ACG PAMPAC MACHINES P.LTD, MUMBAI V. DCIT CEN CIR 42, MUMBAI

ITA 7765/MUM/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5690 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 31-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR YADAVLD
• Assessee Lawyers: MANISH SHAH LD AR
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI , , BEFORE SHRI C.N. PRASAD, JM AND SHRI MANOJ KUMAR AGGARWAL, AM I.T.A. NO.7765/MUM/2014 ( ASSESSMENT YEAR:2010-11) ACG PAMPAC MACHINES PRIVATE LIMITED 1001, DALAMAL HOUSE, 10 TH FLOOR NARIMAN POINT MUMBAI-400 021 VS. DEPUTY COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-42 AAYKAR BHAVAN, M.K.MARG MUMBAI-400 020 !' # PAN/GIR NO.AAACP-4134-F ( '$ APPELLANT ) : ( %'$ RESPONDENT ) REVENUEBY : RAJESH KUMAR YADAV, LD.DR ASSESSEE BY : MANISH SHAH, LD.AR &' DATE OF HEARING : 02/07/2018 ()*' / DATE OF PRONOUNCEMENT : 11/07/2018 O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. AFORESAID APPEAL BY ASSESSEE FOR ASSESSMENT YEAR [A Y] 2010-11 CONTEST THE ORDER OF THE LD. COMMISSIONER OF INCOME -TAX (APPEALS)-38 [CIT(A)], MUMBAI, APPEAL NO.CIT(A)-38/IT-37/2013-14 DATED 28/10/2014. THE ASSESSMENT FOR IMPUGNED AY WAS FRAMED BY LD. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-42, MUMB AI U/S 143(3) OF THE INCOME TAX ACT, 1961 31/01/2013 WHEREIN THE INCOME OF THE ASSESSEE WAS 2 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 DETERMINED AT RS.19.01 CRORES AFTER CERTAIN DISALLO WANCES AS AGAINST RETURNED INCOME OF RS.18.41 CRORES E -FILED BY THE ASSESSEE ON 27/09/2010. ALTHOUGH INITIALLY THE ASSESSEE HAD RAISED ONLY ONE GROUND OF APPEAL, HOWEVER, AN ADDITIONAL ALTERNATIVE GROUND OF APPEAL HAS BEEN FILED VIDE LETTER DATED 29/07/2016. THE SAME BEING ALTERNATIVE GROUND WHICH DO NOT REQUIRE APPRECIATION OF NEW FACTS IS ADMITTED IN TE RMS OF JUDGMENT OF HONBLE SUPREME COURT RENDERED IN NTPC CO. LTD. VS. CIT [229 ITR 383]. ACCORDINGLY, THE ORIGINAL GROUNDS AND ADDITIONAL GR OUNDS READ AS UNDER:- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) -38 MUMBAI [THE CIT(A)] ERRED IN UPHOLDING THE ACTION OF THE DY. COMMISSION ER OF INCOME TAX, CENTRAL CIRCLE-42 MUMBAI (THE A.O.) IN DISALLOWING NON-CO MPETE FEES OF RS.29,70,000. 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD THAT HE NON-COMPETE FEES IS REVENUE EXPENSES. 3. ON THE FACTS & CIRCUMSTANCES OF THE CASE, IF THE NON-COMPETE FEES IS TREATED AS A CAPITAL IN NATURE, THEN DEPRECIATION SHOULD BE ALLO WED ON THE SAME U/S 32(1)(II) OF THE ACT. 4. THE APPELLANT HUMBLY PRAYS THAT THE ASSESSING OF FICER BE DIRECTED TO ALLOW DEPRECIATION ON NON-COMPETE FEES PAID. AS EVIDENT FROM GROUNDS OF APPEAL, THE ONLY ISSUED INVOLVED UNDER THE APPEAL IS CLAIM OF THE ASSESSEE ON ACCOUNT OF NON-C OMPETE FEES PAID BY IT IN THE IMPUGNED AY. 2. FACTS LEADING TO THE DISPUTE ARE THAT THE ASSESS EE BEING RESIDENT CORPORATE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF BLISTER PACKING MACHINES AND CARTOONING MACHINES DURING IMPUGNED AY . UPON PERUSAL OF TAX AUDIT REPORT, IT WAS NOTED THAT THE ASSESSEE PAID AN AMOUNT OF RS.29.70 LACS AS NON-COMPETE FEES WHICH WAS CLASSIFIED AS CAPITAL EXPENDITURE BY THE TAX AUDITOR. HOWEVER, TH E SAME WAS CLAIMED AS 3 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 REVENUE EXPENDITURE. THE ASSESSEE JUSTIFIED THE CLA IM VIDE ITS LETTER DATED 22/01/2013. HOWEVER, NOT CONVINCED, LD. AO CONCLUDE D THAT THE SAID EXPENDITURE WAS INCURRED TO WARD OFF THE COMPETITIO N AND BROUGHT ENDURING BENEFIT TO THE ASSESSEE BY ELIMINATING COMPETITORS IN THE MARKET AND HENCE, CAPITAL IN NATURE AND THEREFORE NOT ALLOWABLE. 3. AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITHO UT ANY SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORDER DATED 28/10/2 014, WHERE LD. CIT(A) AFTER CONSIDERING ASSESSEES SUBMISSIONS AND JUDICI AL PRONOUNCEMENTS ON THE ISSUE, CONCLUDED THE MATTER AGAINST THE ASSESSE E IN THE FOLLOWING MANNER:- DECISION: 10.0 I HAVE CAREFULLY EXAMINED THE FACTS OF THE CAS E, THE STAND TAKEN BY THE A.O IN THE ASSESSMENT ORDER, THE GROUNDS OF APPEAL AND THE WRI TTEN SUBMISSIONS FILED BY THE APPELLANT. 10.1 THE APPELLANTS RELIANCE PLACED ON THE SUPREME COURT JUDGMENTS IN THE CASES OF EMPIRE JUTE CO. LTD VS CIT [124 ITR 69] AND MADRAS INDUSTRIAL CORPORATION. LTD. VS CIT[225 ITR 802] ARE NOT DIRECTLY ON THE ISSUE OF N ON-COMPETE FEE. THE APPELLANT HAD CITED SOME OF THE DECISIONS WHICH ARE IN ITS FAVOUR . HOWEVER, THERE ARE ALSO CONTRARY DECISIONS AVAILABLE ON THE MATTER. THE DELHI HIGH C OURT VIDE ITS RECENT JUDGMENT IN THE CASE OF SHARP BUSINESS SYSTEM VS CIT 133 ITD 275 DA TED 05.11.2012 HELD THAT NON- COMPETE FEES ARE NEITHER ALLOWED AS REVENUE EXPENDI TURE NOR ELIGIBLE FOR DEPRECIATION. DEPRECIATION IS NOT AN ISSUE IN THIS CASE AND THE I SSUE INVOLVED IS ALLOWANCE OF NON- COMPETE FEE. 10.2 THE ISSUE OF ALLOWABILITY OF NON-COMPETE FEE V ARIES FROM CASE TO CASE. THE ITAT, MUMBAI IN THE CASE OF IND GLOBAL CORPORATE FINANCE PRIVATE LTD. VS ITO (ITA NO.1258/MUM/08) HELD THAT NON-COMPETE FEE IS NOT A DEDUCTIBLE EXPENDITURE SINCE IT IS CAPITAL IN NATURE. IT IS ALSO HELD BY ITAT THAT NON -COMPETE RIGHT IS AN INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION UNDER THE IT ACT, 1961. T HE HONBLE TRIBUNAL FURTHER HELD THAT NON-COMPETE AGREEMENT WAS VALID FOR A PERIOD OF THR EE YEARS WHICH HAS TO BE CONSIDERED AS SUFFICIENT LENGTH OF TIME TO TREAT TH E EXPENDITURE AS CAPITAL IN NATURE. THE TRIBUNAL HELD THAT THE PROTECTION ACQUIRED BY THE T AXPAYER FROM COMPETITION WAS NOT PART OF THE WORKING OF THE BUSINESS, AS HELD BY THE HON BLE SUPREME COURT IN THE CASE OF ASSAM BENGAL CEMENT CO.LTD. THEREFORE, THE ITAT HEL D THAT THE EXPENDITURE HAS TO BE DISALLOWED SINCE IT A CAPITAL EXPENDITURE. THE HON BLE TRIBUNAL FOLLOWED THE DECISION OF 4 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 DELHI SPECIAL BENCH TRIBUNAL IN THE CASE OF TECUMSE H INDIA PRIVATE LTD., WHEREIN THE PROVISION FOR PAYMENT OF NON-COMPETE FEE WAS CONTAI NED IN THE AGREEMENT FOR TRANSFER OF BUSINESS. SINCE THE FACTS ARE SIMILAR THE ITAT, MUMBAI FOLLOWED THE DELHI TRIBUNAL SPECIAL BENCH DECISION IN THE CASE OF TECUMSEH INDI A PRIVATE LTD. 10.3 THE FACTS IN THE CASE OF TECUMSEH INDIA PRIVAT E LTD. [127 ITD 1] AND IND GLOBAL CORPORATE FINANCE PVT. LTD. ARE IDENTICAL TO THE FA CTS IN THE CASE OF THE APPELLANT COMPANY. THE APPELLANT PAID NON-COMPETE FEE TO INDT ECH SYSTEMS AND MANUFACTURING PVT.LTD. PURSUANT TO THE BUSINESS TRANSFER AGREEMEN T DATED 27.11.2009. THE INDTECH SYSTEMS AND MANUFACTURING PVT.LTD TRANSFERRED THE B USINESS TO THE APPELLANT COMPANY ON A SLUMP SALE BASIS. SINCE THE FACTS ARE IDENTICA L, RESPECTFULLY FOLLOWING THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF IND GLOBAL CORPORAT E FINANCE PVT. LTD. THE EXPENSE INCURRED ON ACCOUNT OF NON-COMPETE FEE ARE HELD TO BE CAPITAL IN NATURE AND THEREFORE NOT ALLOWED AS DEDUCTIBLE EXPENDITURE. AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. AUHTORIZED REPRESENTATIVE FOR ASSESSEE [ AR], SHRI MANISH SHAH, CONTESTING THE DISALLOWANCE, SUBMITTED THAT IN VIEW OF THE CONFLICTING DECISIONS, A VIEW FAVORABLE TO THE ASSESSEE SHOULD BE TAKEN AND AT LEAST THE DEPRECIATION, ON THE SAME BE ALLOWED. THE SAME WAS CONTROVERTED BY LD. DEPARTMENTAL REPRESENTATIVE [DR], SHRI RAJESH KUMAR YADAV, BY SUBMITTING THAT THE ASSESSEE DID NOT ACQUIRE ANY RI GHT BY MAKING THE AFORESAID PAYMENT AND THEREFORE, DEPRECIATION AGAIN ST THE SAME COULD NOT BE ALLOWED TO THE ASSESSEE. 5. WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS AN D PERUSED RELEVANT MATERIAL ON RECORD INCLUDING CASE LAWS CITED BEFORE US. THE UNDISPUTED FACT REMAIN THAT THE ASSESSEE MADE THE AFORESAID PAYMENT AS NON-COMPETE FEES TO DIRECTOR OF THE VENDOR COMPANY NAMELY INDTECH SYSTEMS AND MANUFACTURING PRIVATE LIMITED IN TERMS OF BUSINESS TRANSFER AGREEMENT DATED 27/11/2009 WHEREIN THE ASSESSEE PURCHASED THE BUSINESS OF THE 5 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 VENDOR ON SLUMP SALE BASIS. THERE IS NO SEPARATE AGREEMENT WITH THE DIRECTOR AS SUCH FOR THE IMPUGNED PAYMENT WHICH LEA D US TO INEVITABLE CONCLUSION THAT THE AFORESAID PAYMENT WAS PART AND PARCEL OF THE ACQUISITION AGREEMENT AND WAS MADE IN THE COURSE OF ACQUIRING NEW SOURCE OF INCOME I.E. BUSINESS OF THE VENDOR COMPANY. HENC E, THE SAME, IN OUR OPINION, WAS CLEARLY A CAPITAL EXPENDITURE IN NATUR E. THE ASSESSEES CLAIM, TO THAT EXTENT AS RAISED IN GROUND NUMBERS 1 & 2 ST AND DISMISSED. 6. THE ONLY QUESTION THAT SURVIVES FOR OUR CONSIDER ATION IS THAT WHETHER THE ASSESSEE COULD BE ALLOWED DEPRECIATION AGAINST THE SAME OR NOT IN TERMS OF THE ARGUMENT OF LD. DR THAT THE SAID EXPEN DITURE DID NOT BRING INTO EXISTENCE ANY BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE WITHIN THE MEANING OF SECTION 32(1)(II) AND RATHER THE AFORESA ID PAYMENT WAS MADE FOR A NEGATIVE COVENANT I.E. TO RESTRICT THE DIRECTOR O F THE VENDOR COMPANY TO COMPETE WITH THE ASSESSEES BUSINESS FOR CERTAIN PE RIOD OF TIME. WE ARE OF THE OPINION THAT THE SAID EXPENDITURE BROUGHT ENDUR ING BENEFIT FOR THE ASSESSEE IN THE SENSE THAT IT ELIMINATED ASSESSEES POTENTIAL COMPETITOR IN THE MARKET PARTICULARLY WHEN THE PAYEE WAS THE DIRE CTOR OF THE VENDOR COMPANY, WHOSE BUSINESS THE ASSESSEE ACQUIRED DURIN G THE YEAR. THEREFORE, THE SAME, IN OUR VIEW, WAS VALUABLE RIGH T FOR THE ASSESSEE AND CONSTITUTE AN INTANGIBLE ASSET IN THE HANDS OF THE ASSESSEE. 7. SO FAR AS THE JUDICIAL PRONOUNCEMENTS IN THIS RE GARD ARE CONCERNED, WE FIND THAT THERE ARE CONTRARY DECISIONS BY THE TR IBUNAL AS WELL AS HONBLE 6 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 HIGH COURTS IN THIS REGARD. THE DECISIONS BY HONBL E HIGH COURTS WHICH STOOD IN ASSESSEES FAVOR COULD BE TABULATED IN THE FOLLOWING MANNER:- (I) PENTASOFT TECHNOLOGIES LTD. [41 TAXMANN.COM 120 MADRAS HIGH COURT] (II) INGERSOLL RAND INTERNATIONAL IND. LTD. [48 TAX MANN.COM 349 KARNATAKA HIGH COURT] PER CONTRA, HONBLE DELHI HIGH COURT IN SHARP BUSINESS SYSTEM VS CIT [2012 254 CTR 233] HAS TAKEN CONTRARY DECISION. NO DECISION OF OUR JURISDICTIONAL HIGH COURT HAS BEEN BROUGHT ON RECOR D. IT IS NOTED THAT BOTH THE DECISIONS RENDERED IN ASSESSEES FAVOR ARE SUBS EQUENT DECISIONS IN COMPARISON TO CONTRARY DECISION RENDERED BY HONBLE DELHI HIGH COURT. KEEPING IN VIEW THE CONFLICTING DECISIONS OF HONBL E HIGH COURT, WE ARE INCLINED TO TAKE A VIEW MORE FAVORABLE TO THE ASSES SEE IN TERMS OF RATIO OF DECISION OF HONBLE SUPREME COURT RENDERED IN CIT VS. VEGETABLE PRODUCTS LIMITED [1973 88 ITR 192]. 8. KEEPING IN VIEW THE ABOVE FACTS AND CIRCUMSTANCE S AND KEEPING IN VIEW THE FACT THAT THE GENUINENESS OF THE EXPENDITU RE IS NOT IN DISPUTE, WE HOLD THAT THE AFORESAID PAYMENT, BEING AN INTANGIBL E ASSET FOR THE ASSESSEE, WAS ELIGIBLE FOR THE DEPRECIATION IN THE IMPUGNED A Y. WE ORDER SO. THE LD. AO IS DIRECTED TO RE-COMPUTE THE INCOME OF THE ASSE SSEE IN TERMS OF OUR ABOVE ORDER. THIS GROUND OF ASSESSEES APPEAL STAND S ALLOWED. 7 ITA NO.7765/MUM/2014 ACG PAMPAC MACHINES PRIVATE LIMITED ASSESSMENT YEAR-2010-11 9. RESULTANTLY, THE ASSESSEES APPEAL STAND PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH JULY, 2018 SD/- SD/- (C.N.PRASAD) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 11.07.2018 SR.PS:-THIRUMALESH ' COPY OF THE ORDER FORWARDED TO : 1. ()*+,- ' THE APPELLANT 2. 123,- ' THE RESPONDENT 3. 73873 9: ; ()*+ < ' THE CIT