TaxTMI 
TaxTMI 
2014 (4) TMI 667
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....esent name. One, Shri Sanjeev Parasrampuria was the Executive Director of the company, who was associated with M/s Indorama Cement Limited and he was looking after the management functions of the company. Upon takeover of the company by the new Management, the company terminated the services of Shri Sanjeev Parasrampuria and in that connection, it entered into a compromise settlement with him on 25.2.2008. Under terms of the settlement, the assessee company paid Rs.80.88 lacs as "non-compete fee" to him. The assessee treated the same as revenue expenditure and accordingly claimed deduction thereof. 4. During the course of assessment proceedings, the AO took the view that the payment of "non-compete fee" falls in the category of Capital Expenditure and accordingly proposed to disallow the same. In response to the query raised by the AO, the assessee offered following explanations before the AO: "It was paid to Mr Sanjeev Parasrampuria, E.D on termination of his employment with the company and with a condition to prohibit him for one year from exercising activities which could be effective competition with the company during this prohibition period either by running a personal ente....
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....ectly related to the sale production capacity of two chemicals which in turn had effect of carrying on assessee's business efficiently and profitably and hence there was no enduring benefit, consequently, the nature was held to be revenue. The other case law of Amway India Enterprises (*111 ITD 112) is not directly on non- compete fees hence not relevant. Further, a perusal of Article 5 of the agreement (Compromise Settlement) dated 25.02.2008 in case of appellant, it is noted that the prohibition is for one year and covers territory of four countries i.e. India, Bangladesh, Pakistan and Afghanistan. By putting such a territorial restriction, the assessee has acquired the business of these countries which could have been carried on by Mr. Parasrampuria in these countries. Further, as per Article 8,. Shri Parasramputia will not disclose the confidential information acquired during his employment with the company which includes any information concerning methods, processes, systems, inventions, plans, formula, computer programs, software, research and development or intellectual property of the company as defined in Clause 8.5.. Thus, the non compete fee is also in lieu of these asse....
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.... order, has categorically held that the question of deduction of non-compete fee should be considered purely on the basis of appreciation of facts of each case. He submitted that the non-compete fee was paid to the erstwhile director of the company in order to prohibit him to take employment somewhere else or to do business on his own, with the belief that if he indulges in such kind of activities, it may affect the revenue of the assessee company. Accordingly he contended that the impugned payment should be considered as a revenue expenditure, since it was paid considering the revenue aspect of the assessee company. The Ld Counsel placed strong reliance on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Eicher Ltd (2008)(302 ITR 249)(Delhi) and submitted that the Hon'ble High Court has categorically held that the non-compete fee cannot be considered as Capital expenditure, if the restrictionis neither permanent nor ephemeral with no enduring advantage or acquisition of capital asset. 6.1 He further submitted that, in the case of Tecumseh India (P) Ltd (supra), the non-compete fee formed part of the MOU entered for purchase of company. However, the assessee therein....
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.... A.R submitted that the assessee is entitled to recover the amount paid as non-compete fee from the payee, if he violates Article 5. However, no such consequence is provided in the Compromise Settlement deed for violating Article 8 and 9. Accordingly he submitted that the tax authorities are not correct in placing undue reliance on Articles 8 and 9, since they are standard terms, which are normally included in such kind of Settlement deeds. He further submitted that in the case of Assam Bengal Cement Co. Ltd, the lease period was 20 years and hence the said decision cannot be taken support of by the revenue. 9. We have heard the rival contentions and carefully perused the record. We notice that the Ld CIT(A) has upheld the addition on the following reasoning:- (a) The prohibition imposed under Article 5 covers territory of four countries., viz., India, Bangaladesh, Pakistan and Afghanistan. By putting such a territorial restriction, the assessee has acquired business of these countries which could have been carried on by Mr. Parasrampuria in these countries. (b) The non-compete fee of Rs.80.88 lakhs was paid in lieu of Article 8, which discusses about the confidential informatio....
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.... 3 above, and will be paid immediately upon signing this agreement." It can be noticed that it is clearly provided in the above said clause that the compensation of 200000 USD is paid for enforcement of this clause. Hence, in our view, the conclusion reached by the tax authorities that the impugned compensation is also paid for enforcing clauses 8 and 9 does not appear to be correct. 9.2 A careful reading of clause 8 would show that the said clause only provide that the payee should maintain all Confidential Information as strictly confidential. As submitted by Ld A.R, this is a usual clause, which is normally incorporated in the separation agreements. Even otherwise, it is expected from anybody that he should not divulge any confidential information, which was acquired or obtained during the course of employment. 9.3 Under Article 9, it is provided that all intellectual Property in any work or material developed, discovered, invented, designed and/or authored by the Executive Director, either individually or in conjunction with any other employee/consultant of the Company, during the course of his employment with the Company, shall belong to and are the absolute property of the....