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2015 (8) TMI 843 - ITAT MUMBAI

2015 (8) TMI 843 - ITAT MUMBAI - TMI - Claim of depreciation on non-compete right as intangible asset - Held that:- The Tribunal in assessee’s own case for the assessment years 2003-04 to 2006-07 [2015 (8) TMI 750 - ITAT MUMBAI] held that the non compete clause under agreement should be read as a supporting clause to the transferor of the copy rights and patents rather to strengthen the commercial right, which was transferred in favour of the assessee. Rejected the argument of revenue that non-c .....

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tual obligation to compensate for income-tax liability, then also same cannot be claimed as deduction, because it tantamounts to paying of sum on account of any rate or tax levied on the profits and gains of any business or profession as stipulated in section 40(a)(ii). Either the assessee pays the income-tax liability of the other person or pays by itself or compensates the same, will not make a difference as there cannot be distinction between such discharge of liability. That it cannot be hel .....

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d amount of ₹ 15,90,229/- being amount of penalty and additional duty cannot be held to be allowable within the ambit of section 37(1). Thus, on this score also the decision of the Hon’ble CIT(A) is upheld. - Decided against assessee.

Determining the ALP u/s 92C(2) after granting 5% sale harbour - Held that:- The standard adjustment of ± 5% as given by the CIT(A) cannot be allowed as this controversy has been set at rest by Finance Act, 2012 with insertion of sub-section (2A) to .....

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n And Shri Amit Shukla, JJ. For the Appellant : Shri Jigar Saiya For the Respondent : Shri N. Padmanaban ORDER Per Amit Shukla, AM: The aforesaid cross appeals have been filed by the assessee as well as revenue against the impugned order dated 04.02.2011, passed by CIT(A)-15, Mumbai for the quantum of assessment passed u/s 143(3) for the assessment year 2005-06. ITA No. 3566/Mum/2011 : Assessee s appeal : 2. At the outset, the Ld. Counsel for the assessee submitted that Ground no. 3 relating to .....

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2,22,473/- on the said Non-compete Rights. 2. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) has erred in disallowing the contractual payments made of ₹ 74,02,764 made to M/s Xylon Holdings Pvt Ltd . 4. Brief facts qua the issue raised in ground no. 1 is that the assessee company was incorporated in 1997 as M/s Vossloh Schwabe India P Ltd. Company with the objective of marketing and distributing the products of VOSSLOH VGE Group in India. The a .....

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#8377; 50 lakhs, which was capitalized in the books and depreciation was claimed. The claim has been rejected by the Assessing Officer on the ground that non-compete fee cannot be treated as intangible asset for the purpose of claiming deprecation. This action of the Assessing Officer has been affirmed by the CIT(A) also. 5. Before us, the Ld. Counsel submitted that this issue had come up for consideration before the Tribunal in the assessee s own case for AYs 2001-02 to 2005-06, wherein this is .....

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Mum/2011 vide order dated 24.04.2015 has decided this issue after observing and holding as under :- 5. We have considered the rival contentions and carefully gone through the orders of lower authorities and found from record that the assessee company has paid an amount of ₹ 50,00,000/- to Mr. Shekhar Shah by entering non-compete agreement so as to prevent him from starting a business in India in completion with that of the assessee company. The assessee company, in addition to prevent him .....

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-compete fee is covered by the decision of Hon ble Karnataka High Court in the case of CIT vs. Ingersoll Rand International Ind. Ltd wherein the Hon ble held as under:- What is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in section 32 effectively confer a right upon an assessee for carrying on a business more efficiently .....

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s to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. Generally, non-compete fee is paid for a definite period. The idea is that by that time, the business would stand firmly on its footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Here the doctrine of ejusdem generis would come into operation and therefore .....

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e marks in respect of the trade mark 'Pentasoft' as well as the training and development division exclusively to be exploited by the assessee. In order to strengthen the aforesaid rights, there was a non compete clause by virtue of which the' transferor was restrained from using the same trade mark, copyrights, etc. Therefore, the non compete clause under agreement should be read as a supporting clause to the transferor of the copy rights and patents rather to strengthen the commerci .....

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td. vs. ITO, 19 ITR (T) 483 (Mumbai Trib) wherein it was held that noncompete right was an intangible asset u/s 32(1)(ii) of the Act. 9. In view of the above, we do not find any merit in the action of lower authorities declining the claim of depreciation on non-compete payment made for acquiring non-compete right which is an intangible asset eligible for claim for depreciation u/s 32(1)(ii) of the Act . 8. Thus, respectfully following the same, we hold that, the assessee is entitled for deprecia .....

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ture of the products. Xylon, was entitled to a fee of 5% of costs being incurred by it for manufacturing. In a way, Xylon acted as a toll manufacturer. Any liability incurred during the course of its operations, that is those of pertaining to the manufacturing operations were agreed to be taken over by the assessee company. Later, on termination of the manufacturing agreement, the assessee company has entered into agreement on 8th August, 2003 for taking over the liabilities of Xylon. In terms o .....

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ability 7.67 Total liabilities to be transferred 758.29 Value of inventories 485.82 Net transfer of liabilities 272.47 11. The said liability thus, also included income tax payable of ₹ 58.13 lakhs, which was raised upon Xylon during its carrying on the business. Besides this there was a demand of ₹ 15.90 lakhs raised by the Excise Department. The above amounts aggregating to ₹ 74,02,674/- was debited to the profit and loss account after taking over the liability and was claime .....

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Excise Duties. Thus the same is disallowable under section 37 of the Act. Also, the Excise liability has not actually been Paid and therefore not allowable as per section 43B of the Act. 12. The assessee s case before the Assessing Officer was that, it was not making any claim of income-tax liability of itself but it was only discharging its contractual liability. The assessee has compensated Xylon for an amount of ₹ 58,13,845/- being an amount equal to the income tax liability that Xylon .....

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of its contention, the assessee strongly relied upon the decision of P&H High Court in the case of Dashmesh Transport Co P Ltd. vs CIT, reported in 93 ITR 275. This decision, was though reviewed by the same High Court in the subsequent decision of the Dashmesh Transport Co. (P) Ltd. vs CIT, reported in 125 ITR 681, wherein the Hon ble High Court has disallowed the said payment u/s 37(1) on the ground that the same were in the nature of capital expenditure. However, the assessee pointed out .....

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deductions being penal in nature. He rejected the assessee s contention and held that the Assessing Officer was right in disallowing the said payment towards the income-tax liabilities and also disallowance of excise duties. 14. Before us, the Ld. Counsel besides retreating the submissions made before the authorities below, submitted that what assessee has paid was purely on account of expense on account of discharge of contractual liability and, therefore, the same is allowable as business expe .....

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bmissions and also perused the relevant finding given in the impugned orders. By virtue of termination of manufacturing agreement with Xylon, the assessee had agreed to take over the inventories and also the liabilities. As per the terms of the agreement for taking over the liabilities, Xylon was compensated for income tax liability and also for the demand raised by the Excise Department, which was debited to the profit & loss account and claimed as deduction. The assessee s claim for deduct .....

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k-up fee of 5%. The tax liability was incurred by Xylon during the course of its manufacturing activities. Even if the assessee was under contractual obligation to compensate for income-tax liability, then also same cannot be claimed as deduction, because it tantamounts to paying of sum on account of any rate or tax levied on the profits and gains of any business or profession as stipulated in section 40(a)(ii). Either the assessee pays the income-tax liability of the other person or pays by its .....

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llowed as deduction is upheld. Similarly, regarding payment of excise duty, it has not been rebutted before us that same is not towards penalty for evasion of excise duty and that such a penalty is not penal but compensatory in nature. Thus, without any detail to controvert this finding of CIT(A), it can be inferred as relating to the evasion of duties and penal in nature. Accordingly, the said amount of ₹ 15,90,229/- being amount of penalty and additional duty cannot be held to be allowab .....

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