TaxTMI 
TaxTMI 
2011 (6) TMI 505
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....ubro was not a competitor of the appellant and the aforesaid expenditure has not been incurred for business purposes of the appellant; 3. That without prejudice, the ld. CIT (Appeals) erred on facts and in law in not holding that the aforesaid expenditure was allowable over the period the benefit of the aforesaid expenditure was to enure; 4. Further, without prejudice, the ld. CIT (Appeals) erred on facts and in law in not appreciating that the aforesaid expenditure resulted in acquisition of an intangible asset and disallowing the appellant's claim of depreciation in respect of the same alleging that the aforesaid expenditure was incurred for non-business purpose." 3. The first issue for consideration relates to confirming the disallowance of Rs. 3,00,00,000/- made by the assessing officer in respect of non-compete fee paid to M/s. Larsen and Toubro Ltd. [L & T]. The facts of the case stated in brief are that the assessee company was incorporated on 27th March, 2000 in pursuant to joint venture agreement by and between M/s. Larsen & Toubro Ltd. and M/s. Sharp Corporation, Japan. Prior to joint venture agreement L & T was engaged in the business of developing, manufact....
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....submitted that if the advantage consisted merely facilitating assessee's trading operations or enabling the management to conduct the business more efficiently/profitably, while leaving the fixed capital un-touched, the expenditure would be on revenue account, even though the expenditure might endure for an indefinite future. It was also submitted that under section 28(va)(a) of the Income Tax Act, 1961 any sum received or receivable in cash or kind under an agreement for not carrying out any activity in relation to business shall be treated as revenue receipt in the hands of the receiver and will be subject to tax accordingly. As a natural corollary the payment of the aforesaid sum of Rs. 3 crores was to be treated as revenue expenditure in the hands of the payer. The assessing officer, however, held that the assessee company had made payment of the non-compete fee of Rs. 3 crores to L & T who had been engaged over a period of years in the business of selling, marketing and distribution of office automation and other products of different global leaders like Canon, HP and others and had developed a sales network all over India. By making the payment of Rs. 3 crores, the assess....
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....ring various arguments raised by the assessee, observed that the payment of Rs. 3 crores was allegedly made for ensuring that M/s. Larsen & Toubro Ltd. would not set up any undertaking or assist any undertaking in India for the business of selling, marketing and trading of office equipment products for a period of 7 years. He has also observed that the Larsen and Toubro Ltd. was not engaged in the business of electronic office equipments and the agreement was for period of seven years, the expenditure was not allowable as revenue expenditure as the same did not relate only to the year under consideration. He accordingly upheld the order of the assessing officer. 8.1 Before us the ld. AR of the assessee submitted that the expenditure incurred by the assessee did not add to the capital field. The expenditure incurred ensured the profitability of the assessee and, therefore, the expenditure was incurred in the revenue field. He placed reliance on the decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra). The ld. AR of the assessee further placing reliance on the decision of Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [19....
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.... the parties. The payments were not related to tie up in any way to any fixed sum agreed to between the parties. Further the ld. AR of the assessee submitted that the assessee by making payment to L & T had not altogether eliminated the competition. There were many others in the field. Therefore, it could not be said that the assessee had warded off the competition altogether. He placed reliance on the following decisions :- 1. Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC); 2. CIT v. G.D. Naidu [1987] 165 ITR 63/[1986] 24 Taxman 255 (Mad.); 3. Dy. CIT v. Mcdowell & Co. Ltd. [2007] 291 ITR 107 (Kar.); 4. CIT v. Eicher Ltd. [2008] 302 ITR 249/173 Taxman 251 (Delhi); 5. CIT v. Lahoty Brothers Ltd. [1951] 19 ITR 425 (Cal.). 8.2 He further submitted that in the case of Tecumseh India (P.) Ltd. v. Addl. CIT [2010] 127 ITD 1/5 ITR (Trib.) 150 (Delhi)(SB), Special Bench of ITAT, Delhi, the payment was made for acquiring business, but in the case of the assessee, the payment has been made to enhance the profitability. Therefore, the payment does not result in advantage of c....
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....agreement with the assessee had undertaken not to set up any undertaking or assist in setting up, undertaking any business in India of selling/marketing and trading of electronic office products for a period of 7 years in lieu of which payment of Rs. 3 crores had been received. The business of joint venture is of importing, marketing and selling in India certain electric and electronic office products. Though, the business of joint venture i.e. Sharp Business Systems (India) Ltd. appears similar to that of L & T but payment of Rs. 3,00,00,000/- has been made in lieu of the latter, not setting up undertaking/assisting in setting up, undertaking any business in India of selling, marketing and trading of electronic office products for a period of 7 years. There is no dispute about the fact that L & T Ltd was having well-established country-wide net work in developing, manufacturing, marketing, distributing and selling various electronic equipments and products in India. The joint venture would have faced tough competition if L & T had set up any undertaking or assisted in setting up, undertaking any business in India of selling/marketing and trading of electronic office products. To w....
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....o the facts of the case as in that case the assessee paid amount for laying of cables by the Electricity Board to ensure the regular supply of electricity. In the case before us, expenditure has not been laid for creation of any asset which did not belong to the assessee, but has been paid to ward off the competition. The aforesaid decision of Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. (supra) has been referred in almost all the cases touching this issue and till the date the said decision has not been over-ruled. 13. Hon'ble Supreme Court in the case of Coal Shipments Ltd. (supra) has held that even in a case where payment is made to ward off competition in business to a rival dealer would constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. Hon'ble Supreme Court in the case of Punjab State Industrial Development Corpn. Ltd. v. CIT [1997] 225 ITR 792/93 Taxman 5 has held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to capital expenditure incurred by the company and although incidentally that wou....
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....1.4.2003 according to which any sum, whether received or receivable, in cash or kind, under an agreement for not carrying out any activity in relation to any business will be chargeable to tax under the head 'profits and gains of business or profession'. In the appeal before us the assessment year involved is 2001-02. It is not the case of the assessee that Larsen and Toubro Ltd had treated the payments received by it as business income and hence as a corollary to the amended provisions of section 28(va) the payment made will be treated as revenue expenditure. Hence, it is not possible to treat the payment of non-compete fee as revenue expenditure in the hand of the assessee for the assessment year under consideration. 16. In view of the above it is held that the non-compete fee paid by the assessee to ward off competition from L & T Ltd. is capital in nature and as such, it cannot be allowed as revenue expenditure. Accordingly, we do not find any infirmity in the order passed by the ld. CIT (Appeals) confirming the addition made by the assessing officer. 17. Alternatively, it has been argued that in case the expenditure is treated as capital in nature, in view of the....
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....le intangible assets like know-how, patents, copyrights, trademarks, licenses/franchises etc. can be sold/assigned to any other person for a value but non-compete right acquired on payment cannot be transferred for a price. No third party can be roped in, in the agreement for non-compete by way of sale/assignment as it is non saleable/un-assignable. Similarly, the right to trade freely or to compete in the market is not an asset. Hence, a right arising out of an agreement of non-compete or not to trade freely will not constitute a commercial right falling in the category of intangible assets. 19. Non-compete fee of Rs. 3,00,00,00/- has been paid to ward off the competition from L& T Ltd. Hon'ble Delhi High court in the case of CIT v. Hindustan Coca Cola Beverages (P.) Ltd. [2011] 331 ITR 192/198 Taxman 104/9 taxmann.com 104 while dealing with issue of depreciation on goodwill in paragraph 22 held as under: "22................To effectively understand what would constitute a intangible asset, certain aspects, like the nature of goodwill involved, how the goodwill has been generated, how it has been valued, agreement under which it has been acquired, what intangible asset i....
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....). Hence it renders no help to the assessee. Therefore, we are not in agreement with the arguments of the assessee that non-compete fee is an intangible asset to which provisions of section 32(1)(ii) of the Act are applicable. Therefore, in our considered opinion, the depreciation cannot be allowed on amount of non-compete fee. We accordingly dismiss this contention of the assessee. 21. The next contention of the assessee is that the expenditure incurred by way of non-compete fee should be allowed during the period of seven years. The reliance has been placed on the decision of the ITAT, Chennai Bench in the case of Orchid Chemicals & Pharmaceuticals Ltd. v. Asstt. CIT [2011] 137 TTJ 373/7 ITR (Trib.) 601/131 ITD 385/9 taxmann.com 44 wherein it has been held that payment of non-compete fee should be spread over in the light of decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 91 Taxman 340/225 ITR 802. We have considered the submissions made by the assessee. We following the decision of Special Bench, Delhi in the case of Tecumseh India (P.) Ltd. (supra) have held that payment of non-compete fee is capital expenditure. In....