VOSSLOH SCHWABE INDIA P. LTD, MUMBAI V. DCIT 3(3), MUMBAI

ITA 3567/MUM/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92445 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 09-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 04-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SACHIDANAND DUBE
• Assessee Lawyers: JIGER SAIYA
• Keywords: Depreciation
• Section: 143(3); 32

Judgement Text

K IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ./ I.T.A. NOS. 3567 TO 3569 /MUM/2011 ( / ASSESSMENT YEARS : 2002-03, 2003-04 & 2004-05 M/S VOSSLOH SCHWABE INDIA PVT. LTD., C/O MZS & ASSOCIATES, CHARTERED ACCOUNTANTS, 1116, RAHEJA CHAMBERS, LEVEL 11, FREE PRESS JOURNAL ROAD, NARIMAN POINT, MUMBAI 400 021. / VS. DY. COMMISSIONER OF INCOME TAX 3(3), MUMBAI. ./ PAN : AAACV5892J ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI JIGER SAIYA R E SPONDENT BY : SHRI SACHIDANAND DUBE / DATE OF HEARING : 12-03-2015 / DATE OF PRONOUNCEMENT : 24-04-2015 [ !' / O R D E R PER R.C. SHARMA, A.M . : THESE ARE THE APPEALS FILED BY THE ASSESSEE AGAINST THE ORDERS PASSED BY THE LD. CIT(A) -4, MUMBAI FOR THE ASSESSMENT YEARS 2002-03, 2003-04 & 2004-05 IN THE MATTER OF ORDER PASSED U/S 143(3) R. W.S. 147 OF THE INCOME TAX ACT, 1961. 2. COMMON GRIEVANCE OF THE ASSESSEE IN ALL THE YEA RS RELATES TO THE DECLINE OF CLAIM OF DEPRECIATION ON THE NON-COMPETE RIGHTS. ITA 3567 TO 3569/M/11 2 4. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS INC ORPORATED IN 1997 AS A PRIVATE LIMITED COMPANY UNDER THE COMPANIES ACT, 19 56 WITH THE OBJECTIVE TO MARKET AND DISTRIBUTE THE PRODUCTS OF THE VOSSLOH G ROUP IN INDIA. THE ASSESSEE COMPANY ENTERED INTO A NON-COMPETE AGREEME NT WITH MR. SHEKHAR SHAH TO PREVENT HIM FROM STARTING A BUSINESS IN IN DIA IN COMPLETION WITH THAT OF ASSESSEE COMPANY IN INDIA. AS PER THE NON- COMPETE FEE AGREEMENT THE ASSESSEE COMPANY NOT ONLY PREVENTED MR. SHEKHAR SHA H FROM CARRYING ON COMPETETITIVE BUSINESS BUT ALSO EMPLOYED HIM FOR CA RRYING ON ITS BUSINESS. THUS THE ASSESSEE COMPANY HAD NOT ONLY OBTAINED A R ESTRICTIVE ADVANTAGE BUT ALSO EMPLOYED MR. SHEKHAR SHAH TO PROMOTE AND CARRY ON SUCH BUSINESS FOR THE ASSESSEE COMPANY, WHICH WAS ESSENTIALLY AN ENHA NCEMENT OF BUSINESS RIGHT. THE AMOUNT SO PAID TO MR. SHEKHAR SHAH WAS C APITALIZED IN THE BOOKS OF ACCOUNT AND DEPRECIATION WAS CLAIMED. HOWEVER, THE CLAIM WAS REJECTED BY THE A.O. ON THE PLEA THAT NON-COMPETE FEE CANNOT BE TREATED AS AN INTANGIBLE ASSET FOR CLAIMING THE DEPRECIATION. BY THE IMPUGNE D ORDER, THE LD. CIT(A) UPHELD THE ORDER OF THE A.O. AND AGGRIEVED BY THIS THE ASSESSEE IS IN FURTHER BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND CA REFULLY GONE THROUGH THE ORDERS OF LOWER AUTHORITIES AND FOUND FROM RECO RD THAT THE ASSESSEE COMPANY HAS PAID AN AMOUNT OF RS. 50,00,000/- TO MR . SHEKHAR SHAH BY ENTERING NON-COMPETE AGREEMENT SO AS TO PREVENT HIM FROM STARTING A BUSINESS IN INDIA IN COMPLETION WITH THAT OF THE AS SESSEE COMPANY. THE ASSESSEE COMPANY, IN ADDITION TO PREVENT HIM FROM C ARRYING ON COMPETITIVE BUSINESS ALSO EMPLOYED MR. SHEKHAR SHAH FOR CARRYIN G ON ITS BUSINESS. THE GENUINENESS OF THE AGREEMENT HAS NOT BEEN DOUBTED A ND ACTUAL PAYMENT HAS ALSO BEEN MADE. THUS BY ENTERING THE NON-COMPETE AG REEMENT, THE ASSESSEE COMPANY NOT ONLY OBTAINED A RESTRICTIVE ADVANTAGE B UT ALSO EMPLOYED MR. ITA 3567 TO 3569/M/11 3 SHEKHAR SHAH TO PROMOTE AND CARRY ON SUCH BUSINESS FOR THE ASSESSEE COMPANY WHICH WAS ESSENTIALLY AN ENHANCEMENT OF BUS INESS RIGHT. 6. THE ASSESSEES CLAIM FOR DEPRECIATION ON NON-COM PETE FEE IS COVERED BY THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. INGERSOLL RAND INTERNATIONAL IND. LTD WHEREIN THE HONBLE HEL D AS UNDER:- WHAT IS TO BE SEEN IS, WHAT ARE THE NATURE OF INTA NGIBLE ASSETS WHICH WOULD CONSTITUTE BUSINESS OR COMMERCIAL RIGHTS TO B E ELIGIBLE FOR DEPRECIATION. IN THIS REGARD, IT IS NECESSARY TO NO TICE THAT THE INTANGIBLE ASSETS ENUMERATED IN SECTION 32 EFFECTIVELY CONFER A RIGHT UPON AN ASSESSEE FOR CARRYING ON A BUSINESS MORE EFFICIENTL Y BY UTILIZING AN AVAILABLE KNOWLEDGE OR BY CARRYING ON A BUSINESS TO THE EXCLUSION OF ANOTHER ASSESSEE. A NON-COMPETE RIGHT ENCOMPASSES A RIGHT UNDER WHICH ONE PERSON IS PROHIBITED FROM COMPETING IN BUSINESS WITH ANOTHER FOR A STIPULATED PERIOD. IT WOULD BE THE RIGHT OF THE PER SON TO CARRY ON A BUSINESS IN COMPETITION BUT FOR SUCH AGREEMENT OF N ON-COMPETE. THEREFORE THE RIGHT ACQUIRED UNDER A NON-COMPETE AGREEMENT IS A RIGHT FOR WHICH A VALUABLE CONSIDERATION IS PAID. THIS RIGHT IS ACQUI RED SO AS TO ENSURE THAT THE RECIPIENT OF THE NON-COMPETE FEE DOES NOT COMPE TE IN ANY MANNER WITH THE BUSINESS IN WHICH HE WAS EARLIER ASSOCIATED. GENERALLY, NON-COMPETE FEE IS PAID FOR A DEFINITE P ERIOD. THE IDEA IS THAT BY THAT TIME, THE BUSINESS WOULD STAND FIRMLY ON IT S FOOTING AND CAN SUSTAIN LATER ON. THIS CLEARLY SHOWS THAT THE COMME RCIAL RIGHT COMES INTO EXISTENCE WHENEVER THE ASSESSEE MAKES PAYMENT FOR N ON-COMPETE FEE. HERE THE DOCTRINE OF EJUSDEM GENERIS WOULD COME INT O OPERATION AND THEREFORE THE NON-COMPETE FEE VESTS A RIGHT IN THE ASSESSEE TO CARRY ON BUSINESS WITHOUT COMPETITION WHICH IN TURN CONFERS A COMMERCIAL RIGHT TO CARRY ON BUSINESS SMOOTHLY. 7. THIS ISSUE IS ALSO COVERED BY THE DECISION OF HO NBLE MADRAS HIGH COURT IN THE CASE OF PENTASOFT TECHNOLOGIES LTD. VS. DCIT , 264 CTR 187 (MAD HC) WHEREIN THE HONBLE COURT HELD AS UNDER:- THE AGREEMENT BETWEEN THE PARTIES IS A COMPOSITE A GREEMENT. UNDER THE AGREEMENT, THE TRANSFEROR HAD TRANSFERRED ALL ITS R IGHTS, COPY RIGHTS, TRADE MARKS IN RESPECT OF THE TRADE MARK 'PENTASOFT' AS W ELL AS THE TRAINING AND DEVELOPMENT DIVISION EXCLUSIVELY TO BE EXPLOITED BY THE ASSESSEE. IN ORDER TO STRENGTHEN THE AFORESAID RIGHTS, THERE WAS A NON COMPETE CLAUSE BY VIRTUE OF WHICH THE' TRANSFEROR WAS RESTRAINED FROM USING THE SAME TRADE MARK, COPYRIGHTS, ETC. THEREFORE, THE NON COMPETE C LAUSE UNDER AGREEMENT SHOULD BE READ AS A SUPPORTING CLAUSE TO THE TRANSFEROR OF THE COPY RIGHTS AND PATENTS RATHER TO STRENGTHEN THE CO MMERCIAL RIGHT, WHICH ITA 3567 TO 3569/M/11 4 WAS TRANSFERRED IN FAVOUR OF THE ASSESSEE. REJECTED THE ARGUMENT OF REVENUE THAT NON-COMPETE FEE IS IN THE NATURE OF A NEGATIVE RIGHT AND IT CANNOT BE OF A COMMERCIAL RIGHT OF SIMILAR NATURE A ND THE EXPRESSION 'SIMILAR NATURE' SHALL BE RELATABLE TO PATENTS, COP Y RIGHTS AND TRADE MARK LICENCE OR FRANCHISE OR ANY OTHER BUSINESS. 8. WE FIND THAT THIS ISSUE IS ALSO COVERED BY THE D ECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF IND GLOBAL CO RPORATE FINANCE (P.) LTD. VS. ITO, 19 ITR (T) 483 (MUMBAI TRIB) WHEREIN IT WA S HELD THAT NON-COMPETE RIGHT WAS AN INTANGIBLE ASSET U/S 32(1)(II) OF THE ACT. 9. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT I N THE ACTION OF LOWER AUTHORITIES DECLINING THE CLAIM OF DEPRECIATION ON NON-COMPETE PAYMENT MADE FOR ACQUIRING NON-COMPETE RIGHT WHICH IS AN INTANGI BLE ASSET ELIGIBLE FOR CLAIM FOR DEPRECIATION U/S 32(1)(II) OF THE ACT. 10. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLO WED IN TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH APRIL, 2015. !' # $% &! ' 24-04-2015 ( ) SD/- SD/- (I.P. BANSAL) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED [ .6../ RK RKRK RK , SR. PS