TMI Blog2017 (12) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... J., This appeal under Section 260A of the Income Tax Act, 1961 (Act, for short) arises out of order dated 26th October, 2004 passed by the Income Tax Appellate Tribunal (for short ITAT ) in ITA No.1281/Del/1999. 2. On 14th December, 2005, the appeal was admitted and the following questions of law were framed. 1. Whether the ITAT was right in holding that payment of ₹ 70 lakhs made by the appellant on account of non-competition for a period of five years was in the nature of capital expenditure? 2. Whether the ITAT was right in holding that the interest income earned by the appellant on deposits in banks towards margin money is not income derived for industrial undertaking? 3. The short question that arises in the present appeal is as to whether the amount of ₹ 70 lakhs paid by the Appellant/Assessee (hereinafter referred as Assessee ) to M/s. Shriram Mobiles Limited (hereinafter referred as SML ) is a non-compete fee and whether the Assessee is entitled to deduction on the ground that it is a revenue expenditure. Brief Background 4. The Assessee claims to be the Indian Arm of the GKN group based in Germany and engaged in the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant/Assessee 9. Mr. V. P. Gupta, learned counsel appearing on behalf of the Assessee submits that the ITAT has erred in holding that the expenditure is capital in nature, inasmuch as it is the settled legal position that a non-compete fee paid for a short term of five years is a revenue expenditure. Mr. Gupta took us through various clauses in the agreement as also the annual report of the Assessee to demonstrate that the Assessee was the market leader and the sole manufacturer of these products. In fact, the factory of SML had not yet commenced manufacturing and there was no serious threat to the market leadership position of the Assessee and hence the noncompete fee was a revenue expenditure incurred by the Assessee. Mr. Gupta specifically relied upon the judgment of this Court in CIT v. Eicher Ltd.[2008] 302 ITR 249 (Del) (hereinafter Eicher Ltd. ) wherein a Division Bench of this Court held that a noncompete fee is in the nature of business/revenue expenditure. It was further submitted that the SLP against this judgment was also dismissed. Submissions of the Revenue 10. Mr. Asheesh Jain, learned Senior Standing Counsel appearing for the Revenue, heavily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IFCI, Madras. 6.1 SML shall indemnify ITL and hold ITL harmless from and against any damages, deficiencies, losses, costs, liabilities and expenses (including legal fees and disbursements) and in particular, but without prejudice to the generality of the foregoing, from and against any depletion or diminution of the assets resulting directly and indirectly from or arising out of any breach of any of the representation, warranties and undertakings made or given by SML. 8.1 SML agrees and undertakes to obtain within 45 days or within such further period as may be mutually agreed upon by the parties in writing, all necessary approvals/sanction form Income Tax Authorities as may be required. 10.1 (a) On and after the execution of this Agreement neither party shall directly or indirectly disclose or divulge to any third party the terms of this Agreement or any previous communication either oral or written between the parties hereto with respect to the subject matter hereof or any Confidential Information as defined in sub-article (b) below except with prior written consent of other party or to comply with law or guidelines issued by any regulatory authority. (b) For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Current Liabilities (Schedule 4) 18.14 Total Liabilities (B) 359.92 Net Assets (A-B) 129.97 Say 130 lakhs 13. A perusal of the agreement clearly points to the fact that while the consideration of ₹ 1.30 Crores was towards the net value of assets as per Schedule 5, the payment of ₹ 70 lakhs is for obligations and covenants which include the following: Warranty and representations Clause 5.1 Indemnification of SML Clause 6.1 Prompt execution of documents for effective transfer of marketable title in all the assets Clause 7.1 Obtaining approvals from the financial institutions confirming the release of charge on the assets Clause 7.2 Approval from the income tax authorities Clause 8.1 Maintenance of confidentiality including confidential information relating to the product services, business commercial activities, formulas, compilations, programs, devices, concepts, inventions, designs, methods, techniques, marketing and commercial strategies, client and contac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the non-compete obligation. 16. Even the non-compete obligations in clause 11 appear to be illusory in nature and restricted to constant velocity joints or any other competitive products . Clearly, the same is of limited nature and there was also no obligation of non-compete imposed upon the promoter directors of SML. In fact, as stated during the course of arguments, the managing director of SML became the corporate director of the Madras Division of the Assessee. Thus, the noncompete clause and the consideration of ₹ 70 lakhs are not completely and exclusively inter-linked. The payment of ₹ 70 lakhs, which is a substantial sum, i.e., more than half of the consideration paid for the net assets of the unit itself, was for a multitude of obligations and covenants which were fastened upon SML and not only towards the non-compete obligations. 17. Insofar the authorities cited are concerned, including Eicher Ltd (supra) and Sharp Business System (supra), it is clear that neither of the cases are comparable on facts to the present case, in terms of the nature of consideration or the non-compete clause. In Eicher Ltd (supra) the employee, with whom the non-compete ag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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