TMI Blog2014 (4) TMI 667X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Eicher Limited [2008 (3) TMI 15 - HIGH COURT OF DELHI] - the assessee could not be said to have derived any enduring benefit out of the payment of non-compete fee - it is in the nature of restricting only one of the employees of the Company that was taken over by the assessee company – thus, it cannot be considered as a Capital expenditure - the tax authorities were not justified in disallowing the claim of ₹ 80.88 lakhs treating the same as Capital expenditure - thus, the order of the CIT(A) set aside – Decided in favour of Assessee. - I.T.A. No. 3411/Mum/2011 - - - Dated:- 28-2-2014 - Shri B. R. Mittal, JM And Shri B. R. Baskaran,AM,JJ. For the Appellant : Shri F. V. Irani/N. H. Gajania For the Respondent : Shri Pitamber Das/ Mr Surendra Kumar ORDER Per B. R. Baskaran, AM : The appeal filed by the assessee is directed against the order dated 18.2.2011 passed by the ld CIT(A) - 22, Mumbai and it relates to the AY 2008-09. 2 The assessee is assailing the decision of the ld CIT(A) in confirming the disallowance of Rs.80.88 lacs paid as non-compete fee to an Executive Director treating the same as capital expenditure. 3. The facts relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the settlement deed. Accordingly, the AO took the view that the settlement with the Director gives enduing benefit to the company. Accordingly, by placing reliance on the decision of the Chennai Bench of the Tribunal, in the case of Asianet Communication vs DCIT reported in (7 SOT 496) (Chennai), the AO rejected the claim of the assessee and added the same to the total income returned by the assessee. 5. In the appellate proceedings, the ld CIT(A) confirmed the addition with the following observations: During the course of appellate proceedings before me it was submitted by the appellant that non compete fees was paid in terms of Article 5 of the said deed to prohibit competition of Mr. Parasrampuria for one year which doesn t create any asset and hence it is revenue in nature. The appellant distinguished the case law relied upon by the A.O. stating that the restriction was for 5 years while in appellant s case it is only for one year. The appellant also relied upon several case laws. However, on perusal of 3 judgments. it is noted that in the case of Eicher Ltd (supra) (*173 Taxman 251) the facts are different since in that case it was not clearly brought on record as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opinion that the AO was justified in treating the non compete fees paid by the appellant as capital in nature which is upheld. (* supplemented) Aggrieved by the order of the Ld CIT(A), the assessee has filed this appeal before us. 6. The Ld Counsel for the assessee submitted that the assessee has deducted tax at source from the non-compete fee. He further submitted that the the payee has also declared the said receipt as his income in the Income tax return filed by him and also paid the tax thereon. The Ld Counsel further submitted that the impugned amount of Rs.80.88 lakhs was paid in terms of Article 5 of the agreement. He further submitted that the Articles 8 and 9 are standard type of clauses, which are invariabily incorporated in all the settlement deeds. He further submitted that the payee was not paid any compensation under clause 8 and 9 and hence the tax authorities are not correct in presuming that the amount of Rs.80.88 lakhs relate to those clauses also. He further submitted that the restriction imposed on the assessee under Article 5 will be in effect for a period of one year only. Accordingly he submitted that the assessee did not get any enduring benefit f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the impugned payment should be allowed as a deduction. 7. On the contrary, the ld D.R submitted that the Compromise Settlement Agreement entered between the assessee and Shri Sanjeev S Parasrampuria should be read as a whole. Though under Article 5 it is stated that the restriction is for one year only, yet there is no such time restriction precribed in Article 8 and 9. As per Article 8, the payee should maintain all Confidential Information , which he may have had access or acquired or received by virtue of his employment. As per Article 9, all intellectual Property in any work or material developed, discovered, invented, designed and/or authored by the payee, either individually or in conjuction with any other employee during the course of his employment with the Company, shall belong to and are the absolute property of the Company. By inviting our attention to these clauses, the ld D.R submitted that the assessee Company has acquired the intellectual rights on permanent basis and consequently acquired an enduring benefit. He further submitted that the claim of deduction of TDS from the payment made as non-compete fee or the claim that the payee has offered the same as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be paid a compensation of 100000 USD on 31.08.2008 with the condition that the process of acquisition of shares of Indorama takes place smoothly. In addition to the above, Mr. Parasrampuria was paid 200000 USD as compensatory indemnity under Article 5. The said Article 5 reads as under:- In view of the international activities of the Company, the Executive Director agrees that after termination of his employment with the Company, he shall be prohibited, during the period and within the territory specified below, from exercising activities which could be in effective competition with the Company during the prohibition period either by running a personal enterprise or by being hired by a competitor and having thus the opportunity to cause a prejudice to the Company or its Group by using for himself or for the profit of a competitor his knowledge of any practice specific to the Company or its Group which he has acquired during his employment with the Company either directly or indirectly. The prohibition set forth above shall apply during a period of one (1) year as of the termination of his employment with the Company and shall cover the following terriroty : India, Banglad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom a careful reading of Article 9. 9.4 The territorial restriction prescribed in Article 5, in our view, does not lead to a conclusion that Mr. Prasrampuria was carrying on any business in those area. On the contrary, he was only prohibited from exercising the activities prescribed in Article 5 in those four countries. During the course of arguments, the Ld A.R categorically submitted that the payee did not carry on business in those territories. Hence, in our view, the Ld CIT(A) has entertained the same only on surmises and presumptions. 10. The foregoing discussions would show that all the three reasons cited by the Ld CIT(A) to confirm the addition has failed. We also notice that the period of prohibition / restriction is for a period of one year only. In our view, the period of one year cannot be considered as a long period which would give an enduring benefit to the assessee. Hence, we agree with the contentions of Ld A.R that the decision rendered by Hon ble Delhi High Court in the case of Eicher Ltd (supra) shall be applicable to the instant case. Accordingly we hold that the assessee could not be said to have derived any enduring benefit out of the payment of noncomp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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