M/s. SUPREME PETROCHEM LTD., MUMBAI V. DCIT CENT. CIR. - 29, MUMBAI

ITA 3669/MUM/2005

• Counselvise Citation: 366919914 RSA 2005
• Duration Of Justice: 6 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 03-05-2011
• Assessment Year: 1997-1998
• Appeal Filed On: 16-05-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATBIR SINGH
• Keywords: Business expenditure; Wholly owned subsidiary; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) AND SHRI N.V.VASUDEVAN (J.M) ITA NO.3669/MUM/2005(A.Y. 1997-98) SUPREME PETROCHEM LTD., 612, RAHEJA CHAMBERS, NARIMAN POINT, MUMBAI 21. PAN:AAACS 7249C (APPELLANT) VS. THE DCIT, CEN. CIR.29, AAYKAR BHAVAN, MUMBAI 400 021. (RESPONDENT) APPELLANT BY : SHRI HITESH TRIVEDI RESPONDENT BY : SHRI SATBIR SINGH ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 8/2/2005 OF CIT(A) OF CITY(A) CEN.V, MUMBAI RELATING TO ASSESSM ENT YEAR 1997-98. ORIGINALLY THIS APPEAL WAS HEARD ALONGWITH ANOTHER APPEAL FIELD BY THE ASSESSEE NAMELY ITA NO.3819/M/05 FOR ASSESSMENT YEA R 1998-99. BOTH THE APPEALS WERE DISPOSED OF BY COMMON ORDER DATED 25/4 /2008. THE ASSESSEE THEREAFTER FILED MA NO.664/M/08 POINTING OUT THAT G ROUND NO.1 IN ITA NO.3669/M/05 FOR ASSESSMENT YEAR 1997-98 WAS NOT DE CIDED BY THE TRIBUNAL WHILE PASSING THE ORDER DATED 25/4/2008. THE TRIBUNAL BY ITS ORDER DATED 1/4/2009 IN MA NO.664/M/08 ACCEPTED THE CLAIM OF THE ASSESSEE AND ACCORDINGLY RECALLED THE ORDER DATED 2 5/4/2008 FOR THE LIMITED PURPOSE OF DECIDING GROUND NO.1 RAISED BY THE ASSES SEE IN ITA NO.3669/M/05 FOR A.Y 1997-98. PURSUANT TO THE AFOR ESAID ORDER OF THE TRIBUNAL THE PARTIES WERE HEARD ON GROUND NO.1 RAIS ED BY THE ASSESSEE IN ITA NO.3669/M/05. THE AFORESAID GROUND OF APPEAL R EADS AS FOLLOWS: ITA NO.3669/MUM/2005(A.Y. 1997-98 2 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS) ERRED IN UPHOLDING THE ACTION OF THE LEARNED DEPUTY COMMISSI ONER OF INCOME TAX IN DISALLOWING THE CLAIM OF THE APPELLANT FOR D EDUCTION IN RESPECT OF NON-COMPETITION FEE OF RS. 4,40,00,000 AND PAYMENT FOR MARKTING NET WORK AMOUNTING TO RS.5,00,000/- PAID TO POLYCHEM L TD. THE APPELLANT SUBMITS THAT THE SAME REPRESENTS BONAFIDE BUSINESS EXPENDITURE AND OUGHT TO HAVE BEEN ALLOWED. 2. THE FACTS AND CIRCUMSTANCES UNDER THE AFORESAID GROUND OF APPEAL ARISE FOR CONSIDERATION AS FOLLOWS: THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF POLYSTYRENE. THE ASSESSEE ENTERED INTO A MEMORA NDUM OF UNDERSTANDING (MOU) ON 26/4/1996 WITH M/S. POLYCHEM LTD.(HEREINAF TER REFERRED TO AS POLYCHEM). AS PER THE MOU DATED 26/4/1996, THE ASS ESSEE PURCHASED THE BUSINESS OF MANUFACTURING POLYSTYRENE OF POLYCHEM A T ITS GOREGAON UNIT, MUMBAI, HAVING 16000 MT. CAPACITY, FOR A TOTAL CONS IDERATION OF RS. 1200 LACS. THE MOU INTER ALIA ENVISAGED THAT THE SELLIN G OF POLYSTYRENE IN POLYCHEM TO THIRD PARTIES WAS TO STOP ON 30/6/1996, I.E. THE SUSPENSION DATE, BUT POLYCHEM COULD CONTINUE TO MANUFACTURE PO LYSTYRENE FOR SALES ONLY TO THE ASSESSEE AT A PRICE TO BE MUTUALLY AGREED. FURTHER, FROM THE SAID SUSPENSION DATE, POLYCHEM WAS REQUIRED NOT TO COMPE TE WITH THE ASSESSEE IN GENERAL PURPOSE AND HIGH IMPACT POLYSTYRENE IN ALL TERRITORIES OF ITS MARKETING NET WORK. THE BREAK UP OF THE AFORESAID CONSIDERATION OF RS. 1200 LACS WAS RS.740 LACS TOWARDS COST OF COMPLETE PLANT AND MACHINERY, RS.5 LACS FOR THE TRADE MARK KNOWN AS POLYSTRON, RS. 5 LACS FOR THE EXISTING MARKETING NET WORK, RS. 10 LACS FOR GOODWILL AND RS .440 LACS TOWARDS NON COMPETITION FEE. THE SCHEDULE OF PAYMENT STIPULATE D IN THE SAID MOU WAS AS UNDER:- 1- RS. 240 LACS TO BE PAID ON THE DATE OF SIGNING OF THE MOU;R\ 2- RS. 660 LACS TO BE PAID WITHIN 15 DAYS OF THE SUSPE NSION DATE. 3- RS.300 LACS TO BE PAID WITHIN 30 DAYS OF RECEIPT OF NOTICE FROM POLYCHEM BY THE APPELLANT FOR THE HANDLING OVER OF THE PLANT AND MACHINERY. ITA NO.3669/MUM/2005(A.Y. 1997-98 3 3. ACCORDING TO THE MOU, THE GOODWILL, THE MARKETIN G NET WORK AND THE TRADEMARK, INCLUDING INFORMATION PERTAINING TO DEAL ERS AND CONSUMERS , WAS TO BE ASSIGNED / DELIVERED TO THE ASSESSEE ON THE M AKING OF PAYMENT OF THE SECOND INSTALLMENT OF RS. 660 LACS. THE PLANT AND MACHINERY WAS TO BE DELIVERED TO THE ASSESSEE ON OR BEFORE 30 TH SEPTEMBER, 1997 AT POLYCHEMS EXISTING SITE. IT WAS ALSO MENTIONED IN THE MOU T HAT POLYCHEM WOULD ENDEAVOR TO DELIVER THE PLANT AND MACHINERY TO THE ASSESSEE BY 30 TH APRIL, 1997. POLYCHEM WAS REQUIRED TO GIVE NOTICE TO THE ASSESSEE FOR HANDING OVER OF THE PLANT AND MACHINERY AND, ONCE THIS NOTICE WA S GIVEN, THE DELIVERY WAS TO BE TAKEN BY THE ASSESSEE WITHIN 30 DAYS AND COMP LETED WITHIN A PERIOD OF 120 DAYS OF RECEIPT OF SUCH NOTICE. THE LAST INSTA LLMENT WAS TO BE PAID BY THE ASSESSEE WITHIN 30 DAYS OF RECEIPT OF THE NOTIC E FROM POLYCHEM FOR HANDING OVER THE PLANT AND MACHINERY. IT WAS ALSO STATED IN THE AFORESAID MOU THAT A BANK GUARANTEE OF RS. 660 LACS WAS TO BE GIVEN BY THE ASSESSEE TO POLYCHEM WITHIN 30 DAYS OF THE EXECUTION OF THE MOU AND, SIMULTANEOUSLY, POLYCHEM, WAS TO EXECUTE A PROMISSO RY NOTE IN FAVOUR OF THE ASSESSEE WITHIN THE SAID PERIOD OF 30 DAYS. ACCORD ING TO THE MOU, THE EXISTING UNSOLD STOCK OF POLYSTYRENE HELD BY POLYCH EM WAS TO BE HANDED OVER TO THE ASSESSEE WITHIN FIVE DAYS OF THE SUSPENSION DATE BY A SEPARATE AGREEMENT. THE AFORESAID MOU WAS EFFECTIVE FOR A P ERIOD OF FIVE YEARS. THE ASSESSEE, HOWEVER, WAS NOT OBLIGED TO TAKE OVER ANY OF THE EMPLOYEES OF POLYCHEM. 4. THE ASSESSEE ENTERED INTO A SUPPLEMENTAL MEMORAN DUM OF UNDERTAKING ON 21 ST AUGSUT, 1996 WITH POLYCHEM WHEREBY THE ASSESSEE AGREED TO MAKE FURTHER PAYMENT OF RS.500 LAKHS TO P LYCHEM AGAINST TOTAL CONSIDERATION OF RS.1,200 LAKHS, WHICH AMOUNT WAS P AID BY THE ASSESSEE ON 21 ST AUGSUT, 1996. THE SAID SUPPLEMENTAL MEMORANDUM OF UNDERSTANDING ALSO AMENDED CERTAIN CLAUSES OF THE MOU DATED 26/4/ 1996. IN THE SAID SUPPLEMENTAL MOU, IT WAS ENVISAGED THAT A SUM OF RS .500 LACS SHALL BE PAID BY THE ASSESSEE TO POLYCHEM BY CREDIT TO A FIXED DE POSIT ACCOUNT IN ICICI ITA NO.3669/MUM/2005(A.Y. 1997-98 4 BANK BEFORE 23/8/1996. IT WAS ALSO STIPULATED IN THE SAID SUPPLEMENTAL MOU THAT, OUT OF THE SAID SUM OF RS. 500 LACS, A SU M OF RS.352 LACS WAS TOWARDS NON-COMPETITION FEE AND THE BALANCE WAS TO BE ADJUSTED AGAINST PLANT AND MACHINERY. THE BALANCE AMOUNT OF RS. 160 LACS, PAYABLE AGAINST THE SECOND INSTALLMENT OF THE MOU DATED 26.04.1996, WAS TO BE PAID ON VACATION OF THE COURTS ORDER AND ON IMMEDIATE DELI VERY OF THE PLANT & MACHINERY BY POLYCHEM TO THE ASSESSEE. IT WAS ALS O STATED IN THE SAID SUPPLEMENTAL MOU THAT POLYCHEM WOULD BE ENTITLED TO MANUFACTURE POLYSTYRENE UP TO 100 MT. PER YEAR FOR THE NEXT THR EE YEARS ENDING WITH APRIL, 20. 1999 AT ITS PLANT AT VADODARA, SO LONG AS POLYC HEM SELLS THE POLYSTYRENE SO MANUFACTURED ONLY TO THE ASSESSEE AT A PRICE TO BE MUTUALLY AGREED UPON. IT WAS ALSO AGREED BY POLYCHEM THAT IT SHALL NOT TR ADE IN POLYSTYRENE NOR SET UP ANY MANUFACTURING FACILITY, DIRECTLY OR INDIRECT LY OR THROUGH OR BY COMPANIES BELONGING TO MR. TANIL TILAKCHAND GROUP, NOR ASSET ANY OTHER PERSON WITH ANY CAPACITY TO MANUFACTURE OR TRADE IN POLYSTYRENE. IT WAS FURTHER AGREED THAT THE TECHNICAL INFORMATION AND D RAWINGS ETC. SHALL BE HANDED OVER BY POLYCHEM TO THE ASSESSEE ON OR BEFOR E 15/10/1996. 5. A SECOND SUPPLEMENTAL MOU WAS ENTERED INTO BETWE EN THE ASSESSEE AND POLYCHEM ON 29/01/1997. THIS AGREEMENT STATED THAT A SUM OF RS. 500 LACS WAS PAID BY THE ASSESSEE TO POLYCHEM ON 21/8/1 996 AND THAT A FURTHER SUM OF RS.138.10 LACS WAS BEING PAID BY THE ASSESS EE TO POLYCHEM TOWARDS FULL ADJUSTMENT OF THE BALANCE AMOUNT OF RS. 160 LA CS, PAYABLE AS PER THE SUPPLEMENTAL MOU DATED 21/8/1996, AFTER DEDUCTING C ERTAIN AMOUNTS DUE FROM POLYCHEM TO THE ASSESSEE. THE AFORESAID BALAN CE AMOUNT OF RS. 138.10 LACS WAS ALSO PAID BY THE ASSESSEE TO POLYCHEM BY C HEQUE AS PER THE FAX/LETTER DATED 28/01/1997 OF POLYCHEM TO THE ASS ESSEE. 6. ON 17/3/1997, THE ASSESSEE ENTERED INTO A FORMAL NON-COMPETITION BOND WITH POLYCHEM. THE RELEVANT CLAUSES OF THE AF ORESAID NON-COMPETITION BOND READ AS UNDER:- ITA NO.3669/MUM/2005(A.Y. 1997-98 5 WHEREAS A) BY A MEMORANDUM OF UNDERSTANDING IN RESPECT OF TH E INTENDED SALE OF POLYSTYRENE BUSINESS OF POLYCHEM MADE ON TH E 26 TH DAY OF APRIL 1996 BETWEEN THE PARTIES HERETO (HEREINAFTER REFRRED TO AS THE MOU) POLYCHEM AGREED TO SELL AND TRANSFER TO SUPRE ME INTER ALIA THE TRADEMARK POLYSTRON (HEREINAFTER REFERRED TO AS THE SAID TRADEMARK) MARKETING NETWORK, I.E. INFORMATION PER TAINING TO DEALERS AND CONSUMERS AND GOODWILL RELATING TO THE POLYSTYRENE BUSINESS AS DESCRIBED IN THE MOU (HEREAFTER REFERR ED TO ASTHE SAID ASSETS) ON THE TERMS AND CONDITIONS AND CONDITIONS AND FOR THE CONSIDERATION SET OUT IN THE MOU; B) UNDER THE MOU IT WAS ALSO AGREED BY AND BETWEEN THE PARTIES THAT ON OR BEFORE 30 TH JUNE 1996(THEREIN AND HEREINAFTER REFERRED TO AS THE SUSPENSION DATE). POLYCHEM SHALL CEASE TO SE LL POLYSTYRENE AND IT WAS ALSO AGREED UNDER THE SUPPLEMENTAL MOU D ATED 29 TH DAY OF JANUARY 1997 THAT UPTO 30 TH JUNE 2001 OR UNTIL THE EXPIRY OF FOUR YEARS FROM THE DATE OF COMPLETION OF DISMANTLI NG AND TRANSPORTATION OF EQUIPMENT BY SUPREME FROM POLYCHE MS SITE, WHICHEVER IS EARLIER, POLYCHEM WOULD NOT COMPETE WI TH SUPREME IN GENERAL PURPOSE AND HIGH IMPACT POLYSTRENE BUSINES S (HEREAFTER REFERRED TO AS THE BUSINESS). HOWEVER, AS PROVID ED IN CLAUSE 7 OF SUPPLEMENTAL MEMORANDUM OF UNDERSTANDING DATED 21 ST AUGUST, 1996, POLYCHEM IS ENTITLED TO MANUFACTURE POLYSTYRE NE UPTO 100 MT PER YEAR FOR THE NEXT THREE YEARS ENDING WITH AP RIL, 30,1999 AT THE PLANT AT VADODARA SO LONG AS POLYCHEM SELLS THE POLYSTYRENE SO MANUFACTURED ONLY TO SUPREME AT A PRICE TO BE MUTUA LLY AGREED. C) POLYCHEM HAD BEEN ENGAGED IN THE BUSINESS OF SEVERA L YEARS AND HAVE DEVELOPED AND ACQUIRED INFORMATION AND EXPERT ISE IN ALL AREAS OF MANUFACTURE, SALE, DISTRIBUTION AND MARKETING TE CHNIQUES OF THE BUSINESS INCLUDING THE SETTING UP OF A LARGE MARKET ING NETWORK (HEREINAFTER CALLED THE KNOWLEDGE) NOW IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: 1) POLYCHEM HEREBY TRANSFERS AND ASSIGNS TO SUPREME TH E SAID ASSETS AND CONSEQUENTLY THE BUSINESS AND KNOWLEDGE OF POLY CHEM TO SUPREME. POLYCHEM UNDERTAKES THAT IT WILL NOT EITH ER ON ITS OWN ACCOUNT OR IN CONJUNCTION WITH OTHERS AND WHETHER D IRECTLY OR INDIRECTLY UPTO 30 TH JUNE, 2001 OR UNTIL THE EXPIRY OF FOUR YEARS ITA NO.3669/MUM/2005(A.Y. 1997-98 6 FROM THE DATE OF COMPLETION OF DISMANTLING AND TRAN SPORTATION OF EQUIPMENT BY SUPREME FROM POLYCHEM A) ESTABLISH, DEVELOP, CARRY ON OR ASSIT IN CARRYING ON OR BE ENGAGED, CONCERNED, INTERESTED OR EMPLOYED IN ANY B USINESS ENTERPRISE OR VENTURE COMPETING WITH THE BUSINESS. B) ACQUIRE AT ANY TIME ANY COMPANY OR OTHER ENTITY OR BUSINESS AS A RESULT OF WHICH POLYCHEM SHALL HAVE ACQUIRED A BU SINESS COMPETING WITH THE BUSINESS OR ANY PART OF IT; C) SOLICIT, CANVAS OR ENTICE AWAY OR ENDEAVOR TO SOLIC IT OR ENTICE AWAY FROM THE BUSINESS OR FROM SUPREME THE CUSTOM O F ANY PERSON FIRM OR COMPANY WHO WAS AT ANY TIME DURING T HE PERIOD OF VALIDITY OF AGREEMENT AS MENTIONED HEREINABOVE A CLIENT OR CUSTOMER OF OR SUPPLIER TO THE BUSINESS FOR THE PU RPOSE OF OFFERING TO SUCH CLIENT OR CUSTOMER, OR OBTAINING F ROM SUCH SUPPLIER GOODS OR SERVICES, SIMILAR TO OR COMPETING WITH THOSE OF THE BUSINESS; D) SOLICIT OR CANVAS OR ENTICE AWAY OR ENDEAVOR TO SOL ICIT CANVAS OR ENTICE AWAY ANY OF THE EMPLOYEES FROM SUPREME OR AN Y OF ITS SUBSIDIARIES FOR THE PURPOSE OF EMPLOYMENT BY POLYC HEM IN AN ENTERPRISE OR VENTURE COMPETING WITH THE BUSINESS; E) DISCLOSE TO ANY PERSON OR USE FOR ANY PURPOSE THE K NOWLEDGE AND SHALL USE ALL REASONABLE ENDEAVOURS TO PREVENT THE PUBLICATION OR DISCLOSURE OF THE KNOWLEDGE AS, MENT IONED, IN C OF RECITAL. F) CARRY ON BUSINESS OR TRADE UNDER A NAME WHICH IS ID ENTICAL OR SIMILAR TO ANY NAMES USED BY THE BUSINESS OR WHICH SUGGESTS ANY CONNECTION WITH THE BUSINESS OR SUPREME; G) DO ANYTHING WHICH MIGHT PREJUDICE THE GOODWILL OF T HE BUSINESS. 2. EACH COVENANT CONTAINED IN THE PRECEDING PARAGR APHS SHALL BE CONSTRUED AS A SEPARATE COVENANT. 3. POLYCHEM SHALL PROMPTLY REFER TO SUPREME ALL EN QUIRIES RELATING TO THE BUSINESS INCLUDING ENQUIRIES OR ORDERS FOR ANY STOCKS SPARE PARTS ITA NO.3669/MUM/2005(A.Y. 1997-98 7 ACCESSORIES AND OTHER EQUIPMENT MANUFACTURED OR SOL D IN CONNECTION WITH THE BUSINESS WHICH POLYCHEM MAY IN FUTURE RECE IVE. 4. IN CONSIDERATION SUPREME HAS PAID A SUM OF RS.4 55 LAKHS (RUPEES FOUR HUNDRED AND FIFTY FIVE LAKHS ONLY) TO POLYCHEM AS MENTIONED HEREIN BELOW: (RS. IN LACS) A) TOWARDS NO COMPETITION FEE 440.00 B) TOWARDS MARKETING NETWORK 5.00 C) TOWARDS GOODWILL 10.00 7. THE AMOUNT HAS BEEN MUTUALLY ARRIVED AT BY CALCU LATING SUPREMES ESTIMATED INCREASE IN THE LOCAL TURNOVER/INCREASE I N MARKET SHARE IN POLYSTYRENE. HOWEVER, IT IS ACKNOWLEDGED THAT SUP REMES OBLIGATIONS TO PAY THE AFORESAID SUM TO POLYCHEM SHALL BE ABSOLUTE AND SHALL IN NO EVENT BE REDUCED FOR ANY REASON INCLUDING BY REASON OF ANY M ISCALCULATION OF INCREASE IN TURNOVER/INCREASE IN MARKET SHARE OR EVEN IF IN FACT THE AFORESAID ESTIMATED INCREASE IN TURN OVER MARKET SHARE IS NO T ACHIEVED BY SUPREME. 8. DURING THE COURSE OF THE ORIGINAL ASSESSMENT PR OCEEDINGS FOR A.Y 1997- 98, IT WAS CLAIMED BY THE ASSESSEE THAT THE AMOUNT OF RS.4.45 CRORES PAID TO POLYCHEM TOWARDS NON-COMPETITION FEE AND MARKETING NET WORK WAS A REVENUE EXPENDITURE, WHICH WAS ADMISSIBLE AS A DEDU CTION IN COMPUTING ITS TOTAL INCOME FOR THE YEAR. THE CLAIM OF THE ASSESS EE WAS, HOWEVER, DISALLOWED BY THE AO ON THE GROUND THAT THE NEW BUS INESS WHICH WAS ACQUIRED AND FOR WHICH THE AFORESAID EXPENSES WERE INCURRED WAS STARTED ONLY IN THE PREVIOUS YEAR RELEVANT TO THE A.Y 1998- 99. ACCORDING TO THE AO, THE CLAIM OF THE ASSESSEE COULD BE CONSIDERED ONLY IN THE NEXT A.Y 1998-99. IN APPEAL, IT WAS ARGUED BY THE ASSESSEE THAT SUCH A SUMMARY DISMISSAL OF THE APPELLANTS CLAIM WAS NOT IN ACCORDANCE WITH TH E LAW AND THAT THE AO SHOULD HAVE CONSIDERED THE ASSESSEES CLAIM ON MERI TS IN THE A.Y 1997-98. ITA NO.3669/MUM/2005(A.Y. 1997-98 8 THIS ISSUE WAS ACCORDINGLY SET ASIDE BY CIT(A) VIDE HIS ORDER DATED 30/10/2000, WITH THE FOLLOWING OBSERVATIONS: I HAVE CONSIDERED THE FACTS OF THE CASE. THE MOU WAS SIGNED IN THE YEAR UNDER CONSIDERATION AND, EXCEPT THE PLANT A ND MACHINERY, ALL THE TERMS OF THE MOU WERE ACTED UPON BY BOTH THE PA RTIES. THE MARKETING NET WORK, TRADEMARK AND THE GOODWILL WERE HANDED OVER TO THE APPELLANT IN THE YEAR UNDER CONSIDERATION. FUR THER, POLYCHEM WAS BOUND BY A NON COMPETITION OBLIGATION. THEREFORE , THOUGH THE MOU WAS FOR A PERIOD OF FIVE YEARS, MOST OF THE EXPENSE S EXCEPT PLANT AND MACHINERY RELATED TO THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER SHOULD HAVE THEREFORE CONSIDERED THESE ISSU ES IN THE YEAR UNDER CONSIDERATION. AS THIS HAS NOT BEEN DONE, I HAVE NO OPTION BUT TO SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSIN G OFFICER. THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE CLAIM OF THE APPELLANT ON MERITS AND DECIDE THE SAME IN ACCORDANCE WITH LAW A FTER GIVING AN OPPORTUNITY TO THE APPELLANT. 9. IN THE RETURN FILED FOR A.Y 1998-99 ALSO, THE AP PELLANT CLAIMED DEDUCTION IN RESPECT OF THE AFORESAID EXPENDITURE O F RS.445 LACS TOWARDS NON-COMPETITION FEE AND MARKETING NET WORK PAID TO POLYCHEM. THOUGH IN ITS BOOKS OF ACCOUNTS THE AFORESAID EXPENDITURE WAS WRITTEN OFF OVER A PERIOD OF 8 YEARS STARTING FROM THE A.Y. 1998-99, THE ASSE SSEE CLAIMED THE ENTIRE AMOUNT AS REVENUE EXPENDITURE IN THE A.Y 1998-99. WHILE COMPLETING THE ASSESSMENT FOR THE A.Y 1998-99, THE AO DID NOT ACCE PT THE ASSESSEES CLAIM ON THE GROUND THAT THIS ISSUE COULD NOT BE CONSIDER ED IN THE A.Y 1998-99 IN VIEW OF THE DIRECTIONS OF THE CIT(A) IN HIS ORDER D ATED 30/10/2000 FOR THE A.Y 1997-98 AND THAT THIS ISSUE WAS TO BE CONSIDERED ON MERITS IN THE A.Y. 1997- 98. 10. IN THE FRESH ASSESSMENT ORDER PASSED BY THE AO FOR THE A.Y 1997-98, WHICH IS THE SUBJECT MATTER OF THE APPEAL BEFORE CI T(A) (AND THE ORDER OF THE CIT(A) PASSED IN SUCH APPEAL IS THE ORDER IMPUGNED IN THIS APPEAL), THE AFORESAID CLAIM OF THE ASSESSEE WAS CONSIDERED BY T HE AO ON MERITS AND WAS REJECTED ON THE GROUND THAT THE SAID EXPENSES WERE IN THE NATURE OF CAPITAL ITA NO.3669/MUM/2005(A.Y. 1997-98 9 EXPENDITURE INCURRED FOR SETTING UP A NEW CAPITAL A SSET, WHICH WAS AN INCOME GENERATING SOURCE. 11. IN THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE AO, THE CIT(A) HELD AS FOLLOWS: 9.14 THE FACTUAL POSITION IN THIS CASE IS THAT TH E APPELLANT COMPANY HAD PURCHASED THE POLYSTYRENE MANUFACTURING BUSINES S OF ITS RIVAL/COMPETITOR POLYCHEM, AT GOREGAON, MUMBAI. AS A PART AND PARCEL OF THE PURCHASE AGREEMENT, A SUM OF RS.445 L ACS WAS PAID BY THE APPELLANT TO THE POLYCHEM TOWARDS NON-COMPETITI ON FEE AND MARKETING NETWORK. THE NON-COMPETITION BOND WAS OP ERATIVE FOR A SPECIFIED AND SUFFICIENTLY LONG DURATION OF TIME, A S STIPULATED THEREIN, AND WAS NOT REVOCABLE UNILATERALLY BY POLYCHEM. BE SIDES THE NON- COMPETITION OBLIGATIONS IMPOSED ON IT, POLYCHEM WAS ALSO OBLIGED TO SELL ALL ITS STOCK OF POLYSTYRENE EXISTING ON THE SUSPENSION DATE, AS STIPULATED IN THE MOUS, AND TO RESTRICT PRODUCTION OF POLYSTYRENE AT ITS OTHER UNIT TO 10 MT, WHICH ALSO WAS TO BE SOLD ONLY TO THE APPELLANT. EVIDENTLY, THROUGH THE AFORESAID PURCHASE DEAL ENTE RED INTO BY THE APPELLANT WITH ITS COMPETITOR, THE APPELLANT NOT ON LY PURCHASED THE BUSINESS UNIT OF POLYCHEM AT GOREGAON AS A WHOLE BU T ALSO ACQUIRED THE RIGHT TO CARRY ON ITS EXISTING BUSINESS AS WELL AS THE BUSINESS OWNED BY ITS RIVAL ON THE CONDITION THAT THE RIVAL WOULD NOT CARRY ON THE SAME OR SIMILAR BUSINESS FOR THE SAID PERIOD. THE PROFIT MAKING APPARATUS OF THE APPELLANT WAS OBVIOUSLY IMPROVED T HEREBY AND THE ENABLED THE APPELLANT TO CARRY ON ITS BUSINESS UNFE TTERED BY ITS RIVAL COMPETITOR. THUS, BY THIS ARRANGEMENT, THE APPELLA NT NOT ONLY DERIVED AN ADVANTAGE BY ELIMINATING POTENTIAL COMPETITION A ND WARDING OFF BUSINESS RIVALRY BUT ALSO ACQUIRED THE BUSINESS OF THE RIVAL, WHICH WOULD NOT ONLY GENERATE INCOME, BUT WOULD SECURE EN DURING BENEFIT FOR THE APPELLANT, WHICH WOULD LAST EVEN BEYOND THE PER IOD STIPULATED IN THE MOUS, AND THUS ENABLE THE APPELLANT TO NOT ONL Y SAFEGUARD ITS GOODWILL BUT ALSO TO ENHANCE IT. THE FACT THAT THE AFORESAID PAYMENT OF RS.445 LACS TOWARDS NON-COMPETITION FEE AND MARKETI NG NET WORK WAS RELATABLE TO THE PROFIT MAKING APPARATUS OF THE APP ELLANT IS ALSO EVIDENT FROM CLAUSE 4 OF THE NON-COMPETITION BOND D ATED 17.3.1997(RELEVANT EXTRACTS REPRODUCED IN PARA 5.5 ABOVE) WHICH STATES THAT THE AMOUNT PAYABLE IN THIS REGARD WAS M UTUALLY ARRIVED BETWEEN THE CONCERNED PARTIES BY CALCULATING SUPRE MES ESTIMATED INCREASE IN THE LOCAL TURNOVER/INCREASE IN MARKET S HARE IN POLYSTYRENE. FROM THE FACTS OF THE CASE, IT IS U NAMBIGUOUSLY CLEAR THAT THE EXPENDITURE IN QUESTION WAS INCURRED BY TH E APPELLANT TO ACQUIRE THE BUSINESS AND TO FREE THE BUSINESS OF TH E APPELLANT FROM DISADVANTAGEOUS COMPETITION WITH A VIEW TO IMPROVE ITS PROFIT MAKING ITA NO.3669/MUM/2005(A.Y. 1997-98 10 APPARATUS. IN VIEW OF THE LEGAL POSITION EMERGING FROM THE JUDICIAL PRONOUNCEMENTS DISCUSSED IN PARA 9.2 TO 9.10 ABOVE, THE PAYMENT OF RS.445 LACS MADE BY THE APPELLANT TOWARDS NON-COMPE TITION FEE AND MARKETING NETWORK IS HELD TO BE IN THE NATURE OF CA PITAL EXPENDITURE. THE ACTION OF THE AO IN DISALLOWING THE SAID AMOUNT OF RS. 445 LACS IN COMPUTING THE INCOME OF THE APPELLANT IS, THEREFORE , UPHELD. 9.15. AS REGARDS THE ALTERNATIVE PLEA OF THE APPE LLANT FOR ALLOWANCE OF THE AFORESAID EXPENDITURE AS DEFERRED REVENUE EXPEN DITURE, THE SAME IS ALSO NOT ACCEPTABLE FOR THE REASON THAT THE EXPENDI TURE IN QUESTION HAS BEEN HELD TO BE CAPITAL EXPENDITURE AND NOT REVENUE EXPENDITURE. 12. AT THE TIME OF HEARING IT WAS SUBMITTED BY THE LD. D.R THAT THE ISSUE WAS SQUARELY COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE ITAT DELHI IN THE CASE OF TECUMSEH INDIA PVT. LTD REPORTED IN VOL.127 ITD 1 (DEL)(SB). THE FACTS OF THE ASSESSEES CASE ARE SIMILAR TO THE CASE DECIDED BY THE SPECIAL BENCH OF ITAT IN THE CASE OF TECUMSEH INDIA PVT. LT D. THE FACTS OF THE CASE BEFORE SPECIAL BENCH WAS THAT TECUMSEH USA, A GLOBA L COMPRESSOR MANUFACTURER, WAS INTERESTED IN ENTERING THE INDIAN MARKET. IT ENTERED INTO A MOU WITH WHIRLPOOL INDIA & WHIRLPOOL-USA UNDER WHIC H WHIRLPOOL-INDIA AGREED TO SELL ITS COMPRESSOR BUSINESS TO THE ASSES SEE, A WHOLLY OWNED SUBSIDIARY OF TECUMSEH USA, FOR THE TOTAL CONSIDERA TION OF RS. 52.5 CRORES. THE AGREEMENT ALSO PROVIDED THAT WHIRLPOOL WOULD NO T COMPETE WITH TECUMSEH . TO GIVE EFFECT TO THE MOU, THE ASSESSEE ENTERED IN TO AN AGREEMENT DATED 2.7.97 WITH WHIRLPOOL INDIA. THE AGREEMENT PR OVIDED A SPLIT OF THE CONSIDERATION OF UP TO RS. 49.85 CRORES BETWEEN LAN D, BUILDING, INVENTORIES ETC. THE AGREEMENT PROVIDED THAT A SEPARATE NON-COM PETE AGREEMENT WOULD BE ENTERED INTO WHICH WAS ENTERED INTO ON 10.7.1997 AND PROVIDED FOR A CONSIDERATION OF RS. 2.65 CRORES. THE PERIOD OF NON -COMPETE WAS 5 YEARS. THE CONSIDERATION OF RS. 52.5 CRORES AGREED TO IN THE M OU WAS ACCORDINGLY BIFURCATED BETWEEN THE ASSETS (RS. 49.85 CRORES) AN D THE NON-COMPETE COVENANT (RS. 2.65 CRORES) . THE SPECIAL BENCH HAD TO CONSIDER WHETHER THE SAID PAYMENT FOR THE NON-COMPETE WAS CAPITAL OR REV ENUE EXPENDITURE. HELD DECIDING AGAINST THE ASSESSEE: ITA NO.3669/MUM/2005(A.Y. 1997-98 11 (I) THE CONTENTION THAT THE NON-COMPETE AGREEMENT S HOULD BE CONSIDERED SEPARATELY FROM WHAT WAS PAID BY THE ASSESSEE TO AC QUIRE THE BUSINESS IS NOT ACCEPTABLE. THE TERMS OF THE MOU AND AGREEMENT MADE IT CLEAR THAT THE PARTIES HAD AGREED ON THE TOTAL CONSIDERATION OF 52 .5 CRORES AND IT WAS ALLOCATED BETWEEN THE ASSETS AND THE NON-COMPETE CO VENANT . ACCORDINGLY, THE NON-COMPETE AGREEMENT CANNOT BE CONSIDERED ON A STAND ALONE BASIS . ALL AGREEMENTS FORM ONE TRANSACTION WHICH ARE INTERWOVE N BY A COMMON THREAD. THE AGREEMENTS ARE NOT MUTUALLY EXCLUSIVE AS ONE CA NNOT BE FULFILLED WITHOUT FULFILLING THE OTHER; (II) THE GENERAL PROPOSITION OF THE ASSESSEE THAT I N ALL CASES OF PAYMENT OF NON-COMPETE FEE, THE PURPOSE OF MAKING SUCH PAYMENT IS TO MAINTAIN/PROTECT THE PROFITABILITY OF THE BUSINESS BY INSULATING THE SAME FROM THE RISK OF COMPETITION AND THAT IT IS, THEREF ORE, REVENUE IN NATURE IS NOT ACCEPTABLE; (III) THERE ARE SEVERAL TESTS FORMULATED BY COURTS TO DISTINGUISH BETWEEN CAPITAL AND REVENUE EXPENDITURE SUCH AS THE TEST OF INITIAL OUTLAY OF THE BUSINESS, THE AIM AND OBJECT OF THE EXPENDITURE, EN DURING BENEFIT TEST AND THE TEST OF FIXED AND CIRCULATING CAPITAL. THESE TE STS CONTINUE TO BE APPLICABLE EVEN IN THE CONTEXT OF THE MODERN SITUATION. (CASE LAWS DISCUSSED IN DETAIL); (IV) AS THE NON-COMPETE AGREEMENT IS PART & PARCE L OF THE ENTIRE TRANSACTION OF ACQUISITION OF BUSINESS, IT FALLS UNDER THE FIRS T TEST WHICH IS THAT IF THE EXPENDITURE IS MADE FOR THE INITIAL OUTLAY OR FOR T HE EXPANSION OF BUSINESS OR A SUBSTANTIAL REPLACEMENT OF THE EQUIPMENT, THEN, I T IS CAPITAL EXPENDITURE . THE INCURRING OF EXPENDITURE ALSO BROUGHT ENDURING BENEFIT TO THE ASSESSEE. IN ASSAM BENGAL CEMENT COMPANY A PERIOD OF FIVE YEA RS WAS REGARDED AS PROVIDING ENDURING ADVANTAGE TO THE ASSESSEE IRRESP ECTIVE OF THE FACT THAT THE PAYMENT WAS TO BE MADE ANNUALLY. THE ARGUMENT THAT THIS WAS A CASE OF ACQUIRING MONOPOLY RIGHTS IS NOT RIGHT BECAUSE IN C OAL SHIPMENT IT WAS HELD THAT EVEN PAYMENT MADE TO WARD OFF COMPETITION FROM A RIVAL DEALER WOULD CONSTITUTE CAPITAL EXPENDITURE ; ITA NO.3669/MUM/2005(A.Y. 1997-98 12 (V) ACCORDINGLY, THE AMOUNT PAID UNDER THE NON-COMP ETE AGREEMENT WAS HELD TO BE CAPITAL EXPENDITURE. 13. IN OUR VIEW THE FACTS OF THE ASSESSEES CASE AN D THAT DECIDED BY THE SPECIAL BENCH REFERRED TO ABOVE ARE IDENTICAL. NO DISTINGUISHING FEATURES WERE BROUGHT TO OUR NOTICE. RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH REFERRED TO ABOVE WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN HOLDING THAT NON COMPETE FEE AND PAYMENT FOR MARKING NET WORK WE RE CAPITAL EXPENDITURE AND COULD NOT BE ALLOWED AS A DEDUCTION. THE GROUN D OF APPEAL IS ACCORDINGLY DECIDED AGAINST THE ASSESSEE. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 18 TH DAY OF MAY, 2011. SD/- SD/- ( P.M.JAGTAP) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 18 TH MAY.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.3669/MUM/2005(A.Y. 1997-98 13 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 5/5/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 6/5/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER