TaxTMI 
TaxTMI 
2010 (6) TMI 557
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....pete fees paid to ward off competition for its existing business as capital in nature without appreciating that the said payment was for the improvement and furthering the prospects of on existing business and did not result in the creation of a new business as held by the Ahmedabad Bench of the Hon'ble ITAT in Smartchem Technologies Ltd., 97 TTJ 818. ii. Alternatively, if on the other hand it is held that the said payment is a revenue expenditure securing an advantage of an enduring nature over the term of the agreement (4 years), this being deferred revenue expenditure, is allowable over the period of agreement as held by the Apex Court in Madras Industrial Investment Corporation (225 ITR 802). iii. Alternatively, if it is held that the said payment is a capital expenditure and had resulted in the creation of a right of an enduring nature for the assessee viz. right to carry on business, the said right being an intangible asset, comes within the ambit of the term intangible asset as envisaged in section 32(1) (ii) and thereby entitling the appellant to depreciation as held by the coordinate Bench in Real Image Media Technologies P ltd. (120 TTJ 983) ....
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....Bench of this Tribunal in the case of Smartchem Technologies Ltd. v. ITO 97 TTJ 818, for contending that it was allowable as a revenue expenditure. However, the Assessing Officer was not impressed. According to him, payment of non compete fee was a capital outgo. There was an enduring benefit obtained by assessee and relying on the decision of Hon'ble Apex Court in the case of Assam Bengal Cement Company Ltd. v. CIT 27 ITR 34, the ld. Assessing Officer disallowed the claim treating it as capital in nature. Assessing Officer noted that assessee had paid Rs. 2 crores up-front and the period of tenure of the non compete agreement was long enough to be considered as resulting in an advantage of enduring nature. 5. Assessee's appeal before ld. CIT(A) did not meet with any success. Its pleading before ld. CIT(A) was that such outgo did not bring any benefit of enduring nature and non-compete agreement being only for a period of five years, it could not be considered as capital outgo. Reliance was once again placed on the decision of Smartchem Technologies Ltd. [supra]. It has to be noted that the Assessing Officer had distinguished this decision in his order on a reasoning that M/s Sm....
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....rallel to civil litigation. Hence, we admit the additional grounds for adjudication. 9. On the main ground raised by assessee that outgo should be treated as revenue expenditure, ld. counsel submitted that non compete fee was purely a revenue outgo since the advantage was only for a period of four years. According to him, decision of Ahmedabad Bench of this Tribunal in the case of Smartchem Technologies Ltd. [supra] had to be applied on facts here. Alternatively, in support of the additional grounds, it was submitted that if the sum paid was considered as deferred revenue expenditure, then based on the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation [supra], it should be allowed to be spread over four years. Further contention was that such non compete fee payment resulted in a commercial right and hence had to be considered as an intangible addition, eligible for depreciation u/s 32(1)(ii) of the Act. In support of the last plea, reliance was placed by assessee on the decisions of the coordinate bench in the case of ITO v. Medicorp Technologies India Ltd. [2009] 21 DTR 69 and ACIT v. Real Image Tech [P] Ltd. [2008] 14 DTR 138. 10. A....
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.... We have heard the rival submissions and perused the orders. Stripped of all trappings, we find that the case boils down to the issue whether non compete fees paid by assessee was revenue expenditure or deferred revenue expenditure or capital outgo and if capital outgo, whether it resulted in acquisition of any commercial rights which would fall within the realm of section 32(1)(ii) of the Act for being eligible for depreciation. A look at the agreement is called for, before deciding the issue. Agreement has been placed by the assessee at pages 3 to 59 of its Paper Book. Nature of the business purchased by assessee, has been given at para 1.4 of the agreement which is reproduced hereunder: "Business" shall mean the entire pharmaceuticals business of Sellers covering among others, the therapeutic segments of neuropsychiatry, cardio-vascular and anti-diabetes as well as nutraceuticals and dietary supplements and including but not limited to the IPRs, Permits, Identified Contracts, Employees, and Goodwill." 13. Thus the business acquired did include IPRs which has been defined in para 1.22 of the agreement as under : "IPRs" shall mean the intellectual property rights of each ....
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....ether the use of the words "Mono", "Sali", "Bala" and/or "Yet" and/or names of the divisions/products related to the Business, or any combination thereof in any language, script or alphabet in relation to or in connection with its activities including but not limited to its corporate name or trading name or trading style and shall not use or employ any name or words or devices closely similar in sound or appearance or meaning to the words "Mono", "Sali", "Bala" and/or "Yet" and/or names of the division I products related to the Business; (b) change or ensure to be changed the corporate name or trading name or trading style in such manner as to delete or omit completely therefrom the words "Mono", "Sali", "Bala" and/or "Yet" and/or names of the divisions/products related to Business and to this end each of the Sellers shall take all necessary arrangements and steps requisite or necessary under the laws with due diligence; (c) discontinue any use of the words "Mano", "Sali", "Bala" and/or "Yet" and/or names of the divisions/products related to the Business." or any variation thereof or any word or mark capable of causing confusion therewith or deceptively simila....
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....luence or attempt to influence any client, customer, or other person directly or indirectly to direct his or its purchase of the Purchaser's products and/or services to himself or any other Person in competition with the pharmaceuticals business of the Purchaser, including the acquired Business; iii. directly or indirectly solicit or attempt to influence any Person employed or engaged by the Purchaser (whether as an employee, consultant, advisor or in any other manner) to terminate or otherwise cease such employment or engagement with the Purchaser or become the employee of or directly or indirectly offer services in any form or manner to himself or any other Person which is a competitor of the Purchaser. The Sellers jointly and severally acknowledge and agree that the restrictions in Clause 10 of this Agreement are considered reasonable for the legitimate protection of the business of the Purchaser, including the Business acquired. However, in the event that such restriction shall be found to be void, but would be valid if some part thereof was deleted or the scope, period or area of application were reduced, the above restriction shall apply with the deletion of such w....
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....dated 3.1.2005 in the last mentioned case held as under: "The Hon'ble Jurisdictional High Court in Chelpark Company Ltd. v. CIT [1991] reported in 191 ITR 249 their Lordships held [Head Note] "that though under the agreement, the benefit of the restrictive covenant was for a period of five years from the term of the dissolution deed as well as from the facts stated by the Tribunal order that the partnership which was a potential competitor to the assessee had vanished and that the managing director had also left India, it was clear that the assessee off damaging competition from a potential competitor resulting in the acquisition by the assessee of a right as well as protection to carry on its business activities as a whole for so long as the assessee carried in such business. Consequently, the payment by the assessee was in the nature of a capital expenditure and not revenue expenditure." 17. Hon'ble Delhi High Court has in the case of CIT v. Eicher Ltd. 302 ITR 249 taken a view that non compete fee cannot be considered as a capital outgo. There the non compete period was indefinite and terminable at any point at the option of either parties. No doubt Section 28(va) of the A....