TaxTMI 
TaxTMI 
2011 (6) TMI 507
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..... 50,000/- per month and an amount of Rs.25,000/- per month paid to Mr. M.G. Saraf and M.G. Saraf (HUF) towards agreeing and undertaking not to compete and cease to carry on the business treating the amounts paid as per capital in nature. The appellant submits that under the facts and circumstances of the case the amounts paid should have treated as revenue in nature. 3. The learned CIT(A) further erred in not taking into account the supplementary deed and clarificatory deed dated 1.4.2002 entered into by the appellant with the above parties for the apportionment of payments between right to use Trade Name and Non-compete fees. Your appellant submits that under the facts and circumstances of the case it was not open to the Assessing Officer to give a different interpretation to the agreement entered into by the appellant with the above mentioned parties. 4. Without prejudice to the above claim that the learned CIT(A) should have taken into account the supplementary and clarificatory deed entered into by the assessee with the above parties, the learned CIT(A) further erred in not following the "Principle of Apportionment" and treating the total amount of Rs.3,50,000 per ....
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....00,000/-. This claim was for the first time made in A.Y. 1997-98 and in subsequent years and the A.O. in the respective scrutiny assessments held the amount as capital expenditure and disallowed the same. This matter was carried to the ITAT, which by the orders in ITA 2218/Mum/2002 for A.Y. 1997-98 and ITA No. 3170/Mum/2002 for AY 1998-99 and ITA no. 3171/Mum/2002 for A.Y. 1999-2000 dated 17th October 2005 held that the amounts were capital in nature. However, during the impugned assessment years assessee made a separate claim on the basis of the supplementary agreement entered into by assessee company w.e.f. the first day of April 2002 with the above said two persons on the basis of which the payment of 3, 50,000/- and 2,00,000/- payable to the respective parties were in turn bifurcated as 3,00,000/- towards use of trade name Supertex and 50,000/- towards non compete fees in the case of M.G. Saraf and 1,75,000/- towards use of trade name Superchem and 25,000/- towards non-compete fees to M.G. Saraf, HUF. On the basis of these supplementary agreements assessee claimed the amounts as assignment fees and royalty for the use of trade name. The A.O., while relying on the findings of th....
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....on thereon. He also relied on the decision in the case of ITO vs. Medicrop Technologies India Ltd. 30 SOT 506 (Chennai) to submit that eventhough the claim was not originally made assessee is entitled to make an alternative claim of depreciation under section 32(1) on non-compete fees, therefore, assessee has raised the additional ground regarding the claim of depreciation. He also relied on the decision of the ITAT Chennai Bench in the case of Orchid Chemicals and Pharmaceuticals Ltd. vs. SCIT 7 ITR (Trib) 601 (Chennai) that the additional grounds raised are grounds involving the question of law which can be raised at any stage of appeal proceedings and therefore the additional grounds are to be admitted and adjudicated upon. 5. Continuing the arguments the learned counsel placed on record the annual reports of assessee from financial year 2000-01 to 2004-05 to submit that upto annual report 200 1-02, i.e. before entering into the supplementary agreement the claim was as non-compete fees made in the books of account whereas w.e.f. 2002-03 onwards the claim was made on the basis of the supplementary agreement as assignment fees of 9,00,000/- and royalty for use of trade name of ....
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....pital in nature. Therefore the present agreement relied upon by assessee as supplementary/ clarificatory agreements does not change the original nature of the payments and relying on the orders of the ITAT in earlier years the amount has to be considered as capital expenditure, even if the present agreements were considered. It was his case that the supplementary clarificatory deeds will naturally acquire its legitimacy on the terms originally agreed between the parties and since the original agreement was already considered by the ITAT in its entirety the nature of the payment eventhough now treated by the party differently cannot be changed. It was further submitted that the ITAT Special Bench in the case of Tecumseh India P. Ltd. vs. ACIT 127 ITD 1 (SB) (Del) has considered various case law on the issue and held that non-compete fees is capital in nature and since this agreement was entered and the businesses were acquired prior to the 1st of April 1998, provisions of section 32(1)(ii) with reference to intangible assets does not apply to the facts of the case. The original rights were acquired as early as 01.09.1996, therefore, the depreciation on the non-compete fees was not e....
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....he record and have considered the precedents cited before us. "First of all, it would be fruitful to refer to the relevant agreements entered into by the assessee company with the two proprietary concerns. These agreements are, mutatis mutandis, similarly drafted and therefore we will refer to the relevant clauses of the agreement dated 2.9.96 entered into by the assessee company with Shri M.G. Saraf. In the preliminary clause, the purpose of the agreement is indicated at page 4 of the agreement, relevant part of which may be reproduced below. "Whereas with a view to achieve its ultimate objective, the party hereto of the second part approached the party hereto of the first part with a proposal to takeover as a running business/going concern the running business and infrastructural facilities, including the continued use of the registered trade name of the business of dealing in textile chemicals & auxiliaries carried on under the name of Supertex (India) Corporation (hereinafter referred to as specified business) from the party hereto of the first part. Whereas the parties hereto of both the parts had a number of meeting for discussion and negotiating the terms and condition....
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....lue so determined within three months from the date of the valuation report, which in any case shall not be later than 31.12.97. In consideration of the transfer and assignment of the specified business as a going concern and considering the 'no compete' obligation undertaken by the proprietor, the company shall pay to the proprietor a sum of Rs.3,50,000/- per month for a period of 15 years starting from 1.9.96 till 31.8.2011. Subject to deduction of tax, if any, under the relevant provisions of the IT Act. The said sum of Rs.3,50,000/- shall accrue and become due at the end of each calendar month." From the above, it may be seen that all fixed assets as per annexure A have to be valued by a valuer. Clause 7 mentions that in consideration of the transfer and assignment of the specified business as a going concern and considering the 'no compete' obligation undertaken by the proprietor, the company shall pay a sum of Rs.3.50 lakhs per month for a period of 15 years. It is true that the assessee company would also get the benefit of the exclusive use of trademarks as also the tenanted premises, which are inseparable part of the proprietary business as a going concern. The agree....
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....themselves contractually not to carry on similar business activity in whatever names for a period of 15 years. As a consideration, the impugned monthly payments are to be paid by the assessee company for a period of 15 years. This means that on the expiry of the non-compete period of 15 years, the payments would also cease to be made. We do not find much merit in the arguments of the ld. counsel for the assessee that the payments are partly attributable to the benefit acquired by the assessee company by way of use of the tenanted premises at a nominal rent. There is no reference to this fact in the agreement. Further, the landlord or owner of such premises is not a party to the agreement and even if some benefit has accrued to the assessee company, it is entirely on account of the Rent Control Act, which may be applicable. The business premises either owned or rented have been taken over by the assessee company as part of the overall agreement or arrangement for purchase of proprietary business as going concern along with all assets and liabilities. 17. Another argument submitted by the ld. counsel for the assessee that one of the proprietors, viz. M. G. Saraf, HUF agreed for in....
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.... from the agreements entered with the erstwhile proprietary concerns by Assessee Company dated 02.09.1996 effective from 01.09.1996 the agreements were very clear that the entire specified business was transferred as ongoing concern to that of the company. This aspect was also discussed by the ITAT in its order in para 10, which was extracted above. The specified business as defined in the agreement includes the running business and infrastructural facilities, including continued use of registered trade names of the companies, i.e. the name of Supertex and Superchem in the respective cases. Not only that vide clause 1, the specified business with its assets and liabilities as a running business/going concern including without limiting the generality thereof, was taken over by assessee. Clause 1.1 is for right to use the trade name Supertex/Superchem. Clause 1.2 is for assets, which are free from all liens and encumbrances, whether legal or otherwise including the rights, title and interest of the proprietors in Supertex/Superchem. Clause 1.6 & 1.7 are specific with reference to trade marks and right to use trade mark which are as under: - "1.6 The Trade Mark and Trade name regis....
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....ction 80-0 in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the source indicated in the section. Contracts of the type envisaged by section 80-0 are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contracts. If the contracts in the present case obliged the assessee to make available information and render services to the foreign Government of the nature outlined in section 80-0, it was the duty of the revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services was apportioned and the assessee given the benefit of the deduction available under the section to the extent of such consideration." 11. In fact the above judge....
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....eciation. In the above referred case the issue of non-compete fees was considered and held to be capital in nature. In that case assessee, who was only a subsidiary of Tecumseh-USA entered into MOU with Whirlpool-India Ltd. through which Whirlpool India decided to sell compressors and related operations owned by it at Faridabad. In accordance with the MOU both the parties entered into asset purchase agreement and the total amount paid to Whirlpool India was an amount of 52.5O crores. The said amount included an amount of 2.65 crores toward non-compete fees. This amount was claimed by assessee to be non-compete fees as revenue expenditure. The A.O. as well as the CIT(A) rejected the claim considering the entire gamut of case laws and the agreement entered into by the parties. The Hon'ble Special bench considered and held as under: - "The assessee's parent company being a leading manufacturer of compressors worldwide, had desired to enter into the Indian market for that activity and, for the purpose of effectuating such desire that company entered into a MoU with the Whirlpool India Ltd. and its parent company in which it was clearly stated in clause 1.1 that Tecumseh and Whirlpoo....
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....he same, the total would come to Rs. 52.50 crores. Thus, it would be incorrect to say tht the non-compete agreement should be considered on stand alone basis as the reference to non-compete agreement was not coming for the first time in the agreement dated 2-7-1997, but it originated from the MoU dated 4-11-1996 wherein as per clause 12, it was clearly stated that these parties would enter into a non-compete agreement and aggregate amount of transfer of all these assets was stated to be Rs. 52.50 crores. All other events had proceeded on the basis of MoU only as there was no significant change in what was stated in the MoU as a total consideration for the whole of the transaction and what was subject to transfer. While considering the facts and arriving at a legal conclusion from those facts, it was necessary to go into the entire transaction for proper appreciation of the facts as well as law. From the facts it was clear that for entire transaction which included non-compete agreement an aggregate sum of Rs.52.5 crores was agreed to be paid as per clause 3.1 of the Mou. As per clause 3.4 of the MoU parties were to meet for determining the proper allocation of the purchase....
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....reof was for the purpose of determining the allowability or otherwise thereof from income-tax point of view, as other payments were never claimed by the assessee on revenue account. But that did not mean that the Assessing Officer had considered non-compete agreement on stand alone basis. As pointed out earlier, to arrive at a proper conclusion, it was necessary to go into the entirety offacts and even if it was the case of the assessee that the Assessing Officer and the Commissioner (Appeals), both had considered the non-compete agreement on stand-alone basis, even then the Tribunal was not precluded from going into the MoU and main agreement to decide the question relating to allowability or otherwise of such a claim of the assessee. Therefore also, the contention of the assessee, that non-compete agreement should be considered on stand alone basis could not be accepted. Coming to the nature of expenditure in question, it can be seen from the various tests laid down in the earlier decided cases that broadly the basic tests to determine the nature of an expenditure remain the same even in the context of a modern situation and those tests include the test of initial outlay of....
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....n expenditure incurred while the business was being carried on. Though it had been the contention of the assessee that non-compete agreement was executed subsequent to the date of main agreement, yet such contention of the assessee could not be accepted as in the main agreement itself the non-compete agreement was appended as 'M' without which the transaction was not complete, as by including the amount paid for non-compete agreement the purchase price as stated in MoU could be arrived at. The incurring of expenditure also brought an enduring benefit to the assessee if the same was examined from the proposition of law laid down in the case of Assam Bengal Cement Co. Ltd. v. CIT [1995] 27 ITR 34 (SC) wherein their Lordships have considered the period of five years as providing an enduring advantage to the assessee irrespective of the fact that the payment was to be made annually. It is well-settled that expenditure incurred on warding off competition in the business even to a rival dealer will constitute capital expenditure and to hold it as capital expenditure it is not necessary that non-compete fee be paid to create monopoly rights. In view of aforesaid, it was to be hel....