Non compete fee did not confer any exclusive right to carry-on the primary business activity. The right is restricted only to the particular party or individual and does not have the exclusivity over the rest of the world. Thus, non-compete fee cannot be termed as intangible asset. The Hon’ble High Court has also set out the differences between the rights conferred by goodwill and rights acquired by the non compete agreement. Therefore, the ratio of the decision of the Hon’ble Delhi High Court in case of Sharp Business System is applicable in the present case and depreciation claimed on the said non compete fee cannot be allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed against the order dated 07.02.2017 passed by CIT(A)-3, Delhi for assessment year 2010-11.
2. The Grounds of appeal are as under:
“1. Ld. CIT(A) erred in law and on facts of the case in deleting the disallowance made by the AO u/s 14A of the IT Act r.w. rule 8D of the IT Rules.
2. Ld. CIT(A) erred in law and on the facts of the case in direction the AO to allow depreciation on non compete fee treating it as intangible asset. The CIT(A) failed to appreciate that non compete fee is not covered in intangible assets as held by the Hon’ble Delhi High Court in the case of Sharp Business System in ITA 492/2012.
3. The appellant craves leave to amend, withdraw and/or add any ground(s) of appeal at any time before or during the hearing of appeal.”
3. The assessee was engaged in the business of providing healthcare services. The assessee filed its return of income declaring loss of Rs. 85,54,63,013/-. In response to the notices issued u/s 143(2) of the Income Tax Act, 1961, the assessee through its AR represented and information was provided before the Assessing Officer. The Assessing Officer made disallowance on non-deduction of TDS on the payment of non-compete fee of Rs. 15.5 crores, disallowance for claim of excess depreciation of Rs. 32,12,888/- and further made disallowance u/s 14A of the Act of Rs. 20,34,862/-.
4. Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). The CIT (A) dismissed the appeal of the assessee.
5. The Ld. DR submitted that as regards to Ground No. 1, the CIT (A) erred in deleting the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. As regards to Ground No. 2, the Ld. DR submitted that the CIT(A) should have not directed the Assessing Officer to allow on non compete fee treating it as intangible asset. The Ld. DR submitted that the CIT(A) has not taken cognizance of the Hon’ble Delhi High Court decision in case of Sharp Business System in ITA No. 492/2012 order dated 05.11.2012.
6. The Ld. AR submitted that as regards to Ground No. 1, the assessee made an investment of Rs. 59.28 crore in the shares of Kanishka Housing Development Company Ltd. and income therefrom was included in the total income. The Ld. AR further submitted that the company had not earned any dividend income. Thus, there is no exempt income claimed by the Assessee during the year. As regards to Ground No. 2, the Ld. AR relied upon the order of the CIT(A) and further submitted the decision of the Hon’ble Delhi High Court in case of Areva T & D India Ltd. vs. DCIT  20 taxmann.com 29 (Delhi). The Ld. AR also relied upon the following decisions:
i) CIT vs. Ingersoll Rand International Ind. Ltd.  48 taxmann.com 349 (Karnataka HC)
ii) CIT vs. Ferromatic Milacron India (P.) Ltd.  99 taxmann.com 154 (Gujrat HC)
iii) Kapi Chits (Kakatiya) P. Ltd. vs. ACIT  85 taxmann.com 300 (Hyd. Trib.)
iv) DCIT vs. Zydus Wellness Ltd.  76 taxmann.com 328 (Ahmd. Trib.)
v) Sharp Business System vs. CIT (ITA No.492/2012 order dated 05.11.2012)
7. We have heard both the parties and perused all the relevant material available on record. As regards to Ground No. 1 of the appeal, there is clear finding of the Assessing Officer as well as the CIT(A) that there is no exempt income. Thus, there is no need to interfere with the findings of the CIT(A). Ground No. 1 is dismissed. As regards to Ground No. 2 of the Appeal, relating to disallowance on non-deduction of TDS on the payment of non-compete fee, the CIT (A) observed in the order that the assessee paid non compete fee of Rs. 15.50 crore as part of the sale consideration for acquiring the Wockhardt Group of Hospitals without deducting the tax within the meaning of Section 194L of the Act and accordingly provisions of Section 40(a)(ia) came into play. The said payment was capital in nature as declared by the assessee itself. The Hon’ble Delhi High Court in case of Sharp Business System (supra) held as under:
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 Exchange. Undoubtedly, it conferred a business advantage and was an asset which and was clearly an intangible asset. The question here, however, is whether a non-compete right of the kind acquired by the assessee against L&T for seven years amounts to a depreciable intangible asset. As discussed earlier, each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be “intangible asset”. The nature of these rights mentioned clearly spell-out an element of exclusivity which enures to the assessee as a sequel to the ownership. In other words, but 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, the advantage is a restricted one, in point of time. It does not necessarily – and not in the facts of this case, 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”. Indeed, the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred – a proposition fully supported by the controlling object clause, i.e. intangible asset. 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 is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue.
13. For the above reasons, this Court is of the opinion that the words “similar business or commercial rights” have to necessarily result in an intangible asset against the entire world which can be asserted as such to qualify for depreciation under Section 32(1)(ii) of the Act.
14. In view of the above discussion, the Court is of the opinion that the appeal is meritless and has to fail. It is accordingly dismissed.
From the perusal of the decision of the Hon’ble jurisdictional High Court in case of Sharp Business System, it can be seen that non compete fee did not confer any exclusive right to carry-on the primary business activity. The right is restricted only to the particular party or individual and does not have the exclusivity over the rest of the world. Thus, non-compete fee cannot be termed as intangible asset. The Hon’ble High Court has also set out the differences between the rights conferred by goodwill and rights acquired by the non compete agreement. Therefore, the ratio of the decision of the Hon’ble Delhi High Court in case of Sharp Business System is applicable in the present case and depreciation claimed on the said non compete fee cannot be allowed. The case laws cited by the Ld. AR will not support the case of the assessee has the jurisdictional High Court decision has given a clear finding relating to non-compete fee. Hence, Ground No. 2 of the revenue’s appeal is allowed.
8. In result, the appeal of the Revenue is partly allowed.
Order pronounced in the Open Court on 30th August, 2019.