Saturday, 17 March 2018

Non-compete fees paid for acquisition of going concern are not eligible for depreciation: ITAT

THE issue is - Whether 'non compete fee' paid as part of slump sale consideration for acquiring a business as going concern, can be equated with 'intangible asset' so as to claim depreciation on same. NO IS THE ANSWER.   


Facts of the case:
The Assessee company is engaged in the business of manufacturing speciality chemicals used in oil drilling industry. It had commenced its operation during the year under consideration after purchase of business of M/s EP Industrial and Agrochemicals Pvt. Ltd. in February, 2007 as a going concern. Having purchased this business as a slump sale, the assessee got the assets valued by a firm of valuers, and total slump sale consideration was bifurcated into tangible and intangible assets. In the audited balance sheet, the assessee declared non-compete fee as intangible asset which was written off on pro-rata basis by way of amortization over a period of five years. However, in the computation of total income, the assessee added back the amortised amount of non-compete fee and claimed the full amount of Rs.10.72 crore as a revenue expenditure. The AO opined that the non-compete fee could not be allowed as revenue expenditure u/s 37(1). He also observed that the payment of non-compete fee did not fall in any of the items of intangible assets specified u/s 32(1)(ii). He, therefore, disallowed even the claim of depreciation on Rs.10.72 crore as well. On appeal, the FAA agreed with the AO in so far as the treatment of non-compete fee as a non-revenue expenditure was concerned. He, however, held such amount to be covered u/s 32(1)(ii) eligible for depreciation @ 25%.
Tribunal held that,
++ the assessee purchased the business of M/s EP Industrial & Agrochemicals Pvt. Ltd., in February, 2007 as a going concern and allocated Rs.10.72 crore towards non-compete fee by treating it as an item of 'intangible asset.' The AO has not disputed the allocation of Rs.10.72 crore as non-compete fee out of total slump sale consideration. There is no cross appeal by the assessee. Thus the action of CIT(A) in treating such amount as not deductible as revenue expenditure in the year of payment, has attained finality. As such, what is required to be considered is the eligibility of depreciation on amount of non-compete fee. The CIT(A) has treated this amount as covered u/s 32(1)(ii) as amended by the Finance (No.2) Act, 1998 w.e.f. 1.4.1999 providing for depreciation on 'Intangible assets' acquired on or after the 1st day of April, 1998, in the nature of 'know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature';
++ the issue is the present case is no more debatable in view of the direct decision of jurisdictional High Court in Sharp Business System VS. CIT in which the dispute was about the granting of depreciation on non-compete fee. Rejecting the assessee's point of view, the jurisdictional High Court has held that that nature of rights of know-how, patent, copyright, trademark, license or franchise or any other right of similar nature as mentioned clearly in the section spell-out an element of exclusivity which ensures to the assessee as a sequel to the ownership. For the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance "in rem". However, in the case of a non-competition agreement or covenant, it was held that the advantage was a restricted one, in point of time. It did not confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right "in personam". Every species of right spelt-out expressly by the Statute - i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such was not the case with an agreement not to compete which is purely personal. In view of the foregoing, the CIT(A) was not justified in granting depreciation on the amount of non-compete fee.

No comments:

CBDT issues second round of frequently asked questions in relation to Direct Tax Vivad Se Vishwas Scheme, 2024

  This Tax Alert summarizes Circular No. 19/2024 dated 16 December 2024 (VSV 2- December Circular) issued by the Central Board of Direct Tax...