TMI Blog2005 (10) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of deduction under section 80HHC. This issue is also admitted to be covered in the assessee s favour by the Bombay High Court decision in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769. Accordingly, the order of the learned Commissioner of Income-tax (Appeals) on this issue is confirmed. The ground No. 3 pertains to the finding of the learned Commissioner of Income-tax (Appeals) that non-compete fees of Rs. 38.5 lakhs paid by the assessee is deductible as revenue expenditure. The relevant facts having bearing on this issue are that the assessee-company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Other two sister concerns viz., Supertex (India) Corporation (proprietor : M. G. Saraf) and Superchem (proprietor : M.G. Saraf, HUF) were engaged in the trading of textile chemicals during the last several years. The assessee-company entered into separate agreements with the aforesaid sister concerns under which the assessee-company acquired, as a going concern, the aforesaid two proprietary businesses. On coming into effect of these agreements as on September 1, 1996, the abovementioned two pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerns were in the same line of business as that of the assessee. Hence, the payment towards non-compete agreement is for the purpose of protecting the interest of the assessee. The expenditure has been incurred on the principle of commercial expediency and exigencies. The proprietary concerns have acquired a considerable knowledge relating to trade secrets, know-how, processes and business information. The assessee has in order to prevent the proprietary concerns from continuing independent business activities which would have been detrimental to the business interest of the assessee has under the agreement paid the abovementioned amount as non-compete fees it is simple and straight business transactions only aimed to prevent otherwise potential business competitor which would prove inconvenient to the assessee causing it a considerable damage. Hence, payment made to dissuade the proprietary concerns from continuing independent business which would be detrimental to the assessee is to be allowed as revenue expenditure. The assessee also relied on the following judicial pronouncements before the Assessing Officer : (i) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been detrimental to the business interest of the assessee has under the agreement paid the abovementioned amount as non-compete fees. It is a business transaction which only aims to prevent otherwise potential business competitor which would prove inconvenient to the assessee causing it a considerable damage. Hence, payment made to dissuade the proprietary concerns from continuing independent business, which would be detrimental to the assessee is to be allowed as revenue expenditure. It is submitted that the learned Commissioner of Income-tax (Appeals) has completely ignored the clear facts stated above. Shri Rajendra took us through the relevant part of the agreement and argued that the impugned payment is entirely in respect of the non-compete obligation undertaken by the two proprietary concerns. He also submitted that the learned Commissioner of Income-tax (Appeals) has merely reproduced in his order the list of judicial pronouncements discussed by the Assessing Officer in his assessment order, without considering as to whether these cases were applicable to the facts of the assessee s case. On the other hand, he submitted that the learned Commissioner of Income-tax ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the assessee-company has been brought to the charge of tax as revenue receipts. Copies of the letter and the assessment order have been filed. Learned counsel submitted that in view of the above facts, it would be unfair to disallow the payments in the case of the assessee-company as capital expenditure. It is reiterated that the issue must be decided on the basis of the substantial facts and not merely by looking at the nomenclature of the payment as mentioned in the agreement. He also strongly relied on the judicial pronouncements which were cited before the learned Commissioner of Income-tax (Appeals). We have given a careful consideration to the elaborate submissions made before us by both the sides. We have also carefully gone through the facts as emerging from the 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 September 2, 1996, entered into by the assessee-company with Shri M. G. Saraf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in clear terms, the proprietary concerns have undertaken not to compete with the assessee-company in any way for a period of 15 years. In clause 5 of the agreement, it was further stipulated that with the transfer and assignment of the business of Supertex, the proprietor shall cease to carry on the business of dealing in textile chemicals and auxiliaries either in the name of Supertex or in any other name. The consideration receivable by the proprietary business is stipulated in clauses 6 and 7 of the agreement, which are as under : The proprietor agrees to transfer and the company agrees to acquire the fixed assets of the specified business as described in annexure A to this agreement at a value as may be arrived at on the basis of the report of a valuer and pay for the said value so determined within three months from the date of the valuation report, which in any case shall not be later than December 31, 1997. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio of this case is as under (headnote) : A firm of boilermakers were members of a trade association formed with the object of limiting competition and controlling prices. In furtherance of this purpose, the association (1) purchased the business of one of its members in order to prevent it being taken over by a non-member who would create external competition, the associa tion not intending to carry on the business, but to close it completely ; (2) granted a sum of money to a member to enable him to acquire a controlling share interest in a non-member competitive business. Each member was charged by the association a sum of money by way of contribution towards the expenditure involved in these transactions. The firm claimed to be entitled in both cases to treat the contributions made by them as payments out of income, for the purposes of income-tax assessment. It was agreed that no distinction ought to be drawn between the firm and the association and it was admitted that the two sums were laid out exclusively for the purposes of the trade of the firm : Held, that in both cases, the benefits which accrued to the association and its members were of an enduring capital chara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 65 the assessee claimed deduction of Rs. 7,200 paid under the agreement. The High Court observed that the agreement extended for a period of 5 years and resulted in elimination of competition and therefore the payment was of capital nature and was not deductible. In the case of Hindustan Pilkington Glass Works [1983] 139 ITR 581 (Cal), which has been referred to by the Assessing Officer, the facts and the ratio are as under (reproduced from the headnote) : The assessee entered into a tripartite agreement with two other concerns which produced the same type of commodity as was produced by the assessee. The object of the agreement was the elimination of competition in order to prevent possible annihilation of the business of the assessee. Under the terms of the agreement one of the concerns agreed not to produce the particular commodity and in consideration thereof the other two concerns agreed to pay to it a stipulated sum every year. The agreement was for a period of five years but it could be brought to an end earlier only if there was mutual consent in writing by all the parties. On the question whether the sum paid by the assessee under the agreement was allowable as bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Depending upon the facts and circumstances, in some cases, it has been held that even though the period of non-competition may be 2 to 5 years, the non-compete fee would still be in the nature of capital nature. Coming to the cases which have been relied upon on behalf of the assessee before the learned Commissioner of Income-tax (Appeals), the first case discussed by the learned Commissioner of Income-tax (Appeals) is the Supreme Court decision in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692. It was held in this case that any expenditure incurred for obtaining the right to use the patents and trademarks for a limited period is to be considered as an expenditure of revenue nature. The learned Commissioner of Income-tax (Appeals) has then referred to the Supreme Court decision in the case of CIT v. Coal Shipments P. Ltd. [1971] 82 ITR 902. The learned Commissioner of Income-tax (Appeals) has observed that in this case, it was held that any payment made to ward off competition constitutes revenue expenditure. To appreciate the finding of the Supreme Court in this case, it would be necessary to reproduce below the relevant part of the headnote : Held that the payment m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in determining whether the payment is revenue or capital disbursement qua the payer. (ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may nonetheless, be on revenue account, and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principal laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. (iii) W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent provided that the Government shall be further entitled to 20 per cent. of the annual net profits subject to a maximum of Rs. 40,000 after providing for depreciation and remuneration of the secretaries and treasurers. This clause was amended to the effect that the Government should be entitled to 10 per cent. of the annual net profits, which was explained to mean the net amount for which the company s audited profits were assessed to income-tax in Travancore. For the previous year relevant to the assessment year 1958-59 the amount payable to the Government under clause 7 came to Rs. 42,480 and the question was whether that amount was allowable under section 10 of the Indian Income-tax Act, 1922. The High Court held that that amount constituted capital expenditure. On appeal, the Supreme Court held that the payment was in the nature of revenue expenditure but remanded the case to the High Court for determining the questions : (a) whether the payment was tantamount to diversion of profits by a paramount title, (b) whether the transaction was a joint venture with an agreement to share profits, and (c) whether the requirements of section 10(2)(xv) were satisfied. The Department not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has undertaken to pay a sum of Rs. 3.5 lakhs per month to one proprietor and another sum of Rs. 2 lakhs per month to another proprietor which is clearly for eliminating competition in the same line of business for a sufficiently long period of 15 years. The user of trademark, if any, by the assessee-company is only an inseparable part of the entire arrangement. By the non-compete clause of the agreement, the erstwhile proprietors are automatically excluded from use of such trademarks and they have bound 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 assesseecompany for a period of 15 years. This means that on the expiry of the noncompete period of 15 years, the payments would also cease to be made. We do not find much merit in the arguments of learned counsel for the assessee that the payments are partly attributable to the benefit acquired by the assessee-company by way of user of the tenanted premises at a nominal rent. There is no reference to this fact in the agreement. Further, the land lord or owner of such premises is not a party to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has rightly decided the issue in view of the Supreme Court decision referred to above. Therefore, his order on this issue is confirmed. Appeals Nos. 3170 and 3171 - Assessment years 1998-99 and 1999-2000 : The first ground, which is common for both the assessment years, pertains to the finding of the learned Commissioner of Income-tax (Appeals) that excise duty is to be excluded from the total turnover for computation of deduction under section 80HHC. This issue is also admitted to be covered in the assessee s favour by the Bombay High Court decision in the case of Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769. Accordingly, the order of the learned Commissioner of Income-tax (Appeals) on this issue is confirmed. The only other ground, which is common for both the assessment years, pertains to the finding of the learned Commissioner of Income-tax (Appeals) that non-compete fees are in the nature of revenue expenditure. This issue has already been considered and decided while dealing with the Department appeal for the assessment year 1997-98. For similar reasons, the expenditure is held to be capital expenditure and the Assessing Officer is directed accordingly. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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