2013 (9) TMI 600 - AT - Income Tax

Tribunal Decision: Non-compete fees as capital expenditure, SEBI fees as revenue, service tax deletion

The Tribunal partly allowed both appeals. It confirmed the non-compete fees as capital expenditure but allowed depreciation on it. The SEBI fees were ... Disallowance of non-compete fees - Capital or revenue expenditure - Deferred revenue expenses - Purchase of Merchant Banking Division - Held that:- non-compete agreement was valid for a period of three years which in our view has to be considered as sufficient length of time to treat the expenditure as capital in nature. The protection acquired by the assessee from competition was not part of the working of the business and went on to appreciate the whole of the capital amount as held by the hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. [1954 (11) TMI 2 - SUPREME Court], and, therefore, on that ground also it has to be treated as capital in nature. Therefore, we hold that expenditure has to be disallowed as capital expenditure - Decided against Assessee. Disallowance of SEBI fees - Fees paid on pro rata basis - Held that:- The assessee had paid a sum of ₹ 5 lakhs to the SEBI for granting registration for a period of three years to enable the assessee to perform certain stipulated functions. The Assessing Officer held that the expenditure was for smooth running of the assessee and was allowable as revenue expenditure but since benefit was for three years, he allowed expenditure on pro rata basis only for one year. - There is no provision in the Income-tax Act for amortisation of such expenditure. Therefore, once the expenditure has been found allowable as revenue expenditure, the same has to be allowed in full - Decided in favour of assessee. Disallowance of service tax - Section 43B - Held that:- the same issue has already been considered by the Mumbai Bench of the Tribunal in case of Pharma Search [2012 (5) TMI 90 - ITAT MUMBAI] - as per service tax law, service tax is payable as and when the payment/fees for underlying services provided are realised. Therefore, if for any reason the payment for service rendered is not realised, there is no liability as to payment of service tax. - As the assessee had not realised any payment for services during the relevant year, it had no liability to pay service tax and once there was no liability for payment of service tax, the provision of section 43B were not applicable as the said provisions can be applied only if any liability has been incurred on account of service tax during the year. The addition made was, therefore, deleted. - Decided in favour of assessee. Disallowance of depreciation - Payments made under the transfer of business agreement - Held that:- It has not been explained before us as to why the assessee would pay for rules and regulations and procedures which are available in the market and, therefore, we have to conclude that the payment of ₹ 25 lakhs had been made for the transfer of business and contracts including clients and client relationship which cannot be considered as know-how. The Commissioner of Income-tax (Appeals) has not accepted the finding of the Assessing Officer that payment was for goodwill nor any material has been produced before us to show that any part of the payment related to acquisition of goodwill. the payment was for transfer of business and contracts including clients and client relationship which in our view is not an intangible asset as defined in section 32(1)(ii) on which depreciation can be allowed - Decided against assessee. Depreciation on the non-compete fee - Held that:- by obtaining non-compete right on payment of noncompete fee, the assessee can run his business without bothering about competition and, therefore, non-compete right was an intangible asset falling in the category of any other business or commercial right under section 32(1)(ii) - depreciation will be allowed to the assessee on the non-compete expenditure incurred by it - Following decision of Real Image Technologies (P.) Limited. Versus Assistant Commissioner Of Income-Tax [2008 (2) TMI 490 - ITAT MADRAS-B] - Decided in favour of assessee. Issues Involved:1. Addition on account of disallowance of non-compete fees.2. Disallowance of SEBI fees.3. Addition on account of service tax.4. Disallowance of depreciation on the payments made under the transfer of business agreement.Issue-wise Detailed Analysis:1. Addition on account of disallowance of non-compete fees:The assessee-company, incorporated on October 11, 2000, for providing corporate advisory and merchant banking services, entered into a transfer of business agreement on December 7, 2000, with Ind Global Financial Trust Ltd. The agreement included a non-compete fee of Rs. 1.70 crores to restrict certain activities for 36 months. The assessee claimed this fee as revenue expenditure in the return of income, but the Assessing Officer (AO) treated it as capital expenditure, citing enduring benefits. The Commissioner of Income-tax (Appeals) (CIT(A)) held the expenditure as revenue, facilitating higher efficiency without changing fixed capital assets. However, the Tribunal, following the Special Bench decision in Tecumseh India P. Ltd., held that the non-compete fee was capital in nature, as it was part of the initial outlay for setting up new business and to ward off competition, providing enduring benefits. The Tribunal set aside the CIT(A)'s order and confirmed the AO's addition. However, the Tribunal allowed depreciation on the non-compete expenditure, treating it as an intangible asset under section 32(1)(ii).2. Disallowance of SEBI fees:The assessee paid Rs. 5 lakhs to SEBI for registration for three years. The AO allowed one-third of this amount as revenue expenditure, disallowing the balance Rs. 3,33,333. The CIT(A) directed the AO to allow the entire amount as revenue expenditure, citing that once expenditure is held as revenue, it should be allowed in full, irrespective of the period of benefit. The Tribunal upheld the CIT(A)'s decision, confirming that there is no provision in the Income-tax Act for amortisation of such expenditure.3. Addition on account of service tax:The assessee did not credit the service tax charged from customers in the profit and loss account, nor claimed any expenditure on this account. The AO added Rs. 2,25,000 to the total income, treating service tax as an integral part of the assessee's income. The CIT(A) upheld this addition, treating service tax similar to sales tax. However, the Tribunal, following its decision in Pharma Search, held that service tax liability arises only on receipt by the assessee. Since the assessee had not realised any payment for services during the relevant year, there was no liability to pay service tax, and hence, section 43B provisions were not applicable. The Tribunal set aside the CIT(A)'s order and allowed the claim of the assessee.4. Disallowance of depreciation on the payments made under the transfer of business agreement:The assessee paid Rs. 25 lakhs to Ind Global Financial Trust Ltd. under the transfer of business agreement, treating it as expenditure for acquiring know-how and claimed depreciation. The AO disallowed the claim, treating the payment as for goodwill. The CIT(A) confirmed the disallowance, noting that the payment was for a compilation of regulations and procedures available in the market, not for any technique or skill. The Tribunal upheld the CIT(A)'s decision, concluding that the payment was for transfer of business and contracts, including client relationships, which cannot be considered as know-how or goodwill. Therefore, depreciation could not be allowed on this payment.Conclusion:Both appeals were partly allowed. The Tribunal confirmed the addition of non-compete fees as capital expenditure but allowed depreciation on it. The SEBI fees were allowed in full as revenue expenditure. The addition on account of service tax was deleted, and the disallowance of depreciation on the payment under the transfer of business agreement was upheld. The order was pronounced on August 31, 2012.