2009 (1) TMI 332 - AT - Income Tax

Non-compete fee qualifies for depreciation as intangible asset under IT Act; Tribunal upholds CIT(A)'s decision.

Income-Tax Officer. Versus Medicorp Technologies India Limited.

The Tribunal upheld the CIT(A)'s decision, allowing the assessee to claim depreciation on the non-compete fee under s. 32(1)(ii) of the IT Act. The ... Depreciation on non-compete fees - intangible assets - 'non-compete right' - principle of ejusdem generis - 'business/commercial right', acquired by the assessee, is of a 'similar nature' as 'know-how, patents, copyright, trademark, licenses, or franchises' or not - Whether the non-compete fee, paid by the assessee, qualifies for depreciation under cl.(ii) of sub-s.(1) of s.32 - main argument of the ld DR, was that the 'right' acquired by the assessee through the non-compete agreement, on the facts of the present case, was not an 'asset' at all. HELD THAT:- The scope of s. 32(1) was widened by the Finance Act, 1998 by allowing depreciation in respect of 'intangible assets' w.e.f. 1st April, 1999. It was achieved by introducing cl.(ii) in s.32(1). Prior to this, depreciation was allowable only in respect of the 'tangible assets' namely, buildings, machinery, plant, or furniture. With the passage of time there have been conceptual changes in all areas of the commercial world. Admittedly, payment made by the assessee company to ward off competition in the export business which was acquired by it from MS. There is no ambiguity or controversy with regard to these facts. Hence, It can be safely concluded, without any further discussion, that what was acquired by the assessee by payment was a business/commercial right. The principle of ejusdem generis applies where the mention of specific items of the same genus is followed by an expression of a general or a residuary nature pertaining to the same genus. The scope of this rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. It signifies a principle of construction. A 'patent' gives its owner an exclusive right to make and sell the subject-matter of the 'patent' for a particular period of time. The grant of a 'patent', to any individual or a firm, provides that individual or firm with competitive advantage over others within a given industrial field. A 'copyright' means rights conferred upon its owner in respect of his literary, dramatic', musical or artistic work. It does not really mean a right to do something, but only the right to exclude others from the doing of certain specific acts and things. A 'patent' is distinguishable from 'copyright'. A 'trademark' is a symbol attached to goods or services that adds or creates a distinctive quality to the product by associating it in the buyers mind with some manufacturer or distributor. Its main purpose is to eliminate 'free riding' by other manufacturers of similar goods and services. A person who buys a 'patent' acquires an exclusive business/commercial right, and if there is a breach he can sue. In the present case also the assessee company acquired an exclusive business/commercial right, and in the case of a breach the assessee could sue. Therefore, there are no doubt that, on the facts of the case the business/commercial right acquired by the assessee is of the same nature as the business/commercial right of a patent. Thus, the 'non-compete right' acquired by the assessee company, was eligible for depreciation under cl. (ii) of s. 32(1) of the Act - The order of CIT(A) is accordingly, upheld. Issues Involved:1. Claim of depreciation on non-compete fee paid by the assessee.Issue-wise Detailed Analysis:1. Claim of Depreciation on Non-Compete FeeBackground and Facts:The Department appealed against the order of CIT(A) dated 25th June 2007, for the assessment year 2002-03, which directed the AO to allow depreciation on the non-compete fee of Rs. 2 crores at the rate of 25%. The assessee company (MTIL) is engaged in the manufacture and distribution of bulk drugs and intermediaries and sought to expand its market reach. MTIL entered into an agreement with Medispan Limited (MS) to transfer MS's export business, which included a non-compete obligation for a period of 10 years.Arguments by the Department:- The Department argued that the non-compete fee does not qualify as an asset under s. 32(1)(ii) of the IT Act because it lacks market value, assignability, and transferability.- The Department cited definitions from Advanced Law Lexicon and various Tribunal decisions to support their claim that non-compete obligations are not similar to know-how, patents, copyrights, trademarks, licenses, or franchises.- The Department relied on the decision of the Tribunal in the case of A.B. Mauria India (P) Ltd., where depreciation on non-compete fee was not allowed.Arguments by the Assessee:- The assessee contended that the non-compete fee represents a business/commercial right similar to the intangible assets listed in s. 32(1)(ii).- The assessee argued that the non-compete obligation acquired was a tool to carry on the business and should be eligible for depreciation.Tribunal's Analysis and Decision:- The Tribunal examined the legislative history and scope of s. 32(1) of the IT Act, noting that the scope was widened by the Finance Act, 1998, to include intangible assets.- The Tribunal emphasized that the traditional concepts of asset valuation and depreciation have evolved, and the provisions of s. 32 do not necessarily follow these traditional concepts.- The Tribunal applied the principle of ejusdem generis to determine whether the non-compete right was of a similar nature to the listed intangible assets.- The Tribunal concluded that the non-compete right acquired by the assessee was indeed a business/commercial right and was of a similar nature to patents, copyrights, trademarks, licenses, and franchises.- The Tribunal distinguished the present case from the A.B. Mauria India (P) Ltd. case, noting that the facts and circumstances were different.Conclusion:The Tribunal upheld the order of CIT(A), confirming that the non-compete right acquired by the assessee was eligible for depreciation under s. 32(1)(ii) of the IT Act. The appeal filed by the Department was dismissed.