Non-compete fee not depreciable under Section 32(1)(ii) - Tribunal decision

Gujarat Glass Private Limited (Now known as Piramal Glass Limited), Versus Asst. Commissioner of Income Tax

Gujarat Glass Private Limited (Now known as Piramal Glass Limited), Versus Asst. Commissioner of Income Tax - TMI Issues Involved:
1. Treatment of non-compete fee: Whether it is an intangible asset liable for depreciation or should be spread over the tenor period.
2. Admissibility of additional ground of appeal by the assessee.
3. Validity of depreciation claim on non-compete fee under Section 32(1)(ii) of the Income Tax Act, 1961.
4. Determination of the character of non-compete agreement and its eligibility for depreciation.
5. Spread over of non-compete fee as directed by the CIT(A).

Detailed Analysis:

1. Treatment of Non-Compete Fee:
The primary issue in both the assessee's and the department's appeals is the treatment of the non-compete fee. The assessee argued that the non-compete fee should be treated as an intangible asset eligible for depreciation under Section 32(1)(ii) of the Income Tax Act, 1961. Alternatively, the assessee contended that the payment should be spread over the tenor period of the non-compete agreement.

2. Admissibility of Additional Ground of Appeal:
The assessee filed an additional ground of appeal, arguing that the payment of Rs. 18 crore was made for know-how and the consequent non-compete covenant. The department objected to the additional ground, stating that it was not part of any earlier proceedings. The tribunal, however, admitted the additional ground based on the Full Bench decision of the Hon'ble Bombay High Court in Ahmedabad Electricity Co. Ltd. vs CIT, which allows the Tribunal to permit additional points to be raised if they arise from the subject matter of the proceedings.

3. Validity of Depreciation Claim on Non-Compete Fee:
The assessee claimed depreciation on the non-compete fee under Section 32(1)(ii), which includes intangible assets such as know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature. The tribunal considered various judicial precedents, including decisions in ACIT vs Real Image Tech. (P.) Ltd., ITO Vs Medicorp Technologies India Ltd., Bunge Agribusiness (India) (P.) Ltd. Vs DCIT, and others, which allowed depreciation on non-compete payments by treating them as business or commercial rights.

4. Character of Non-Compete Agreement:
The tribunal examined whether the non-compete agreement constituted a capital asset eligible for depreciation. The tribunal noted that the agreement between the assessee and PEL, dated 26.02.1998, and the subsequent agreement with NPIL, effective from 01.04.1998, indicated that the non-compete fee was paid for acquiring technical know-how and enforcing non-compete covenants. The tribunal referred to the decision in Tecumseh India (P.) Ltd. vs ACIT by the Special Bench at Delhi, which held that non-compete fee was a capital expenditure.

5. Spread Over of Non-Compete Fee:
The CIT(A) directed the AO to spread over the payment of Rs. 18 crore over the period of the tenor, i.e., 18 years. The tribunal, however, held that since the non-compete fee was a capital expenditure and not an asset eligible for depreciation, the spread-over approach was not applicable. The tribunal sustained the order of the CIT(A) on this issue and upheld the AO's disallowance of depreciation on the non-compete fee.

Conclusion:
The tribunal concluded that the non-compete fee did not qualify as an intangible asset under Section 32(1)(ii) and was not eligible for depreciation. The assessee's appeal was dismissed, and the revenue's appeal was allowed, rejecting the claim for depreciation and the spread-over approach for the non-compete fee.