOT AN ASSET, THEREFORE, DEPRECI ATION CANNOT BE ALLOWED. ON FURTHER APPEAL BEFORE HIGH COURT, IT W AS FOUND THAT UNDER THE AGREEMENT, THE TRANSFEROR HAD ALL THE RIG HTS LIKE COPYRIGHT, TRADEMARK, ETC. THE HIGH COURT FURTHER FOUND THAT THE NON-COMPETE FEE IS A COMMERCIAL RIGHT AND THEREFORE, ELIGIBLE F OR DEPRECIATION UNDER SECTION 32(1)(II) OF THE ACT. 8. IN VIEW OF THE JUDGMENT OF MADRAS HIGH COURT IN PENTASOFT TECHNOLOGIES LTD. (SUPRA), THIS TRIBUNAL IS UNABLE TO UPHOLD THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY, THE ORD ERS OF BOTH THE AUTHORITIES BELOW ARE SET ASIDE AND THE ASSESSING O FFICER IS DIRECTED TO GRANT DEPRECIATION ON THE NON-COMPETE FEE PAID B Y THE ASSESSEE. 7 I.T.A. NOS.2064 & 2924/MDS/16 9. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE STAND ALLOWED. ORDER PRONOUNCED ON 4 TH OCTOBER, 2017 AT CHENNAI. SD/- SD/- ( ) ( . . . ) (S. JAYARAMAN) (N.R.S. GANESAN) ' / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 4 /DATED, THE 4 TH OCTOBER, 2017. KRI. - +056 76'0 /COPY TO: 1. )* /APPELLANT 2. +,)* /RESPONDENT 3. / 80 () /CIT(A)-1, CHENNAI 4. PRINCIPAL CIT, CHENNAI-1, CHENNAI 5. 69 +0 /DR 6. :& ; /GF.