TMI Blog2016 (3) TMI 1347X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has valued the fixed asset and intangibles as per the valuation made by the consultants. The assessee in its books of accounts has allocated sum to the intangible being customer relationship. Therefore, though the seller has agreed not to engage in any business for a period of three years or participate or engage as owner, partner shareholder, consultant, advisor or any other capacity solicit the employees of the CMS Business however in the absence of any intention of parties to pay consideration for such restrictive covenants in the agreement the payment in question cannot be regarded as non-compete fees The claim of the assessee is required to be considered by treating the said payment as goodwill. The learned Authorised Representative of the assessee has relied upon the judgment of Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Ltd. [ 2012 (8) TMI 713 - SUPREME COURT] and submitted that in view of the said judgment of the Hon'ble Supreme Court, goodwill eligible for depreciation as per the Section 31(1)(ii) . Since the assessee did not claim depreciation on goodwill in the return of income and even not made any claim before the CIT (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd International Ind.Ltd. ii) by the ITAT Chennai Bench in ITO Vs Medicorp Technologies India Ltd (2009) 30 SOT 506 5 The learned CIT(A) has erred in law and in facts, by differentiating the Customer relationship rights (non-compete fees) from any other business or commercial rights. The Appellant has claimed depreciation on Customer Rights on the understanding that the consideration was paid to TVS Electronics Ltd to acquire certain commercial rights, including these customer relationship right, which are in the nature of intangible capital assets and essential for carrying on the business. Thus these rights qualify to be a part of any other business or commercial rights as mentioned under Section 32(1 )(ii) of the Income-tax Act, 1961 and hence eligible for depreciation. On acquiring the business from TVS Electronics Ltd for a slump price on a going concern basis a part of the consideration was bonafide allocated towards Customer Rights in the Appellants books of accounts. The price was paid for marketing and trading reputation, trading style, territory know-how, customer database, distribution network, contracts, refraining the seller from entering the same business an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the judgment of Hon'ble Delhi High Court in the case of Sharp Business System Vs. CIT (2013) 211 Taxman 576. 4. Before us, the learned Authorise Representative of the assessee has submitted that as per Article 11 of the Business Transfer Agreement (BTA), the seller agreed and undertook that it was not directly or indirectly for a period of three years (i) participate or engage in any jurisdiction or in any capacity in Contract Manufacturing Services (CMS) business and contract manufacturing related to medical and power electronics and (ii) Solicit / entics the employee of the CMS business of buyer of the assessee (buyer). Thus the payment made by the assessee is for getting a vested right, which can be enforced under law and without that other business man could compete with the assessee. The learned Authorised Representative has submitted that the payment of non compete is for acquiring a number of rights such as restricting the seller directly or indirectly participating in the business similar to the assessee as acquired or directly or indirectly soliciting the claim or customers of the existing business. Thus the learned Authorised Representative has submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Departmental Representative has submitted that neither anything mentioned in the BTA nor in the arrangement between parties which can indicate that there was any transfer of intangible asset in the transaction of contract manufacture service division of TVS Electronics Ltd.. Further, the term customer relationship right does not find place in Section 32(1)(ii) and this term also not similar to the terms of know how, patent, copy right, trade mark, business or franchise. Therefore, in view of the judgment of Hon'ble Delhi High Court in the case of Sharp Business System (supra), the payments made by the assessee on account of business relationship right or non-compete fees is not eligible for depreciation. 6. We have heard the rival submissions as well as considered the relevant material on record. The transaction of purchase of contract manufacturing service division of TVS Electronics Ltd. by the assessee vide BTA dt.31.5.2007 is slump sale as the consideration was agreed and paid in lump sum without assigning any value to specific assets. Therefore as per the agreement the consideration was paid lump sum without giving any details of payment for any specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement between the parties for any consideration on account of non-compete fees as well as in the absence of any such value assigned to the non-compete fees in the books of accounts, we do not find any substance in the contention of the learned Authorised Representative that the said payment is made as non-compete fees. The assessee in its books of accounts has allocated sum to the intangible being customer relationship. Therefore, though the seller has agreed not to engage in any business for a period of three years or participate or engage as owner, partner shareholder, consultant, advisor or any other capacity solicit the employees of the CMS Business however in the absence of any intention of parties to pay consideration for such restrictive covenants in the agreement the payment in question cannot be regarded as non-compete fees. Therefore, the decision of the Hon'ble jurisdictional High Court in the case of Ingersoll Rand International India Ltd. (supra) will not help the case of the assessee. As regards the nature of payment in question, as treated by the assessee in the books of accounts being customer relationship, the issue is clearly decided against the assessee by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to ₹ 5,992,765 i.e 25% of the written down value of the total goodwill amounting to ₹ 31,961,412, which arose on account of acquisition of the Contract Manufacturing Services division of TVS Electronics Limited under a slump sale arrangement by executing a Business Transfer Agreement. 8. We have heard the rival submissions as well as considered the relevant material on record. The issue of depreciation on goodwill is a legal issue and does not require any further investigation of fact as the Assessing Officer has not disputed or disturbed the valuation allocated/assigned by the assessee in the books of accounts to the fixed assets and intangibles including goodwill. Therefore in the facts and circumstances of the case and in the interest of justice, we admit the additional ground raised by the assessee. Since this issue has been raised for the first time by the assessee before us, therefore we set aside this issue to the record of the Assessing Officer for deciding the same as per law. 8. In the result, the appeal of the assessee is allowed for statistical purpose. Order pronounced in the open court on the 9th day of March, 2016. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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