TMI Blog2010 (6) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the ld. CIT(A) in its appeal. According to the assessee, as per section 28(va) of the Income-tax Act, 1961 [in short, the Act], non compete fee received by a person had to be considered as income, and therefore, any payment of such fee had necessarily to be treated as a revenue outgo. Further grievance is that the lower Authorities did not follow the decision of the Ahmedabad Bench of this Tribunal in the case of Smartchem Technologies Ltd. v. ITO 97 TTJ 818, despite this being cited by the assessee. 2. Assessee has also raised certain additional grounds, which runs as under: i. The Learned Commissioner of Income Tax (Appeals) erred in disallowing the payment of Rs.2 crores as compete fees paid to ward off competition for its existing business as capital in nature without appreciating that the said payment was for the improvement and furthering the prospects of on existing business and did not result in the creation of a new business as held by the Ahmedabad Bench of the Hon ble ITAT in Smartchem Technologies Ltd., 97 TTJ 818. ii. Alternatively, if on the other hand it is held that the said payment is a revenue expenditure securing an advantage of an enduring nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores mentioned in column No. 3 above. Assessee had claimed it as Revenue expenditure. When the Assessing Officer asked for explanation, it was submitted by the assessee that the business acquired by it was specialized therapeutic segments of neuropsychiatry, cardio-vascular and anti-diabetes as well as nutraceuticals and dietary supplements, including the intellectual property rights and goodwill. According to the assessee, acquisition of the specialty therapy business had resulted in a positive contribution to its revenue. Further, according to it, there was only a maintenance of its profit making apparatus on account of such acquisition, and that too, by cutting off one of the possible sources of competition. Reliance was placed on the decision of the Ahmedabad Bench of this Tribunal in the case of Smartchem Technologies Ltd. v. ITO 97 TTJ 818, for contending that it was allowable as a revenue expenditure. However, the Assessing Officer was not impressed. According to him, payment of non compete fee was a capital outgo. There was an enduring benefit obtained by assessee and relying on the decision of Hon'ble Apex Court in the case of Assam Bengal Cement Company Ltd. v. CIT 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 82 would apply and hence treating this as a deferred revenue expenditure, it should be allowed over the period of agreement. Other alternative contention is only for allowing depreciation in case non compete fees was to be considered as giving rise to the acquisition of an intangible asset. It is trite law that grounds involving question of law can be raised at any stage of appellate proceedings, even though it was not before the lower authorities. In taking this view, we are fortified by the decision of the jurisdictional High Court in the case of CIT v. Indian Express (Madurai) Pvt. Ltd. 140 ITR 705, where it was held that powers of the Tribunal are not limited to the decision of a case before the lower authorities and its scope and jurisdiction are not parallel to civil litigation. Hence, we admit the additional grounds for adjudication. 9. On the main ground raised by assessee that outgo should be treated as revenue expenditure, ld. counsel submitted that non compete fee was purely a revenue outgo since the advantage was only for a period of four years. According to him, decision of Ahmedabad Bench of this Tribunal in the case of Smartchem Technologies Ltd. [supra] had t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Tribunal in the case of Bharatbhai J. Vyas v. ITO [2006] 97 ITD 248 and that of the Mumbai Bench of this Tribunal in the case of R.G. Keswani v. ACIT 308 ITR [AT] 271. 11. In his rejoinder, the ld. A.R. submitted that payment of non compete fee did give rise to a commercial right to the assessee and such commercial right would fall within the purview of intellectual rights, on account of a reason that certain persons who were having the intellectual capability and intellectual knowledge for competing with the assessee, was precluded from doing so, through the non compete agreement. Therefore, according to him, it was very much a commercial right, eligible for deduction u/s 32(1)(ii) of the Act, in case it was not considered as a revenue outgo. 12. We have heard the rival submissions and perused the orders. Stripped of all trappings, we find that the case boils down to the issue whether non compete fees paid by assessee was revenue expenditure or deferred revenue expenditure or capital outgo and if capital outgo, whether it resulted in acquisition of any commercial rights which would fall within the realm of section 32(1)(ii) of the Act for being eligible for depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion payable by the Purchaser to each of the Sellers for the Fixed Assets, the Outstanding inventory and other dues between the Parties." 15. Schedule giving break up of purchase price of Rs. 2400 lakhs reproduced at para four of this order would show that the amount relatable to the non compete covenant was Rs. 200 lakhs. Thus, there can be no doubt that assessee had purchased the business and purchase included a non compete clause as well. Obligations as per non compete clause given at paras 10.1 to 10.5 of the agreement run as under : "The Sellers hereby jointly and severally covenant that, upon Completion, each of the Sellers and their respective Affiliates shall forthwith: (a) discontinue altogether the use of the words "Mono", "Sali", "Bala" and/or "Yet" and/or names of the divisions/products related to the Business, or any combination thereof in any language, script or alphabet in relation to or in connection with its activities including but not limited to its corporate name or trading name or trading style and shall not use or employ any name or words or devices closely similar in sound or appearance or meaning to the words "Mono", "Sali", "Bala" and/or "Yet" and/o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes shall not do or indulge in any of the following without the express prior written approval of the Purchaser: (v) directly or indirectly carry on or participate in any business and/or activity within the territory of India (whether directly or indirectly, as a partner, shareholder, principal, agent, director, affiliate, employee or consultant) which is simitar to the Business and I or conflicts with the business interests of the Purchaser which include at present pharmaceuticals, nutraceuticals and dietary supplements. i. engage in any activity that conflicts with the obligations of Seller No. 3 to the Purchaser; ii. directly or indirectly solicit or influence or attempt to influence any client, customer, or other person directly or indirectly to direct his or its purchase of the Purchaser's products and/or services to himself or any other Person in competition with the pharmaceuticals business of the Purchaser, including the acquired Business; iii. directly or indirectly solicit or attempt to influence any Person employed or engaged by the Purchaser (whether as an employee, consultant, advisor or in any other manner) to terminate or otherwise cease such employment or en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not inclined to accept. This is for a reason that coordinate bench in the case of M/s Hatsun Agro Products Ltd [supra], M/s Asianet Communications P Ltd. [supra] and ACT India Ltd. [supra] have clearly held non compete fees payment as capital outgo. In the case of M/s Hatsun Agro Products Ltd. [supra], non compete fee precluded the party concerned from engaging in a competing business for twenty years, whereas in the case of M/s Asianet Communications P Ltd. [supra] as well as ACT India Ltd. [supra] the tenure was five years. Assessees in all these cases had claimed it to be revenue expenditure. Such claim was disapproved and Tribunal in its order dated 3.1.2005 in the last mentioned case held as under: "The Hon'ble Jurisdictional High Court in Chelpark Company Ltd. v. CIT [1991] reported in 191 ITR 249 their Lordships held [Head Note] "that though under the agreement, the benefit of the restrictive covenant was for a period of five years from the term of the dissolution deed as well as from the facts stated by the Tribunal order that the partnership which was a potential competitor to the assessee had vanished and that the managing director had also left India, it was clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time payment, where the liability was spread over a number of years. In the case before the Hon'ble Apex Court, 12 year debentures were issued on a discount of Rs. 3 lakhs and their Lordships held that proportionate sum of Rs. 12,500 on six monthly basis, was allowable and not the entire discount of Rs, 3 lakhs in the year of issue. Here, an expenditure was incurred by assessee which does not give it any advantage for considerable period and hence more in the nature of a deferred revenue expenditure. Though there was no liability on the assessee which was to be discharged in futuro, the non compete agreement precluded the sellers from engaging in a competing activity for a period of four years. Hence, in our opinion, the cited decision of Hon'ble Apex Court would definitely come to the aid of the assessee on its contention that the outgo should be treated as deferred revenue in nature and hence allowable over a period of four years prorata. In taking this view we are fortified by the decision of Hon'ble Delhi High Court in the case of CIT v. Eicher Ltd. (supra). Hence we are inclined to allow the additional ground number 1 of the assessee. 19. Since we have taken a view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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