TMI Blog2014 (6) TMI 934X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Therefore that right which the assessee acquires on payment of non-compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trade marks, licences, franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an 'intangible asset'. Their right to carry on business without competition has an economic interest and money value. The term 'or any other business or commercial rights of similar nature' has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl.(b) of Expln.3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which inturn confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec.32(1)(ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision ie., precisely what the Tribunal has held. - Decided i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompete fee is paid for warding off the competition for a short period, the expenditure would be of a revenue in nature deductible under Sec. 37 of the Act and if the non-compete fees is treated as capital in nature, then it would be expenditure incurred for the purpose of other intangible assets and hence depreciation at the rate of 25% should be allowed for the relevant assessment years. However, the Appellate Authority, after reviewing the entire case law, held that the non-compete fee is in the nature of capital expenditure, but it held no depreciation is allowable. However it held, Sec.194J is not applicable to the case on hand. 3. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal, by the impugned order, held non-compete fee is in the nature of capital expenditure. It is in the nature of a business or commercial right and depreciation is allowable on such an asset and thus allowed the appeal. Aggrieved by the said order, the Revenue is in appeal. 4. Learned counsel for the Revenue, assailing the impugned order, contends non-compete fee does not constitute a commercial or a business right for allowing depreciation under Sec. 32(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Steel Equipment Pvt. Ltd. Vs. CCE reported in AIR 1988 SC 631 has explained the meaning of the term similar as under: The expression similar is a significant expression. It does not mean identical but it means corresponding to or resembling to in many respects; some;what like; or having a general likeness. The statute does not contemplate that goods classed under the words of 'similar description' shall be in all respects the same. If it did these words would be unnecessary. These were intended to embrace goods but not identical with those goods. If the items were similar appliances which are normally used in the household, these will be taxable under Tariff Item No.33C. The Delhi High Court in the case of Areva T and D India Ltd Vs. Deputy Commissioner of Income Tax (Delhi) reported in (2012) 345 ITR 421 (Delhi) explaining the principles of Ejusdem Generis with reference to Section 32(1)(ii) of the Income Tax Act, 1961 has held in para No.13, which reads as under:- In the present case, applying the principle of ejusdem generis, which provides that where there are general words following particular and specific words, the meaning of the latter words sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of the Supreme Court in Techno Shares and Stocks Ltd.(2010) 327 ITR 323 (SC) wherein it was held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a licence or akin to a licence which is one of the items falling in Section 32(1)(ii) of the Act. The Madras High Court in the case of M/s.Pentasoft Technologies Ltd. Vs. The Deputy Commissioner of Income Tax reported in (2014) 264 CTR (Mad) 187 in answering the question whether non-compete agreement / arrangement fall within the ambit of clause (ii) of Section 32(1) of the Act, has held in para Nos.18, 19, 21 and 27, which reads as under:- 18. The only issue is whether non compete agreement/arrangement would fall within the ambit of clause (ii) of Section 32(1) of the Act. 19. It is the case of the Revenue that this non-compete fee is in the nature of a negative right and it cannot be of a commercial right of similar nature and the expression similar nature shall be relatable to patents, copy rights and trade mark licence or franchise or any other business. Therefore, it is submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial or business right which is held to be similar in nature to know- how, patent, copyright, trademark, licence, franchise etc. The commercial right thus acquired by the appellant unambiguously falls in the category of an 'intangible asset' which in accordance with the provisions of s.32(1)(ii) of the IT Act, will qualify for depreciation @ 25 per cent. I accordingly direct the AO to allow depreciation for the asst.yr.2001-02 and subsequent assessment years @ 25 per cent on the non-compete fee of ₹ 1,87,94,660 which has already been held to be a capital expenditure by the AO and upheld by the undersigned. The ground of the appeal in this regard succeeds. The Delhi High Court in the case of Sharp Business System Vs. Commissioner of Income Tax- III reported in (2012) 254 CTR (Del) 233 dealing with business expenditure, non-competing fees paid, whether eligible for depreciation under Section 32(1)(ii) has held in para Nos.11 and 12 as under:- 11. This question arose as a direct sequel to the appellant's alternative submission that if the expenditure is treated as a conferring capital advantage, necessarily they are depreciable. The appellant claims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat goodwill is a depreciable capital asset. So far as the decisions in Techno Shares Stocks Ltd. (supra) is concerned, the Supreme Court clearly limited its holding that the right to membership of Stock Exchange is in the nature of any other business or commercial right which was an intangible asset as is evident from the following observations: Before concluding we wish to clarify that our present judgment is strictly confined to the right to membership conferred upon the membership under the BSE Membership Card during the relevant assessment years. We hold that the said right to membership is business or commercial activity which gives a non-defaulting continuing membership and right to access Exchange and to participate therein and in that sense it is a license or akin to a license, in terms of Section 32(1)(ii)....... 12. It is, therefore, apparent that the ruling in Techno Shares Stocks Ltd. (supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 32(1) In respect of depreciation of-- (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-- (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed; (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed 7. Section 32 has been widened by the Finance Act No.2 (Act of 1998) whereby depreciation is allowed on intangible assets acquired on or after 1st April 1998. As per Sec.32(1)(ii), depreciation is allowable in respect of know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. The assets which are included in the definition of intangible asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with the person receiving the non-compete fee to do business with a person who is directly or indirectly in competition with the business which is being acquired. The right is acquired for carrying on the business and therefore it is a business right. The word 'commercial' is defined in Black's Law Dictionary as 'related to or connected with trade and commerce in general', 'commerce' is defined as 'the exchange of goods, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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