TMI Blog2011 (11) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... ar for the Appellant. M.P. Sharma for the Respondent. JUDGMENT A.K. Sikri, Actg. CJ The facts leading to the filing of this appeal may first be recapitulated and these are as follows: The appellant/assessee company was incorporated on 23.4.2004 under the Companies Act, 1956 and is a wholly owned subsidiary of Pitney Bowes Inc., USA. The assessee is engaged in the business of wholesale trading, selling and marketing of hi-tech documents and providing maintenance and after sales service of its products. During the year under consideration, the assessee company had acquired mailing business from M/s. Kilburn Office Automation Limited (hereinafter referred to as 'KOAL') as a going concern on a slump sale basis pursuant to Business Transfer Agreement dated 15.10.2004 entered into by the appellant with the later. The consideration for such transfer was stated as ₹ 18.92 Crores which included a sum of ₹ 5.94 Crores by way of non-compete fee which was limited for a period of 5 years. Seller Company (KOAL) before the transfer of said business has been acting as a distributor of Pitney Bowes' products in India and Nepal. In the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction of expenditure incurred as non-compete fee aggregating to ₹ 5,94,47,290/- could not be allowed to it either in the instant year or even in five years on deferred basis? 2. Whether the Income Tax Appellate Tribunal was justified in law in remanding the issue in respect of alternate plea of the assessee, instead of directing the Assessing Officer to allow depreciation @25% under Section 32(1)(ii) of the Income Tax Act, 1961? Re: Non-compete fee, whether capital or revenue: 7. It was submitted in this behalf that under the agreement entered with KOAL, the assessee did not acquire the business of photocopiers and drawing office equipment business of the seller. In consideration for the sale of the business by the seller including the transfer of assets, the assessee agreed to pay ₹ 17,91,15,000/-. Under this Business Transfer Agreement, KOAL had agreed that it shall not compete with the assessee for a limited period of five years, who has acquired the running mail business as a going concern. Clause 33.2 of the Agreement provided for certain adjustments and deductions to be made at closing, from the aforesaid consideration. Under the aforesaid agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the advantage and the same could be put to an end at any time. It specifically held that how long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case. This Court in Eicher Ltd. (supra) reported in 302 ITR 249, has held, after applying the principles laid down by the Apex Court in the case of CIT v. Madras Auto Services Pvt. Ltd. [1998] 233 ITR 468/99 Taxman 575 that since the assessee did not acquire any capital asset by making the payment of non-compete fee, it merely eliminates competition in the two wheeler business, for a while. In the said case, it was not clear how long the restrictive covenant was to last but it was held that the same was neither permanent nor ephemeral. It was argued that in the instant case, the situation is identical and in fact, far-better namely that the benefit was to be derived only for a period of five years and was not ephemeral. It is also undisputed that by incurring the expenditure to eliminate competition it was able to deter M/s KOAL who was trading in the same automation equipment. It was able to increase its revenues thereby earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussed by the Special Bench of the Tribunal in Tecumseh India Pvt. Ltd. (supra) in greater details and after applying the ratio of various judgments of different High Courts including jurisdictional Court as well as the Supreme Court, the Tribunal summarized in the following terms: 129. According to above observations it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non-compete fee is paid to create monopoly rights. 130. The assessee also cannot get any help from the decision of Hon'ble Delhi High Court in the case of CIT v. Eicher Company Ltd. (supra) as in that case their Lordships have clearly found from the record that it was not clear that how long the restrictive covenant was to last and what the assessee had done was that it eliminated the competition in the two-wheeler business for a while. Their Lordships have also found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non compete ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue cannot be allowed, which is self-contradictory. When nature of payment is discussed and at that stage, Department pleads that the expenditure is not revenue in nature, but is of capital nature, there is no reason to remit the case back to the AO to determine the nature of expenditure. At the same time, it is still a moot question as to whether depreciation can be allowed thereupon under Section 31(1)(ii) of the Act or not. We may note here that the learned counsel for the Department had referred to the judgment of the Kerala High Court in the case of B. Raveendran Pillai v. CIT [2011] 332 ITR 531/[2010] 194 Taxman 477, on the basis of which, argument was raised that goodwill is not specifically mentioned in Section 32(1)(ii) of the Act and depreciation is allowable, apart from tangible assets, on such intangible assets, which are specifically enumerated in the said Clause. Though the AO would not have to consider the nature of expenditure, as that has been determined by the Tribunal, at the same time, whether depreciation thereupon is to be allowed or not under Section 32(1)(ii) of the Act has to be decided. 17. We, thus, find no fault in the order of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X
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