DCIT Vs Ebix Software India Pvt. Ltd. (ITAT Delhi)
The Assessing Officer has held that the cost of the purchase consideration over the tangible assets is to be treated as payment for the non-compete fees as there was no goodwill with the seller and creation of the goodwill is misleading. The aforesaid finding is based on the complete misconception of facts and circumstances and the evidence placed on the record. It is reiterated that the fact that valuation report provides for a valuation of the business acquired by the company as on going concern at a higher sum than the book value and such value represents goodwill of the business. It is submitted that even the method of valuation as adopted in the valuation report is a discounted cash flow method of the revenue for the succeeding years which itself establish the submission of the appellant that amount has been paid for the goodwill of the assessee and not for a non-compete fee. It is to be highlighted that non compete fee clause is for a period of two years i.e. for the period from 1.5.2012 to 30.4.2014 whereas revenue as per valuation report is for the financial year 2012-13 to financial year March 2017. Thus it itself shows that the money paid and determined as consideration based on the valuation report and accepted in the agreement with M/s. Planet Online India Pvt. Ltd. are in respect of “goodwill” and not in respect of non-compete fees, it is reiterated that non-compete fee was an incidental obligation on M/s. Planet Online India Pvt. Ltd. and there was no separate consideration paid towards non-compete fees. It is submitted that judicially, it has been consistently recognized and held that any sum paid over and above the book value is to be held as exclusive until there is an agreement to the contrary and thus, in absence of any agreement to the contrary, in any manner, holding that the sum is paid towards non compete fees, is absolutely contrary to the actual facts. The Assessing Officer has referred to the judgment of the Hon’ble Delhi High Court in the case of Sharp Business System v. CIT reported in 254 CTR 233. This judgment has no application to the facts of the case of the appellant. In the said case, expenditure of Rs. 3 crores has been incurred towards non compete fee and the same was claimed as revenue expenditure which on the facts of the case was held to be capital expenditure. However, no such expenditure has been claimed by the appellant company, in any case, a close reading of the judgment would show that in the said case, non compete fee has been paid for a period of seven years which was held to be enduring benefit and therefore, such expenditure has been held to be capital expenditure. It is submitted that in the said case, the appellant thereafter, made an alternative contention that the expenditure be held to be intangible assets, eligible for depreciation under section 32 of the Act. The Hon’ble Apex Court after considering the judgment in the case of Techno Shares and Stock Brokers (P) Ltd. (supra) and the judgment in the case of Hindustan Cola Beverages (supra) held that there is no acquisition of non competition agreement, it is restricted one and ‘therefore, such a sum is not eligible for the capital assets under section 32(1) of the Act. It was held that expression ‘similar business of commercial rights’ has to be necessarily result in an intangible asset against the entire world to be eligible for the deprecation. The said judgment has no application on the facts of the instant case more particularly when there is no independent agreement and there is no specified consideration for non-compete fee having been paid by the company. It is well settled law that an agreement is to be read as such. Reliance is placed on the following judgments:
a) 288 ITR 408 (SC) of Ishikawajima-Harima Heavy Industries ltd. s BIT
b) 341 ITR 1 (SC) Vodafone International Holdings B.V. v UOI
c) 173 ITR 479 (SC) C1T v Arvind Narottam
The Hon’ble Delhi High Court in the case of CIT vs. Eicher Ltd. reported in 302 ITR 249 while examining the nature of non-compete fee laid the stress on the length of period of restriction. The Hon’ble Court referring to Hon’ble Supreme Court’s judgment in Coat Shipment’s case reported in 82 ITR 902 (SC) has observed that payment made to ward off the competition in a business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time, it was held that, “How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case.” The Hon’ble Court also observed that, “to decide whether an expenditure of this nature is a capital expenditure or not would depend on the facts of the case. However, it is necessary to know whether the advantage derived by the prayer is of an enduring nature, and for this one of the considerations is the length of time for which the non-compete agreement would operate although that is not decisive. While the length of time for which computation is eliminated may not strictly be decisive in all cases, yet, at the same time, it should not be so brief as to virtually be transitory. The Court finally held that, “the assessee did not acquire any capital asset by making the payment of non-compete fee of 4 crores. It merely eliminated completion in the two wheeler business, for a definite period of time.” Therefore, the expenditure was held to be revenue in nature.
In view thereof, claim of non-compete fee without payment of any consideration is though a part and parcel of the agreement and provided on account of commercial expediency and business necessity, yet the same cannot be made a basis to hold that excess of consideration paid over, the book value assets is not goodwill, but payment for non compete fee as claimed by the Assessing Officer. The judgment relied by the Assessing Officer to deny the eligible deduction of depreciation on the goodwill has been given in the different context and has no connection with the facts of the given case In view of the above, the Assessing Officer is directed to allow the depreciation of Rs.8,40,26,029/- and modify the order of assessment accordingly
During the course of the assessment proceedings, the Assessing Officer had disallowed depreciation claimed by the Assessee on goodwill recorded pursuant to a business transfer agreement.
FULL TEXT OF THE ITAT JUDGEMENT
The above two appeals filed by the Revenue are directed against the separate orders dated 30th May, 2017 of the CIT(A)-3, New Delhi relating to assessment years 2013-14 and 2014-15, respectively.
2. Since common issues are involved in both these appeals, therefore, these were heard together and are being disposed of by this common order.
3. Facts of the case, in brief, are that the assessee is a wholly owned subsidiary of Ebix Singapore Pvt. Ltd. and is engaged in the business of rendering information technology/information technology enabled services (IT/ITES). It filed its return of income on 30.11.2013 declaring nil income after claiming deduction of Rs.226,98,41,758/- under section 10AA of the IT Act. However, the assessee has paid tax u/s 115JB on book profit of Rs.205,06,58,504/-. Since the assessee had entered into certain international transaction, the AO referred the matter to the TPO for determination of the ALP of the international transaction. However, the TPO did not draw any adverse inference in respect of such international transaction undertaken by the assessee. So far as the other issues are concerned, the AO, after considering the various replies given by the assessee, rejected the claim of deduction u/s 10AA of the Act made by the assessee in respect of income from six SEZ units and made addition of Rs.226,98,41,758/-. Similarly, the AO made addition of Rs.82,88,099/- on account of other income from four SEZ units. The AO further made addition of Rs.8,40,46,029/- by rejecting the claim of depreciation on goodwill. Thus, the AO determined the total income of the assessee at Rs.212,44,62,496/-.
4. In appeal, the ld.CIT(A) deleted the additions made by the AO.
5. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
6. Ground of appeal No.1 by the Revenue reads as under:-
“1. Ld. Commissioner of Income Tax (Appeals) erred on law and on the facts of the case in deleting the addition of Rs. 2,26,98,41,758/- made by the AO on account of business income from 6 units.”
6.1 So far as ground No.1 is concerned, the facts of the case, in brief, are that the assessee has claimed deduction of Rs.226,98,41,758/- u/s 10AA of the Act in respect of four eligible business undertakings, i.e., Noida SEZ, Nagpur SEZ, Coimbatore SEZ and Hyderabad SEZ, the details of which are as under:-
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