Depreciation on non ­compete fee payment treating it as an intangible asset

Advocate Akhilesh Kumar Sah

DCIT vs. Compass Group (India) Support Services P. Ltd.(ITAT Chennai)

Recently in the DCIT vs. Compass Group (India) Support Services P. Ltd.  ITAT Chennai decided on 12.06.2019, one of the ground taken by Revenue in the appeal was that the Learned CIT(A) has erred in providing relief to the assessee by holding that the appellant was entitled to depreciation on non ­compete fee as an intangible asset under Section 32( l)(ii) of the Income Tax Act, 1961 (hereinafter referred in short as the Act).

Brief Facts:

Campus Group (India) Support Services Pvt. Ltd., formerly known as Epicurean Enterprises Pvt. Ltd., is engaged in the business of providing catering, facility management and other services to camps, onshore and offshore oil fields, schools and universities, office establishments and hospitals. During the financial year 2009-10, the assessee had been acquired by Compass Group (Singapore) Pvt Limited vide a share purchase agreement dated 31.03.2009. Pursuant to it, the assessee had executed a non-compete agreement dated 23.04.2009 with Mr. Darayes P Dalal, Mr. N.S. Udaykumar and Compass Group (Singapore) Pte Limited formerly Stamfless Food Management Pte Limited, Singapore providing that Mr. Darayes P Dalal and Mr. N.S. Udaykumar (‘Covenanters’) should not engage in any competing business. Pursuant to the non-compete agreement, the Covenanters were entitled to receive non-compete fee. Accordingly the assessee paid a non-compete fee and claimed them as revenue expenditure debiting the P&L account as an exceptional item. However, while computing the taxable income, the assessee voluntarily disallowed it but claimed depreciation at the rate of 25% under section 32 of Act, considering the payment towards non-compete fee as intangible asset. While making the assessments for the assessment years 2012-13, 2013-14 & 2014-15, the Assessing Officer (AO) refused to allow the non-compete fee. He refused to allow the assessee’s alternate claim that if the impugned claim is not allowed, the entire payment may be considered under section 37 of the Act, as revenue expenditure. Against these orders, the assessee filed appeals before the Learned CIT(A). The Learned CIT(A) passed consolidated orders. On the disallowance of depreciation on the non-compete fee, the Learned CIT(A) found that this Tribunal, following the decision of the Hon’ble Jurisdictional Madras High Court in Pentasoft Technologies Ltd. vs. DCIT (2014) 41 taxmann.com, 120 in the assessee’s own case in ITA Nos.2064 & 2924/Mds/2016 for the assessment years 2010-11 & 2011-12 directed the AO to grant depreciation on non-compete fee paid by the assessee. Therefore, following the order of the ITAT, the Learned CIT(A) directed the AO to grant depreciation on the compete fee paid by the assessee.

The Learned Members of the ITAT, Chennai heard the rival submissions and on the issue of disallowance of depreciation on non-compete fee for the assessment years 2012-13, 2013-14 & 2014-15, found that the co-ordinate Bench of this Tribunal in the assessee’s own case decided the issue in assessee’s favour. The relevant portion of the case Compass Group (India) Support … vs.  ACIT, Chennai (ITA Nos.2064 & 2924/Mds/2016) is extracted as under:-

“6. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee- company earlier known as Epicurean Enterprises Pvt. Ltd. was acquired by Compass Group of companies by means of share purchase agreement. The only issue arises for consideration is disallowance of depreciation on non-compete fee. The Assessing Officer found that non-compete fee paid by the assessee is not a right available to the company which can be sold. The Assessing Officer further found that business as well as commercial right are similar nature. According to Section 32(1)(ii) of the Act, it cannot be said to arise overnight on account of payment of non-compete fee. The Assessing Officer also found that the payment of non-compete fee did not result in any intangible asset. Accordingly, the Assessing Officer by placing reliance on the judgment of Delhi High Court in Hindustan Coco Cola Beverages Pvt. Ltd. (331 ITR 192), found that the assessee is not eligible for depreciation on the non- compete fee. Before this Tribunal, the assessee is placing itsreliance on the judgment of Madras High Court in Pentasoft Technologies Ltd. (supra).

7. We have carefully gone through the judgment of Madras High Court in Pentasoft Technologies Ltd. (supra). In the case before Madras High Court, the assessee paid non-compete fee by virtue of an agreement. The assessee claimed the same as capital expenditure and depreciation was also claimed. The Assessing Officer rejected the claim of the assessee. The Tribunal also confirmed the order of the Assessing Officer on the ground that the non-compete fee is not an asset, therefore, depreciation cannot be allowed. On further appeal before High Court, it was found that under the agreement, the transferor had all the rights like copyright, trademark, etc. The High Court further found that the non-compete fee is a commercial right and therefore, eligible for depreciation under Section 32(1)(ii) of the Act.

8. In view of the judgment of Madras High Court in Pentasoft Technologies Ltd. (supra), this Tribunal is unable to uphold the order of the lower authority. Accordingly, the orders of both the authorities below are set aside and the Assessing Officer is directed to grant depreciation on the non-compete fee paid by the assessee.

9. In the result, both the appeals of the assessee stand allowed.”

Following the above, the Learned Members of the ITAT, Chennai dismissed the appeals of the Revenue on the above mentioned issue for the assessment years 2012-13, 2013-14 & 2014-15.

FULL TEXT OF THE ITAT JUDGEMENT

The Revenue filed the above appeals against the orders of the Commissioner of Income Tax(Appeals)-4, Chennai in ITA Nos.370,369  & 371/2016-17 dated 27.09.2018 for the assessment years 2012-13, 2013-14 & 2014-15 respectively, while the assessee filed cross objection against the order related to assessment year 2013-14.

2. Campus Group (India) Support Services Pvt. Ltd., formerly known as Epicurean Enterprises Pvt. Ltd., is engaged in the business of providing catering, facility management and other services to camps, onshore and offshore oil fields, schools and universities, office establishments and hospitals. During the financial year 2009-10, the assessee had been acquired by Compass Group (Singapore) Pte Limited vide a share purchase agreement dated 31.03.2009. Pursuant to it, the assessee had executed a non-compete agreement dated 23.04.2009 with Mr. Darayes P Dalal, Mr. N.S. Udaykumar and Compass Group (Singapore) Pte Limited formerly Stamfless Food Management Pte Limited, Singapore providing that Mr. Darayes P Dalal and Mr. N.S. Udaykumar (‘Covenanters’) should not engage in any competing business. Pursuant to the non-compete agreement, the Covenanters were entitled to receive non-compete fee. Accordingly the assessee paid a non-compete fee and claimed them as revenue expenditure debiting the P&L account as an exceptional item. However, while computing the taxable income, the assessee voluntarily disallowed it but claimed depreciation at the rate of 25% U/s.32 of the Act, considering the payment towards non-compete fee as intangible asset. While making the assessments for the assessment years 2012-13, 2013-14 & 2014-15, the Ld.AO refused to allow the non-compete fee. He refused to allow the assessee’s alternate claim that if the impugned claim is not allowed, the entire payment may be considered U/s.37 of the Act, as revenue expenditure. Further, the Ld.AO noticed that the assessee failed to credit the employees’ contribution to PF & ESI in time for the assessment years 2013-14 & 2014-15. Therefore, he disallowed them.

3. Aggrieved against these orders, the assessee filed appeals before the Ld.CIT(A). The Ld.CIT(A) passed consolidated orders. On the disallowance of depreciation on the non-compete fee, the Ld.CIT(A) found that this Tribunal, following the decision of the Hon’ble Jurisdictional Madras High Court in Pentasoft Technologies Ltd. vs. DCIT (2014) 41 taxmann.com, 120 in the assessee’s own case in ITA Nos.2064 & 2924/Mds/2016 for the assessment years 2010-11 & 2011-12 directed the Ld.AO to grant depreciation on non-compete fee paid by the assessee. Therefore, following the order of the ITAT, the Ld.CIT(A) directed the Ld.AO to grant depreciation on the non-compete fee paid by the assessee. In respect of disallowance of belated PF & ESI contribution made U/s.36(1)(va) for the assessment years 2013-14 & 2014-15, the Ld.CIT(A) found that the assessee had deposited employees’ contribution to PF & ESI after the due dates specified in the respective Act. However, the assessee deposited them before the due date of filing the return of income under the Income Tax Act, 1961. Therefore, following the decision of the Hon’ble Jurisdictional Madras High Court in the case of CIT vs. M/s. Industrial Security & Intelligence India Pvt. Ltd., (Appeal No.585 and 586 of 2015 dated July 24,2015) and the decision of the Hon’ble Delhi High Court in the case of CIT vs. AIMIL Limited [2010] 321 ITR 508 (Delhi), directed the Ld.AO to verify once again whether the impugned amounts were remitted to government exchequer within the due date for filing of return of income U/s.139(1) of the Act. Subject to this verification, he allowed the appeals of the assessee.

4. Aggrieved against these orders, the Revenue filed these appeals with the following common grounds:-

1. The order of the Ld. CIT(A) is contrary to law, facts and circumstances of the case.

2. The Ld. CIT(A) has erred in providing relief to the assessee by holding that the appellant was entitled to depreciation on non-­compete fee as an intangible asset under Section 32( l)(ii) of the Income Tax Act, 1961.

3. The Ld. CIT(A) has erred in providing relief to the assessee by relying on the decision in the case of M/s Pentasoft Technologies Limited vs DCIT[(2014)41 com120] where the facts are distinguishable in as much as the non compete fee in the instant case is quantifiable and not a composite fee paid to the other party.

4. The Ld. CIT(A) erred in holding that delayed payments of Provident Fund and Employees State Insurance dues being the employees contributions under the relevant statutes but remitted before the due date for filing of return of income under the Income tax Act are allowable as deduction under section 36(1)(va) of the Income tax Act.

5. The Ld. CIT(A) erred in allowing deduction under section 36(1)(va) on delayed payments of Provident Fund and Employees State Insurance dues being the employees contributions under the relevant statutes considering that application of Section 36(1)(va) read with Section2(24)(x) alone is the proper course and any other interpretation would only defeat the object and scope of both the provisions viz., 438 and 36(1)(va).

6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) be set aside and that of the AO restored.

5. The Ld.DR presented the case on the lines of grounds of appeal and pleaded to set aside the orders of the Ld.CIT(A) and restore the orders of the Ld.AO. Per contra, the Ld.AR relied on the decision of this Tribunal and the Hon’ble Jurisdictional High Court, supra.

6. We heard the rival submissions. On the issue of disallowance of depreciation on non-compete fee for the assessment years 2012-13, 2013-14 & 2014-15, we find that the co-ordinate Bench of this Tribunal in the assessee’s own case decided the issue in assessee’s favour. The relevant portion is extracted as under:-

“6. We have considered the rival submissions on either side and perused the relevant material available on record. The assessee­company earlier known as Epicurean Enterprises Pvt. Ltd. was acquired by Compass Group of companies by means of share purchase agreement. The only issue arises for consideration is disallowance of depreciation on non­compete fee. The Assessing Officer found that non­compete fee paid by the assessee is not a Officer further found that business as well as commercial right are similar nature. According to Section 32(1 )(ii) of the Act, it cannot be said to arise overnight on account of payment of non­compete fee. The Assessing Officer also found that the payment of non­compete fee did not result in any intangible asset. Accordingly, the Assessing Officer by placing reliance on the judgment of Delhi High Court in Hindustan Coco Cola Beverages Pvt. Ltd. (331 ITR 192), ,found that the assessee is not eligible for depreciation on the non­compete fee. Before this Tribunal, the assessee is placing its reliance on the judgment of Madras High Court In Pentasoft Technologies Ltd. (supra).

7. We have carefully gone through the judgment of Madras High Court in Pentasoft Technologies Ltd. (supra). In the case before Madras High Court, the assessee paid non­compete fee by virtue of an agreement. The assessee claimed the same as capital expenditure and depreciation’ was also claimed. The Assessing Officer rejected the claim of the assessee. The Tribunal also confirmed the order of the Assessing Officer on the ground that the non­compete fee is not an asset, therefore, depreciation cannot be allowed. On further appeal before High Court, it was found that under the agreement, the transferor had all the rights like copyright, trademark, etc. The High Court further found that the non­compete eligible for depreciation In view of the judgment of Madras High Court in Pentasoft Technologies Ltd. (supra), this Tribunal is unable to ‘uphold the order of the lower authority. Accordingly, the orders of both the authorities below are set aside and the Assessing Officer is directed to grant depreciation on the non-­compete fee paid by the assessee.

9. In the result, both the appeals of the assessee stand allowed.”

Following the above order, the Revenue’s appeal grounds on this issue are dismissed for all these assessment years.

6.1 On the issue of disallowance of PF & ESI contribution in respect of assessment years 2013-14 & 2014-15, since the Ld.CIT(A) followed the decision of the Hon’ble Jurisdictional Madras High Court and the Hon’ble Delhi High Court, we do not find any reason to interfere with his orders. Thus the Revenue’s appeals are dismissed for all these three assessment years.

Assessee’s Cross Objection No.5/Chny/2019:-

7. In the assessment year 2013-14, the assessee added to its intangible assets “Brands and Customer Contracts” valued at Rs.1,46,15,269/- and claimed depreciation at the rate of 25% on it. When the Ld.AO sought the particulars, the assessee explained, inter alia, that

pursuant to a composite scheme of arrangement sanctioned by the Hon’ble Madras High Court, the food business undertaking of the CGIHS were demerged and transferred to the Company with effect from 1 April 2012. The scheme was made effective from 23 August 2013, upon necessary fillings with Registrar of Companies. Under the scheme, all assets and liabilities including contingent liabilities pertaining to the demerged food business undertaking of CGIHS were recorded at book values.

Amongst the assets transferred, the company acquired brands and customer contracts owned by CGIHS. These brands and customer contracts were purchased by CGIHS from Indus Executive Catering Services Pvt. Ltd., (‘Indus’) under an Asset Purchase Agreement dated 8 November 2010.

The nature of intangibles recorded in CGIHS’s books of accounts has been tabulated below:

As per section 32 of the Act, the following assets shall qualify as intangible assets that are eligible to be depreciated:

• Know-how, patents, copyright, trademarks, licenses, franchises; or
• Any other business or commercial rights of similar nature.

The brands are covered within the definition of an intangible asset under section 32(1)(ii) of the Act and accordingly, CGIHS was entitled to claim depreciation on consideration paid towards acquisition of such brands acquired from Indus. The Company places reliance on the ruling of the Mumbai Tribunal in the case KEC International Ltd vs. ACIT (2010) (41 SOT 43) wherein was held that the brand name is an intellectual property right similar to trade mark, eligible to be depreciated under section 32 of the Act.

In respect of customer contracts, the Company applying the principle of ejusdem generis, believes that the consideration paid towards customer contracts is for acquiring a business 1 commercial right of the nature akin to license specified under section 32(1)(ii) of the Act, which vested with CGIHS on acquisition of contracts relating to the food & catering services business of Indus. In the absence of such rights it would have been illegal on part of CGIHS to trade with such clients.

Thus, in the instant case, consideration paid by CGIHS to acquire brands and rights in customer contracts qualify as intangible assets within the meaning of section 32(1)(ii) of the Act and accordingly, eligible for depreciation.

As stated, pursuant to the demerger of the food business undertaking of CGIHS, all assets and liabilities were taken over by the Company. The Company continued to claim depreciation in respect of the brands and customer contracts vested with it. Recently, the Chennai Tribunal upheld this view in the case of DCIT vs. Emerald Jewel Industry India Ltd (ITA 1811/Mds/2015) wherein intangible assets acquired by making payment through banking channel before amalgamation would be eligible for depreciation.

Accordingly, it is submitted that the depreciation on brands and customer contracts of INR 3,653,817 is eligible for depreciation under section 32 of the Act.

7.1 The Ld.AO found from the Valuation Report that the valuation of brand name was at Rs.70,14,258/-, the remaining sum of Rs.76,01,011/- was valued for the non-compete clause. After considering the submissions, the Ld.AO held, inter alia, that the value of brands could be allowed as an intangible asset and accordingly allowed the depreciation. However, on the value of client contracts, held, inter alia, that since the client contract do not provide any right to the company and there is no ownership attached to them, the assessee is not eligible to claim the vendor network as an asset for the reason that the clients had a continued right to obtain services for which they had entered into contracts. With a transfer of business, the assessee would naturally have to continue the same unless it is specifically cancelled and therefore there is no question of acquiring any rights. Further, it is the right of the client to continue with the business of the assessee company or not. Therefore, the contracted clients cannot be an intangible asset for the assessee company. The customer contracts are also not alienable in nature and its value cannot be determined. Therefore, he disallowed the depreciation claimed by the assessee with respect to the customer contracts. On an appeal, the Ld.CIT(A) confirmed the stand taken by the Ld.AO.

8. Aggrieved against the disallowance of depreciation on customer contracts sustained by the Ld.CIT(A) for the assessment year 2013-14, the assessee filed cross objection with the following ground:-

“1. That on the facts and in the circumstances of the case and in law, the Hon’ble Commissioner of Income ­tax (Appeals) has erred in upholding the erroneous action of the Learned Assessing Officer in disallowing the depreciation of Rs.19,00,253 on customer contracts as claimed under section 32 of the Income­ tax Act, 1961.”

9. The Ld.AR relied on the decision of the Mumbai ITAT in the case of Skyline Caterers (P.) Ltd., reported in [2008] SOT 266 (Mum) dated 28.12.2007. Per contra, the Ld.DR supported the orders of the lower authorities.

10. We have heard the rival submissions and gone through relevant material. The head note of the decision relied by the Ld.AR is extracted as under:-

“Section 32 of the Income ­tax Act, 1961 ­ Depreciation ­ Allowance/Rate of -Assessment year 2003-04 ­ Whether expression ‘any other business or commercial rights of similar nature’ appearing in clause (ii) of section 32(1) would include such rights which can be used as a tool to carry on business ­ Held, yes ­ Assessee­company was engaged in business of providing catering, house-keeping and allied services to a company HLL ­ Such catering business was earlier carried on by one ‘R’ under a catering contract with HLL for last 30 years ­ Assessee entered into an agreement with ‘R’ for taking over catering contract of ‘R’ with HLL against a consideration of Rs. 27 lakhs ­ Out of said sum, assessee paid a sum of Rs. 25 lakhs to ‘R’ as a consideration for acquiring all rights under said catering contract and balance sum of Rs. 2 lakhs was paid to ‘R’ on account of not to compete with assessee ­ Assessee further reflected total amount of Rs. 27 lakhs in its balance sheet as goodwill and claimed depreciation thereon treating same as intangible assets ­ Assessing Officer held that goodwill did not find place in section 32 as part of intangible assets and, therefore, disallowed assessee’s claim for depreciation ­ Whether since amount paid by assessee to ‘R’ related to acquisition of all rights under catering contract between ‘R’ and HLL as well as all articles and paraphernalia belonging to ‘R’, it could not be said that said payment was on account of goodwill ­ Held, yes ­ Whether, therefore, merely because assessee showed said payment on account of goodwill in books of account, no adverse inference could be drawn against assessee ­ Held, yes ­ Whether, therefore, rights acquired by assessee under catering contract, along with articles and paraphernalia lying in canteen of HLL which were tangible assets, would be eligible for depreciation under clause (i) of section 32( I) and balance amount would be allocated for intangible asset for purpose of granting depreciation under clause (ii) of section 32( I) ­ Held, yes

Interpretation of statute : Rule of Ejusdem Generis

Words and phrases: Expression ‘any other business or commercial rights of similar nature’, as appearing in clause (ii) of section 32(1) of the Income ­tax Act, 1961”

Since the facts and circumstances of this assessee’s case is on the same line, following the above decision, the assessee’s cross objection is allowed.

11. In the result, the appeals of the Revenue for the assessment years 2012-13, 2013-14 & 2014-15 are dismissed and the cross objection of the assessee for the assessment year 2013-14 is allowed.

Order pronounced on the 12^th June, 2019 at Chennai.