TaxTMI 
TaxTMI 
2011 (11) TMI 372
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....included a sum of Rs. 5.94 Crores by way of non-compete fee which was limited for a period of 5 years. Seller Company (KOAL) before the transfer of said business has been acting as a distributor of Pitney Bowes' products in India and Nepal. In the year under consideration, the Pitney Bowes Inc., USA (holding company of the assessee) had decided to enter in the Indian market directly and consequently has caused the incorporation of the assessee company as its wholly owned subsidiary. 2. For the instant assessment year 2005-06, the assessee company filed its return of income, declaring a total loss of Rs. 2,59,84,980/- as was computed in the computation of income. 3. In the said return, the assessee claimed deduction of non-compete fee of Rs. 5.94 Crores as business/revenue expenditure in the computation of income filed with the return of income. The Assessing Officer (AO), however, disallowed the same on the ground that the payment of non-compete fee was a capital outlay, non-allowable under Section 37 of the Act. The assessee filed appeal against this order before the CIT (A). The CIT (A) held that the expenditure incurred on non-compete fee by the assessee needs to be allowe....
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....d of five years, who has acquired the running mail business as a going concern. Clause 33.2 of the Agreement provided for certain adjustments and deductions to be made at closing, from the aforesaid consideration. Under the aforesaid agreement, Clause 7 provided that the seller shall comply with the non-compete obligations set forth in Annexure 1.1(B). From the perusal of the Annexure 1.1(B), it would be seen that it was specifically provided that there is a non-compete obligation of the transferor when it undertook that it shall not either on its own account or in conjunction with any of its affiliates or others and whether directly or indirectly for a period of five years from the closing date establish, develop, carry on or assist in carrying on or be engaged, concerned, interested, or employed in or provide technical, commercial or professional advice to any other business enterprise or venture which supplies goods and/or services which are competitive with or are of the type supplied by the business at the closing date within the whole of India. It is, thus, evident that the assessee company incurred an expenditure to eliminate the competition for a limited period of five year....
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....years and was not ephemeral. It is also undisputed that by incurring the expenditure to eliminate competition it was able to deter M/s KOAL who was trading in the same automation equipment. It was able to increase its revenues thereby earning profits, which is the revenue profit and, thus, the expenditure incurred was in the commercial field. 10. The learned counsel for the Revenue, on the other hand, relied upon the reasons given by the Tribunal in holding the expenditure to be capital in nature. He drew our attention to Para 3 of the impugned order of the Tribunal where the Tribunal had recorded that both the parties agreed that the issue about the non-compete fee by the assessee was covered by the decision rendered by the Tribunal, Principal Bench, Delhi vide judgment dated 30.7.2010 in the case of Tecumseh India (P.) Ltd. v. Addl. CIT [2010] 132 TTJ 129 (SB). 11. We have considered the submissions of both the parties. We find that in the return filed by the assessee, it had given its Notes to the computation and Note file pertained to non-compete fee, which was stated in the following terms: "5. Non-Compete fee paid to KOAL - During the year, the Company had acquired the mai....
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....so found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non compete agreement is applicable for 5 years, which period has been considered to be sufficient to give enduring benefit in the case of Assam Bengal (supra). 131. With these observations we hold that the expenditure of Rs. 2.65 crore claimed by the assessee in pursuance of non-compete agreement dated 10th July, 1997 are capital expenditure, the deduction of which cannot be granted to the assessee as revenue expenditure. The main issue is decided against the assessee and in favour of the revenue." 13. The position in the instant case is almost identical. That was a reason that even the learned counsel for the appellant had conceded before the Tribunal that the matter was covered by the aforesaid Special Bench decision. 14. Agreeing with the aforesaid view, we are of the opinion that the Tribunal rightly held that the expenditure was capital in nature. Question No.(1) is answered accordingly. Re: Applicability of Section 32(1)(ii): 15. Alternate submission of the lear....