TMI Blog2011 (6) TMI 507X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in as early as 01.09.1996 was interpreted and the payments were considered as capital expenditure - against assessee. Claim of depreciation - Held that:- Section 32(1) (ii) allowed depreciation on intangible assets acquired on or after 1st of April 1998. Since the assets / so called intangible assets were acquired before the aforesaid date, provisions of section 32(1)(ii) are not applicable to the facts of the case . Thus the grounds on allowance of depreciation on the non compete fees also stand dismissed - appeal decided against assessee. - ITA Nos. 1135 & 1136/Mum/2010 & 7193/Mum/2008 - - - Dated:- 30-6-2011 - Shri R.V. Easwar, and Shri B. Ramakotaiah, JJ. Represented By: Appellant by: Shri Jitendra Sanghavi Respondent by: Shri S.K. Singh Per B. Ramakotaiah, These are assessee s appeals for assessment years 2003-04, 2004-05 and 2005-06 against the orders of the CIT(A) VII, Mumbai dated 03.11.2008 for A.Y. 2005-06 and 06.11.2009 for other two assessment years. 2. Assessee raised common grounds in all the appeals which are as under: 1. The learned Commissioner of Income Tax (Appeals) VII, Mumbai [CIT(A)J erred in confirming the disallowance of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Assessing Officer ought to have granted depreciation u/s. 32 of the Act on the total payments under the agreement treated as capital expenditure and ought not restrict the same to the payment of the year under consideration." 3. Briefly stated, assessee company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Assessee company entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns, viz., Supertex (India) Corporation (proprietor M.G. Saraf) and Superchem (prop. M.G. Saraf, HUF), which were engaged in trading of chemicals in earlier years for a long period. As per the agreements the assets of the proprietary concerns were valued and the business was taken over as a going concerns. In addition to the amounts paid on the basis of valuation reports towards acquiring the assets and liabilities of the two proprietary concerns, the company also undertook to pay a sum of 3.5 lakhs per month to Shri M.G. Safar and a sum of 2,00,000/- per month to M.G. Saraf, HUF for a period of 15 years starting from 01.09.1996 to 31.08.2011. These amounts were payable as per the relevant clauses of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that supplementary/clarificatory deed does not change the issue during this year as the same is an afterthought of assessee and which have been rightly held by the A.O. as a sham transaction and stage managed just to escape from the ITAT order against assessee in its own case. Thus holding, the CIT(A) rejected assessee's contentions more so relying on the order of the ITAT. 4. The learned counsel reiterated the submissions made before the A.O. and relying on the supplementary deeds submitted that the intention to pay the amounts by 3,00,000/- and 2,50,000/- per month to the two proprietary concerns have led to certain complications, therefore, before the issue was finalised by the ITAT, vide agreement dated 01.04.2002 assessee has clarified and bifurcated the amount towards assignment fees and royalty for use of trade name and relied on the clauses of the supplementary deed to submit that the royalty for use of trade name is revenue expenditure. While admitting that the Special Bench of the ITAT in the case of Tecumseh India P. Ltd. vs. ACIT 127 ITD 1 (SB) (Del) held that non-compete fees being in the nature of capital expenditure cannot be allowed as revenue expenditure, the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of preserving or maintaining assessee's assets and partly for another purpose, i.e. to acquire individual assets without apportion of expenditure which is incurred for former purposes should be allowed as revenue expenditure (relied on Transport Co. Ltd. vs. CIT 31 ITR 259) and other portion should be disallowed as being capital gain (Indian Copper Corporation Ltd. vs. CIT 110 ITR 434). It was the submission of the learned counsel that the amount was paid both for the use of trade mark and for non-compete fee, the amount to the extent of use of trade mark should be allowed as Revenue and the amount to the extent of non-compete fees, eventhough considered as capital expenditure should be considered for allowance of depreciation, the additional grounds raised on that issue. 6. The learned D.R. while admitting that the annual reports placed on record by assessee have been verified from the assessment records and assessee has shown bifurcation of assignment fees of 9.00,000/- and royalty of 57,00,000/- from the year 2002-03, it was his submission that the supplementary deed does not change the contents of original agreements and the entire payment made as per the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to be in conformity with the judgement of the Hon'ble Supreme Court relied upon (60 Taxman 429 dated 15.0 1.1992). 8. We have considered the issue and arguments of the rival parties and examined the record. As stated earlier the agreement effective from 0 1.09.1996 was considered by the ITAT vide order dated 17.10.2005 and held that the payment is capital in nature. Not only that at the time of considering the issue for A.Y. 1997-98 the supplementary deeds which were entered w.e.f. 0 1.04.2002 have not been placed on record for the reasons best known to assessee and so not considered by the ITAT, eventhough the said agreements were supposed to have been entered and acted upon. Be that as it may, we have considered whether the supplementary agreement will modify the terms of the issue and the expenditure can be considered as revenue in nature. We are afraid that the supplementary/clarificatory deeds does not change the nature of payments, as the ITAT has considered the issue in its entirety. At the time of arguing the matter it was submitted that the payment of 66,OO,OOO/- comprises of the following considerations: (a) right to use trade marks and trade names, (ii) right to us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny with all assets, rights, properties, liabilities, etc. Apparently, this is a case where the proprietary business has been acquired by the assessee company as a going concern. 10. The 'non-compete' obligation is stipulated in clause 2 of the agreement, which is as under: "From the date of transfer of business by Supertex to the company in terms hereof, the proprietor shall not compete with the company, neither on his own account nor through any proprietary or partnership concern with the company in respect of the business assigned and transferred by the party hereto of the first part to the party of the second part for a period of fifteen years from the date of transfer and assignment of the specified business in all the territories." It may be seen that 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 consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion undertaken by the proprietor, the assessee company has undertaken to pay a sum of Rs. 3.5 lakhs per month for a period of 15 years during which 'no compete' agreement shall be in force." 9. After that the ITAT considered various case laws relied upon by both the parties from para 11 to 15, which we do not intend to extract here.Findings by the ITAT in paras 16 17, which are material for deciding the issue are as under: - "16. On a careful consideration of the legal position as applied to the facts of the assessee's case, in our view, the payment made by the assessee company to the two proprietary concerns for a period of 15 years as per the terms and conditions of the agreement cannot be treated as revenue expenditure. The proprietary concerns have been acquired by the assessee company as going concerns. The two proprietors, by virtue of this agreement, have transferred the respective business along with rights, assets and liabilities which included trademarks etc. In addition to the value of the assets, the assessee company 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 clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re automatically excluded from use of such trade mark and they have bound themselves contractually not to carry on similar activities in whatever name for a period of 15 years. In view of this, since the payment was composite payment at the time of acquiring the business, eventhough payable over a period of 15 years in monthly instalments, the ITAT came to a conclusion that the amount has to be treated as capital expenditure. 10. In view of the clear findings of the ITAT on the original agreement, we are of the opinion that the supplementary agreement bifurcating the monthly payments into use of trade mark and non-compete fee does not help assessee's case. Since the payments were also held to be capital in nature, respectfully following the Coordinate Bench decision we agree with the findings of the CIT(A) that the amounts cannot be allowed a revenue expenditure. In the course of argument the learned counsel tried to distinguish the facts in the present issue with that of the earlier year when the ITAT has considered the issue. It was his submission that consequent to the principles established by the Hon'ble Supreme Court in the case of Continental Construction Ltd. vs. CIT 60 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompete fees for which a lump sum amount was paid on the revaluation of assets and liabilities specified, which was acknowledged having received in lump sum in supplementary agreement and monthly payment for a period of 15 years at a fixed amount quantified therein. Since the supplementary agreement only tries to bifurcate the amounts payable into two components for usage of trade name and non‑ compete fee, in our view, it does not change the terms and conditions originally agreed upon which are for acquiring the entire business as a going concern for which the payments were being made for a period of 15 years. Since the parties have agreed on the terms and conditions originally which were already considered to be capital in nature towards non-compete clause while acquiring the business, the supplementary deed cannot be considered now so as to differ from the interpretation and findings already given. Moreover the judgement of the Hon'ble Supreme Court in the case of Continental Construction Ltd. vs. CIT 60 Taxman 429 was given in the context of deduction under section 80-0 and in that context the Hon'ble Supreme Court considered that apportionment can be done to certain part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the parties are aware about the judgement now relied upon. When the parties themselves are unable to segregate the amount originally and decided to collect the lump sum payment over a period of 15 years regularly on monthly basis, the argument of the learned counsel that the ITAT should have apportioned the amount has no logic. Since the present label given by assessee for bifurcating the amount towards use of trade mark and non-compete fees can only be stated to be self serving as there is no basis for such segregation undertaken by assessee. Moreover, whether the amount is paid towards use of trade mark or for non-compete fees, the entire amount arose from the original agreement which was entered at the time of taking over of the erstwhile proprietary concern as a going concern and on the basis of facts and law, the amount paid or payable was considered to be capital expenditure, therefore, in our view there is no need to differentiate or distinguish the present payments in any other manner. For the reasons stated above, we uphold the order of the CIT(A) and dismiss the grounds raised by assessee. 12. One of the additional grounds raised is with reference to the claim of depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mseh. However, whirlpool had been given a right to sell refrigerator compressors to service partners purchased from Tecumseh subject to provisions of clause 6.1 of the agreement. Looking into the above clauses of the MoU it could be observed that principally both the parties had agreed to pass on a total consideration of Rs.52.5 crores. Allocation of purchase price for various assets was to be determined at the further meeting of the parties and according to clause 3.5, the base price retained for purchase of raw material and work-in-progress were kept at Rs. 5.25 crores, being 10 per cent of the total purchase price agreed. To ascertain as to what for the total payment of Rs. 52.5 crores was made, one had to look into the agreement dated 2-7-1 997 which was entered into in the furtherance of MoU by the to be established local Indian entity, namely, the assessee and Whirlpool India Ltd. wherein a total sum of Rs.49.85 crores was determined for the various assets. Broadly stated, the purchase price paid for the sale and purchase of Compressor Davison and related operations and facilities excluding the raw materials, work-in-progress and the land and building at Ballabhgarh wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he non-compete fees payment should be considered and viewed on stand alone basis. The same was to be rejected. It would also be incorrect to say that the Assessing Officer had considered such payment on stand alone basis as all the agreements, namely, MoU final agreement, non-compete agreement and supply agreement were produced before the Assessing Officer and he had discussed all these agreements in the assessment order. ~t was mentioned by the Assessing Officer in the assessment order that the assessee-company was incorporated on 30-1 -1 997 and it was a fully owned subsidiary of the non-resident company known as Tecumseh, USA. The company started business of acquiring the Compressor Division of Whirlpool India in the month of July, 1997. For such purchase, the assessee entered into a MoU on 4-11-1 996 and a final agreement was executed on 2-7-1997 according to which an amount of Rs.46.25 crores was paid to Whirlpool India Ltd. for various items like inventory, building, land and plant and machinery. ~t was further started by the Assessing Officer that included in that amount was a sum of Rs.2. 56 crores (actual amount was Rs.2. 65 crores) and Whirlpool was to sign a non-compet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d building. It can be seen that non-compete agreement was made Appendix M to the agreement dated 2-11-1 997 and was, thus, part and parcel of the main agreement, the signing and execution whereof was a condition precedent. It could be mentioned here that the total purchase price of Rs.52.5 crores envisaged in MoU vide clause 3 included a sum of Rs.2. 65 crores which was to be paid for non-compete agreement. The other sum of Rs. 49.85 crores which was to be paid in respect of various assets. If these two sums were aggregated, then the total amount would come to Rs. 52.5 crores which was the agreed purchase price. The assessee-company was incorporated for the purpose of effectuating the transactions agreed in the MoU. The purpose of the assessee-company for which it was incorporated was that Tecumseh UAS , being a leading global compressor manufacture, was interested in purchasing compressor related operations of Whirlpool India for the Indian compressor market. Thus, the very intention and purpose was to establish business in India by taking over the compressor and related operations of Whirlpool India in India. The non-compete agreement was part and parcel of the whole trans ..... 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