TaxTMI 
TaxTMI 
2023 (10) TMI 1409
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....ame as revenue expenditure. For this, assessee has raised the following ground Nos. 2 & 3:- ''2. Disallowance of payment of non-compete fees: 2.1. That on the facts and circumstances of the case and in law, the CIT(A) has erred in confirming the disallowance of expenditure amounting to INR 2,42,80,088, being payment for non-compete fees, alleging it to be capital in nature, without appreciating that the expenditure was not incurred for bringing into existence any asset and / or an advantage of enduring nature. 2.2. That on the facts and circumstances of the case and in law, the CIT(A) has erred in confirming the disallowance of non- compete fees holding it to be capital in nature and not appreciating that the agreements for non-compete and asset purchase were independent and mutually exclusive. 2.3. Notwithstanding and without prejudice, that on the facts and circumstances of the case and in law, the CIT(A) has erred in not directing the AO to allow depreciation considering that non-compete fees was treated as capital in nature. 3. Disallowance of expenditure incurred in respect of customer and other contracts, backlog orders, customer and suppliers lists. 3.1. That on ....
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....ement to protect adequately the interests of the purchasers, and as ancillary to the Asset Purchase Agreement and the sale of the assets to the purchasers, and the purchasers would not consummate such transaction without the sellers execution to the agreement'' and noted that non-compete agreement cannot be considered in the standalone basis. Non-compete fee paid forms part of initial outlay on the acquisition of business and hence the assessee had acquired the right to carry on business unfettered by any completion which results in the protection for business as a whole and will help appreciate the whole of the capital assets. Hence, he treated non-compete fee, customer and other contracts, backlog orders, customer and suppliers lists as capital expenditure and hence disallowed the amount of Rs.3,21,91,838/-. Aggrieved, assessee preferred an appeal before the ld. CIT(A). 4. The Ld. CIT(A) after considering the submission of the assessee confirmed the action of the ld. Assessing Officer by observing as under:- '''5.5 I have examined the submissions of the AR of the appellanT. The APA and NCA are integrated and execution of one is dependent on the other. As noted already, Non Co....
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....(82 1TR 902) 0cd the decision of High Court of Madras in the case of CIT Vs GD Naidu (165 ITR 63). Hence, depreciation on Non-compete fee and other related expenditure rightly held as not allowable in the assessee's case''. Aggrieved, now the assessee is in appeal before us. 5. Ld. Counsel for the assessee stated the facts that during the financial year 2011-2012 for commercial consideration, assessee acquired certain assets pertaining to fuse and fuse accessories business of GE India Pvt Ltd pursuant to the asset purchase agreement dated 22.12.2011 for a total consideration of Rs.6,12,34,796/-. It was claimed by the assessee that it did not lead to any significant expansion of the existing capacity of the assessee. He drew our attention to the asset purchase agreement which was enclosed in paper book attached at Annexure-4A. He narrated the content of agreement and argued that assessee also entered into non- compete agreement with GE on 222.12.2011 for a period of three years, for which assessee had paid non-compete fee of Rs.2,42,80,088/- to GE India Pvt Ltd. Assessee claimed that the said agreements for asset purchase and non-compete fee are mutually exclusive and independ....
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....ally similar fuse products or accessories from any Person that purchased a Product, equivalent fuse, or substantially similar fuse product or accessory from the Sellers that would be a violation of Section 1(d) (3) if the purchase occurred during the Term or that was an actively sought prospective customer of the Business during the one year period prior to the Closing Date; and (B) The Sellers and GE hereby agree that, during the first year of the Term, the Participating Units will not (on behalf of the Participating Units or any other Person). directly or by assisting others solicit or attempt to solicit, any senior management employee of the Purchasers working primarily for the business acquired by Purchasers pursuant to the Asset Purchase Agreement, it being understood that contacts with individuals as part of generalized searches for employees shall not constitute conduct in violation of this provision." Further, ld. Counsel for the assessee drew our attention to para 1d(1) to 1d(4) and argued that he clarified that the non-compete agreement laid down the restrictive covenants that GE shall not do as under:- * ''Participate in any business conducted under any corporate, p....
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....nder:- ''Whereas, the purchaser, consider this agreement as integral to the transactions completed by the Asset Purchase Agreement to protect adequately the interests of the purchasers, and as ancillary to the Asset Purchase Agreement and the sale of the assets to the purchasers, and the purchasers would not consummate such transaction without the sellers execution to the agreement'' We note that non-compete fee paid by the assessee forms part of initial outlay on the acquisition of business by the assessee and in the combined reading of the asset purchase agreement and non-compete agreement suggest that non compete agreement was very much part of the entire part of the purchase of business of GE India Pvt Ltd by the assessee. Hence, by virtue of non compete agreement assessee has acquired the right to carry on business unfettered by any competition which results in the protection for business as a whole and will help appreciate the whole of the capital assets. Hence, we find no force in the argument of the Ld. Counsel of the assessee. We agree with the alternative argument of the ld. Counsel that since it was held as capital expenditure, the assessee is entitled for depreciatio....