Case Law Details

Case Name : M/s. India Medtronic Pvt. Ltd. Vs. ACIT (ITAT Mumbai)
Appeal Number : ITA No. 812/Ahd/2008
Date of Judgement/Order : 25/05/2017
Related Assessment Year : 2003- 04, 2004- 05
Courts : All ITAT (5308) ITAT Mumbai (1657)

During AY 2002-03, the Assessee had paid non-compete fees amounting to USD 1 million i.e. equivalent to INR 4,73,00,000 to the directors of Med tech Devices Limited and claimed the same as revenue expenditure. The learned AO disallowed the same under section 37(1) of the Act on the grounds that there is no justification for incurring the said expenditure. Alternatively, the learned AO held that the said amount should be considered as capital in nature. The issue under consideration is squarely covered by the order of The Hon’ble ITAT vide its order dated 25 October 2016 (ITA No. 811/Ahd/2008) in Assessee’s own case for. AY 2002- 03 wherein it was held that non-compete fee Incurred by IMPL is a capital expenditure which is in the nature of any other business or commercial rights and hence eligible for depreciation under the provisions of the Act. The relevant extract of the ruling has been reproduced below:

‘The Court observed, any intangible assets which are invaluable and result in smoothly carrying on the business as part of the tool of the trade of the assessee would come within  the expression “any other  business or commercial right of similar nature”. The Hon ‘ble Supreme Court in CIT v/s Smiffs Securities Ltd. (supra) held even applying the principle of ejustem generis goodwill will come within the expression “any other business or commercial rights of similar nature”. The Hon ‘ble Kamataka High Court in the case of CIT v/s Ingersoll Rand International Industries Ltd., [2014J 48 taxmann.com 349 (Kar.), while deciding the issue relating to allow ability of depreciation on non-competence fee as an intangible assets, took note of the decision of the Hon ‘ble Delhi High Court in case of Areva T&D India Ltd. (supra) and Sharp Business System vis CIT, [2012J 211 taxmann 576 and the decision of the Hon’ble Madras High Court in Pentasoft Technologies Ltd. vis DCIT, [2014J  222 taxmann 209 and also referring to the decision of the Hon ‘ble Supreme Court in the case of Techno Shares and Stocks Ltd. ultimately held as under:-

“8. Therefore what is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in Sec. 32 of the Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. A non-compete right encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trademarks, licenses, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, at least for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with the person receiving the non-compete fee to do business with a person who is directly or indirectly in competition with the business which is being acquired. The right is acquired for carrying on the business and therefore it is a business right. The word ‘commercial” is defined in Black’s Law Dictionary as related to or connected with trade and commerce in general’, ‘commerce ‘is defined as ‘the exchange of goods, productions or properly of any kind; the buying, selling and exchanging of articles’. A right by way of non-compete is acquired essentially for trade and commerce and therefore it will also qualify as a commercial right. A right acquired by way of non-compete can be transferred to any other person in the sense that the acquirer gets the right to enforce the performance of the terms of agreement under which a person is restrained from competing. When a businessman pays money to another businessman for restraining the other businessman from competing with the assessee, he gets a vested right which can be enforced under law and without that, the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his-business without bothering about the competition. Generally, non-compete fee is paid for a definite period. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Therefore that right which the assessee acquires on payment of non­ compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trademarks, licenses, franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an ‘intangible asset’. Their right to carry on business without competition has an economic interest and money value. The term ‘or any other business or commercial rights of similar nature’ has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl. (b) of Expin. 3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in tum confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec. 32(1) (ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held.”

In our considered opinion, the aforesaid decision of the Hon ‘ble Kamataka High Court, squarely settles the issue in faovur of the assessee. Therefore, respectfully following the aforesaid decision of the Hon ‘ble Karnataka High Court, we hold that the assessee is entitled to depreciation on the payment of non-compete fee as the assessee has acquired intangible asset in the nature of any other business or commercial right.”

42. Respectfully following the decision of the Tribunal in assessee’s own case, we hold that assessee is eligible for consequential depreciation on non-compete fees in the AY 2003-04.

Expenses on Sponsoring Foreign Trips of Doctors for Business Promotion is allowable 

Dis allowance of 50% of expenditure incurred for sponsoring the foreign trips of doctors. We have considered rival contentions and found that the AO disallowed the expenditure contenting that the assessee has not proved that the expenses were incurred wholly and exclusively for the purpose of business as the assessee has not adduced any evidence on record to show that such education imparted by it abroad t the medical professionals would culminate in assured business from these professionals upon their return. The CIT(A) held that while the assessee has failed to justify the real intended purpose behind such expenditure, it is also true that such expenses on foreign trips of professionals generate goodwill for the company and lead to future business growth. Accordingly, the CIT(A) held that 50% of the dis allowance is justified and granted relief for the balance 50%. We found that expenditure were incurred wholly and exclusively for the purpose of business. A company being an artificial juridical person cannot have personal expenses. All the expenses incurred by the company has to be for the purpose of the business of the company. Accordingly no adhoc dis allowance can be made, for which reliance can be placed on Johnson & Johnson Ltd., (39 CCH 58), Johnson & Johnson Ltd., (35 CCH 275) and Sayaji Iron and Engg. Co., (172 CTR 339). We accordingly direct the AO to delete the dis allowance of expenditure incurred on foreign trips of doctors.

Expenditure incurred on purchase of catalogues and brochures, which were wholly and exclusively for the purpose of business is allowable as expenditure.

Ground No. 5 relates to dis allowance of expenditure incurred on purchase of catalogues and brochures. We have considered rival contentions and found that the AO has disallowed on the ground that the assessee has not been able to substantiate that the expenses were incurred wholly and exclusively for the purpose of business. The CIT(A) held that the argument and submission of the assessee appear to be non-convincing and contrary to the market practices for such high value items, accordingly, upheld the action of the AO.

We have considered rival contentions and found that expenditure has been incurred under the commercial expediency. Relying on the decision of Supreme Court in case of Dhanarajgirji Raja Narsingirji (91 ITR 544) Panipat Woolen and general Mills (103 ITR 66), Eastern Investments (20 ITR 1) and the decision of Bombay High Court in case of Dinshaw (F.E) Ltd., 36 ITR 114, we do not find any merit for dis-allowance of expenditure incurred on purchase of catalogues and brochures, which were wholly and exclusively for the purpose of business. Accordingly, AO is directed to delete the same.

Full Text of the ITAT Order is as follows:-

O R D E R

PER R.C.SHARMA (A.M):

These are the cross appeals filed by the assessee and revenue against the order of CIT(A) – VI, Baroda dated 07/12/2007 for the A. Y.2003-04 and 2004-05 in the matter of order passed u/s. 143(3) of the IT Act.

2. Rival contentions have been heard and record perused.

3. Facts in brief are that assessee IMPL was incorporated in 1993 at Baroda, Gujarat and is a part of Medtronic Group. IMPL’s registered office is at Mumbai, Maharashtra. IMPL’s primary business is to distribute medical devices in India. IMPL deals in cost effective therapies for various chronic diseases. It concentrates on segments of Cardiac rhythm disease management, Neuromodulation, Ear, Nose and Throat and neurologic technologies, Cardio vascular, Diabetes and Spinal and Biologics.

4. During the course of scrutiny assessment additions/ dis allowances were were made by the AO on account of depreciation on plant and goodwill, contribution made to group gratuity, legal and professional fees, commission to Radical Health Tech, difference in ledger account, foreign trip expenses, sales promotion expenses, Convention and production charges, capital expenditure and other welfare expenses.

5. By the impugned order, CIT(A) deleted the addition of Rs. 15,59,553/- on account of expenditure incurred on foreign trip of Director in the AY. 2004- 05 and Rs. 19,17,584/- in the A.Y. 2003- 04. Against the above order of CIT(A), both the assessee and revenue are in further appeal before us.

6. At the outset, Ld. Counsel for the assessee stated that in order to cut down on frivolous litigation and taxpayer’s grievance, the CBDT, which formulates policies for the Income Tax Department, has issued recent instruction No.21/2015 dated 10.12.2015 revising the monetary threshold fixing the tax effect limit of Rs. 10 lacs for the revenue to file appeal before the ITAT and since in this appeal, the tax effect is below Rs. 10 lakhs, the appeal filed by the revenue is not maintainable and liable to be dismissed in limine.

7. The ld Departmental Representative agreed to the contention of ld counsel for the assessee.

8. We have considered rival contentions and perused the record. Recently, the CBDT in its Circular No. 21/2015 dated 10thDecember, 2015 have revised the monetary limit to Rs. 10 lakhs from Rs. 4 lakhs to file the appeal before the Tribunal by the Revenue. On scrutiny of appeal filed by the revenue, it is found that the total tax demand is below the prescribed limit of Rs. 10 lakhs. The CBDT also clarifies that this instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/ Tribunal. The Income Tax Act was amended and Section 268A has been introduced on the Statute book with retrospective effect. Section 268A carves out an exception for filing of appeals and References under section 260A of the Act. The legislature has prescribed that the CBDT is empowered to issue circulars and instructions from time to time, with regard to filing of appeals depending on the tax effect involved. The relevant circular issued by CBDT reads as under:

“Reference is invited to Board’s instruction No 5/2014 dated 10-07- 2014 wherein monetary limits and other conditions for filing departmental appeals (in income-tax matters) before Appellate Tribunal and High Courts and SLP before the Supreme Court were specified.

2. In super session of the above instruction, it has been decided by the Board that departmental appeals may be filed on merits before Appellate Tribunal and High Courts and SLP before the Supreme Court keeping in view the monetary limits and conditions specified below.

3. Henceforth appeals/ SLPs shall not be filed in cases where the tax effect does not exceed the monetary limits given here under:-

Sr.No.

Appeals in Income-tax matters

Monetary Limits (in Rs.)

1.

Before Appellate Tribunal

10,00,000

2.

Before High Court

20,00,000

3.

Before Supreme Court

25,00,000

It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.

4. For this purpose, “tax effect” means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as “disputed issues”). However the tax will not include any interest thereon, except where charge ability of interest itself is in dispute. In case the charge ability of interest is the issue under dispute, the amount of interest shall be the tax effect. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against.

5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal, can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the ‘tax effect’ is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately.

6. In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect being less than the monetary limit specified above, the Commissioner of Income-tax shall specifically record that “even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction”. Further, in such cases, there will be no presumption that the Income-tax Department has acquiesced in the decision on the disputed issues. The Income-tax Department shall not be precluded from filing an appeal against the disputed issues in the case of the same assessee for any other assessment year, or in the case of any other assessee for the same or any other assessment year, if the tax effect exceeds the specified monetary limits.

7. In the past, a number of instances have come to the notice of the Board, whereby an assessee has claimed relief from the Tribunal or the Court only on the ground that the Department has implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any other assessment year or in the case of any other assessee for the same or any other assessment year, by not filing an appeal on the same disputed issues. The Departmental representatives/counsels must make every effort to bring to the notice of the Tribunal or the Court that the appeal in such cases was not filed or not admitted only for the reason of the tax effect being less than the specified monetary limit and, therefore, no inference should be drawn that the decisions rendered therein were acceptable to the Department. Accordingly, they should impress upon the Tribunal or the Court that such cases do not have any precedent value. As the evidence of not filing appeal due to this instruction may have to be produced in courts, the judicial folders in the office of CIT must be maintained in a systemic manner for easy retrieval.

8. Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above ‘or there is no tax effect:

(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or

(b) Where Board’s order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or

(c) Where Revenue Audit objection in the case has been accepted by the Department, or

(d) Where the addition relates to undisclosed foreign assets/ bank accounts.

9. The monetary limits specified in para 3 above shall not apply to writ matters and direct tax matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to be governed by relevant provisions of statute & rules. Further, filing of appeal in cases of Income Tax, where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12 A of the IT Act, 1961, shall not be governed by the limits specified in para 3 above and decision to file appeal in such cases may be taken on merits of a particular case.

10. This instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/ Tribunals. Pending appeals below the specified tax limits in para 3 above may be withdrawn/ not Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.

11. This issues under Section 268A (1) of the Income-tax Act 1961.”

9. Considering the above CBDT Circular, we found that these appeals of the revenue are not maintainable as the tax effect in these appeals are below Rs. 10 lakhs. Accordingly, we dismiss the appeals of the revenue.

10. Learned AR also placed on record the order of the Tribunal in assessee’s own case wherein most of the issues are decided in favour of the assessee by the Tribunal.

11. We have gone through the order of the Tribunal in assessee’s own case as well as the order of the lower authorities for the year under In the A.Y. 2003- 04, the CIT(A) has confirmed the addition on account of depreciation on plant and machinery, building, furniture and fixtures by holding the same to be related to the discontinuity of manufacturing operation of the assessee and also holding that the same have not been used during the year. We found that exactly the similar issue was considered by the Tribunal in assessee’s own case for the A.Y. 2002- 03 vide order dated 23/11/2007 also in the A.Y. 2007- 08 vide order dated 30/03/2012 and for A.Y. 2009- 10 vide order dated 31/12/2015.

12. Learned DR fairly conceded that issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case. We also found that assessee was engaged in the business of manufacturing and trading. However, the manufacturing processes were discontinued with effect from 25 January 2002. During the year under consideration, the assessee had claimed depreciation on plant and machinery, building, furniture and fixtures and office equipment. Once the concept of block of assets was brought into effect from AY 1989-90 onwards, then depreciation is allowable on the aggregate of WDV of all the assets in the block at beginning of the Financial year alongwith the additions made to the assets in the subject AY. The individual asset losses its identity for depreciation. From the record, we also found that in AY 2007-08, the Hon’ble CIT(A) has allowed the assessee’s ground by placing reliance on the decisions in case of CIT v Oswal Agro Mills (197 Taxman 25) (HC), Swati Synthetics Ltd v ITA (38 SOT 208) (Mumbai ITAT) and Allied Photographics (8 SOT 318) (Mumbai ITAT). The Department has filed an appeal before the Hon’ble ITAT for AY 2007-08. However, the aforementioned issue was not taken in appeal by the Department before ITAT. We also found that Department accepted CIT(A) order for AY 2002-

03. The CIT(A) has accepted the principle that with the introduction of concept of WDV of block of assets, the depreciation is allowable not on individual items but depending upon date of acquisition and put to use of the asset. Further, CIT(A) was in agreement with Assessee’s view that section 38(2) deals with usage of assets for non-business purposes and does not refer to assets partly used during the year for business purposes. Accordingly, CIT(A) has allowed the depreciation claimed on plant and machinery during AY 2002-03. The Department has filed an appeal before the Hon’ble ITAT for AY 2007-08. However, the aforementioned issue was not taken in appeal by the Department before ITAT. In view of the above, based on a combined reading of all of the above, it is abundantly clear that depreciation is allowable on the plant and machinery, building, furniture and fixture and office equipment of INR 1,22,84,477 and the dis allowance made by the AO was not justified. Thus, there is no merit for the disallowance so made. Respectfully, following the order of the Tribunal in assessee’s own case, we delete the disallowance of depreciation so made by the AO.

13. With regard to dis allowance of depreciation on goodwill amounting to 5.46.875/- in the A.Y.2003-04 on the plea that there was no provision under the Act to provide for the depreciation on goodwill.

14. We have considered rival contentions and found from record that the assessee has entered in to an agreement with Medtech Devices for purchase of Goodwill from Medtech Devices for a consideration of INR 25,00,000 (paid goodwill). The Assessee has claimed depreciation @ 25% amounting to INR 5,46,875/­ on such goodwill paid to MDL. The learned AO has held that goodwill is not a depreciable asset under Section 32 (1 )(ii) of the Act. The CIT(A) has held that Goodwill would not tantamount to acquisition of intangible asset as contemplated in Section 32 (1 )(ii) and accordingly not eligible for depreciation.

15. From the record we found that the Hon’ble Mumbai ITAT, in the assessee’s own case for AY 2002-03, has allowed depreciation on goodwill by placing reliance on the ruling of the Supreme Court in case of CIT vs Smifs Securities Limited (348 ITR 302). The relevant extract of the ruling has been reproduced below:

“Having considered the submissions of the parties, we are of the view that this issue is squarely settled in favour of the assessee by the decision of the Hon’ble Supreme Court In Smiffs Securities Ltd. (supra) wherein, the Hon ‘ble Supreme Court in no uncertain terms has held that goodwill is in the nature of “any other business or commercial right of similar nature”, hence, eligible for depreciation. Respectfully following the decision of the Hon ‘ble Supreme Court as referred to above, we allow assessee’s claim of depreciation. “

16. In light of the above, and respectfully following the order of Tribunal, we direct the AO to allow depreciation on goodwill of INR 5,46,875/-.

17. Next grievance of assessee relates to disallowance of contribution made to group gratuity scheme – INR 53,48,822/-. Rival contentions have been heard and record perused.

18. Facts in brief are that during the year under consideration, the assessee has claimed deduction of an amount of INR 40,98,052 pertaining to earlier years in the return of income on payment basis. Additionally, the assessee had debited an amount of INR 12,50,770 in the profit and loss account. Out of the amount debited to the profit and loss account, the assessee had paid an amount of INR 11,51,670 to the fund and disallowed the balance amount of INR 99,100 while filing the return of income for the year under consideration. The AO disallowed INR 53,48,822 on account of group gratuity scheme not being approved.

19. By the impugned order, CIT(A) confirmed the addition by observing that approval has not been granted to the fund gratuity by the assessee. Assessee is in further before us.

20. We have considered rival contentions and found from record that the mount of INR 40,98,052 and INR 11,51,670 had been disallowed under section 43B of the Act in earlier years and the same had been paid in the year under consideration and accordingly, an amount of INR 40,98,052 and INR 11,51,670 should be allowed on payment basis. We also found that the gratuity trust maintained by IMPL has now been granted approval under the Act by Commissioner of Income Tax – 1, Baroda with retrospective effect from 01.03.2003.

21. In view of the above discussion, the gratuity payments totalling to INR 53,48,822 should be allowed under section 36 (1)(v) of the Act as the assessee has made payment to approved gratuity fund.

22. Assessee is also aggrieved for dis allowance of legal and professional fee – INR 11,82,642/-. Facts in brief are that the assessee had entered into consultancy agreement with Dr Ashok N. Johari to provide professional services (training etc) to the assessee. The learned AO issued notice under section 133(6) of the Act to Dr Ashok N: Johari. However, no response was received from Johari medical. Research and The AO disallowed the claim by observing that genuineness of transaction is not established. By the impugned order , CIT(A) confirmed the dis allowance against which assessee is in further appeal before us.

23. We have considered rival contentions and found that assessee had entered into an agreement with Dr Ashok N. Johari for receiving the following services.

  • Imparting training to a fellow n spinal disease management, spinal surgery in general and with instrumentation.
  • Making presentation on spine surgery at medical meetings and training programs.
  • Conducting training sessions performing paediatric spine surgeries.
  • Monthly meetings with Appellant to discuss any foregoing topics.
  • Providing monthly reports written reports on aforesaid items.

24. As per the terms and conditions of the agreement, an amount of INR 11,82,642 was payable to Dr Ashok N. Johari as his professional fees for the aforementioned services. The assessee had created a provision in the books of accounts for the entire amount payable to Dr Ashok N. Johari of INR 11,82,642. The assessee had made actual payments to Dr Ashok N. Johari of INR 6,20,150 by cheque. The balance amount of provision of INR 5,62,492 payable to Dr Ashok N. Johari has been written back in the books of accounts of the assessee as the services were no longer required by the assessee. The said amount of provision written back has been already offered to tax by the assessee in AY 2006-07.25. In view of the above discussion and considering that the aforesaid services are required for the regular business activities, these expenses are incurred wholly and exclusively for the purpose of business and hence be allowed as a deductible expense under section 37(1) of the Act except an amount of INR 6,20,150 should be disallowed during the year under As the assessee has suo moto reversed and offered to tax an amount of INR 5,62,492 in AY 2006-07, we direct the AO that in respect of the reversal of the amount in the books of accounts to the extent of INR 5,62,492, not to treat the same as income of AY 2006-07 as offered by assessee in the return of income as it would amount to double taxation. We direct accordingly.

26. Next grievance of assessee relates to dis allowance of sale commission of Rs. 11,19,811/-. AO dis allowance assessee’s claim of commission payment on the plea that notices issued u/s.133(6) to the payee were returned unserved. AO, therefore, observed that said expenditure were not genuine. By the impugned order CIT(A) confirmed the action of the AO.

27. It was contended by learned AR that the sales commission expenses were incurred by IMPL in order to increase the sales. The sales for the year under consideration were INR 1,25,09,31,683 vis-a-vis the sales for AY 2002-03 of INR 78,35,24,117. It was further submitted that assessee has been consistently following mercantile system of accounting. Based on this, the assessee has made a provision on an estimated basis for all known liabilities and accordingly had recognised an amount of INR 11,19,811 as expenditure payable to Radical Health Tech. We have considered rival contentions and found that the amount of INR 11,19,811 was not payable to Radical Health Tech. Accordingly, assessee had written back and offered to tax the said amount in A.Y.2004-05. In view of the above, we confirm the action of the AO for dis allowance of sales commission during the Assessment Year 2003-04.

28. AO has also disallowed amount of difference in ledger accounts – INR 22,48,672/-. Facts in brief are that during the year under consideration, the Assessee implemented a new ERP package. Due to integration problems arising in implementation of ERP package, there were difference in various modules as under;

General Ledger module and AP module- INR 24,19,369 .

General Ledger module and AR module- INR 1,70,440.

29. The learned AO formed a view that assessee has claimed more purchases in the P&L account than what shown in the respective party ledgers and less sales was recorded in the P&L account than that what was shown in the respective party ledger. On account of aforesaid non-reconciliation, the AO added an amount of INR 25,89,809 to the total income.30. By the impugned order CIT(A) reduced the addition to Rs. 22,48,672/-. We have considered rival contentions and found that the difference sought to tax is the difference between amounts as per GL module and AR / AP module. As the assessee failed to reconcile the difference ever after giving various opportunities, we confirm the addition made on account of difference in ledger account.

31. AO has also disallowed expenditure incurred on foreign trip of Mr. Nitin Shah amounting to Rs. 10,42,000/-. During the year, Mr. Nitin Shah, director of the assessee undertook certain foreign trips in connection with the imports of the assessee. Accordingly, the expense on foreign trip of 10,42,000 was incurred and was claimed by assessee in its return of income. The AO disallowed expenses foreign trip stating that no specific evidence is submitted to substantiate that expenditure incurred is wholly and exclusively incurred for business purpose. By the impugned order CIT(A) confirmed the action of the AO.

32. It was contended by learned AR Shri Rajan Vohra that the expenses in connection with the foreign trip of Mr. Nitin Shah were incurred in the ordinary course of business and more so, in view of the nature of products and accordingly, the said expenses have been incurred wholly and exclusively for the purpose of business of the assessee. In this regard, assessee has submitted details of the foreign trips alongwith supporting documents. Reliance was placed on the decision of Hon’ble Gujarat High Court in the case of Sayaji Iron and Engg. Co. (253 ITR 749)(Guj HC).

33. We have considered rival contentions and found that foreign trips were undertaken for the purpose of business, therefore, keeping in view nature of commercial expediency and the decision of Supreme Court in case of Sassoon J David (118 ITR 261), we do not find any merit for the dis allowance so made by the AO. Assessee being an artificial juridical person cannot have personal expenses. The expenditure so incurred by the company has to be for the purpose of business of the company. Accordingly, AO is directed to allow the same.

34. AO has also disallowed sales expenses of Rs.9,17,951/-. The AO disallowed the same by observing that the Assessee failed to furnish any submission giving reasons explaining how the sales promotion expenses were incurred wholly and exclusively for the purpose of business of the The Assessee failed to explain the promotion in sales due to payments made to the hospitals and organisations as mentioned above. 35. By the impugned order CIT(A) confirmed the disallowance. It was contended by learned AR that since assessee is engaged in the business of life saving devices which are used during various types of surgery. The sales promotion expenses have been incurred by the assessee in connection with the products sold to hospitals and contacted organizations. He further contended that sales promotion expense should be allowed as business expense u/s.37(1) of the Act.

36. We have considered rival contentions and found from record that the expenditure were incurred in normal course of business to keep cordial relations with existing and potential clients. Out of the total expenses 9201/- was not paid to Dr. Krishna. Accordingly, we confirm the disallowance of Rs.9201/- out of the total expenses of Rs.9,17,951/-.

37. Next grievance of assessee relates to disallowance of convention and perfusion expenses. The learned AO disallowed the entire payment contending that same was not incurred wholly and exclusively for the purpose of business. Considering the fact that the same would generate goodwill for the company and lead to future business growth the Hon’ble CIT (A) allowed 50 % of expenditure incurred. However, the balance 50% was disallowed on contention that the Assessee failed to justify the real intent behind the expenditure incurred. Assessee is in appeal against the 50% addition upheld by the CIT(A) and Department is in appeal against the 50% disallowances deleted by the CIT(A).

38. We have considered rival contentions and found that the expenditure for convention and perfusion was incurred for business purpose and same was substantiated with supporting documents (refer paper book page number 251 to 284). The learned AO and Hon’ble CIT(A) nowhere doubted the genuineness of the expenditure. The 50 percent disallowance on contention that Assessee failed to justify the real intent behind the expenditure incurred is not tenable. Accordingly, we direct the AO to allow the entire expenditure incurred under the head of convention and perfusion expenses.

39. Next grievance of assessee relates to disallowance of Rs.22,464/- treating the same as capital in nature. We found that during the year under consideration, the Assessee claimed INR 1,09,828 (INR 87,464 + INR 22,464) on account of renovation of conference room as revenue expenditure. However, the amount of INR 22,464 was written back in the books of accounts on 22 August 2002. The Department has not filed an appeal against the allowance of INR 87,464 made by the learned AO. As the expenditure is revenue in nature, we do not find any justification for disallowance of the same.

40. The AO has also disallowed the staff welfare expenditure of 20,000/-. From the record, we found that the assessee has incurred certain expenses on account of ganpati festival expense, birthday celebrations, Diwali, marriage gifts etc. totalling to approx. INR 1,00,000. The AO disallowed entire expenditure holding that same was wholly and exclusively for the business purpose. The Hon’ble CIT (A) granted a relief of INR 80,000 and disallowed INR 20,000 contenting that the expenses on Ganpati festival, birthday celebrations, Diwali, marrage gifts, etc. ensures cordial employer-employee relationship, though the entire amount cannot be said to be incurred wholly and exclusively for business purpose. The Department has not filed an appeal against the relief granted by the CIT(A) of INR 80,000. Since the expenditure was incurred wholly and exclusively for the purpose of business, we do not find any merit for the disallowance of Rs.20,000/-.

41. Assessee is also aggrieved for disallowance of non-compete fees. We found that during AY 2002-03, the Assessee had paid non-compete fees amounting to USD 1 million i.e. equivalent to INR 4,73,00,000 to the directors of Medtech Devices Limited and claimed the same as revenue expenditure. The learned AO disallowed the same under section 37(1) of the Act on the grounds that there is no justification for incurring the said expenditure. Alternatively, the learned AO held that the said amount should be considered as capital in nature. The issue under consideration is squarely covered by the order of The Hon’ble ITAT vide its order dated 25 October 2016 (ITA No. 811/Ahd/2008) in Assessee’s own case for. AY 2002-03 wherein it was held that non-compete fee Incurred by IMPL is a capital expenditure which is in the nature of any other business or commercial rights and hence eligible for depreciation under the provisions of the Act. The relevant extract of the ruling has been reproduced below:

‘The Court observed, any intangible assets which are invaluable and result in smoothly carrying on the business as part of the tool of the trade of the assessee would come within  the expression “any other  business or commercial right of similar nature”. The Hon ‘ble Supreme Court in CIT v/s Smiffs Securities Ltd. (supra) held even applying the principle of ejustem generis goodwill will come within the expression “any other business or commercial rights of similar nature”. The Hon ‘ble Kamataka High Court in the case of CIT v/s Ingersoll Rand International Industries Ltd., [2014J 48 taxmann.com 349 (Kar.), while deciding the issue relating to allowability of depreciation on non-competence fee as an intangible assets, took note of the decision of the Hon ‘ble Delhi High Court in case of Areva T&D India Ltd. (supra) and Sharp Business System vis CIT, [2012J 211 taxmann 576 and the decision of the Hon’ble Madras High Court in Pentasoft Technologies Ltd. vis DCIT, [2014J  222 taxmann 209 and also referring to the decision of the Hon ‘ble Supreme Court in the case of Techno Shares and Stocks Ltd. ultimately held as under:-

“8. Therefore what is to be seen is, what are the nature of intangible assets which would constitute business or commercial rights to be eligible for depreciation. In this regard, it is necessary to notice that the intangible assets enumerated in Sec. 32 of the Act effectively confer a right upon an assessee for carrying on a business more efficiently by utilizing an available knowledge or by carrying on a business to the exclusion of another assessee. A non-compete right encompasses a right under which one person is prohibited from competing in business with another for a stipulated period. It would be the right of the person to carry on a business in competition but for such agreement of non-compete. Therefore the right acquired under a non-compete agreement is a right for which a valuable consideration is paid. This right is acquired so as to ensure that the recipient of the non-compete fee does not compete in any manner with the business in which he was earlier associated. The object of acquiring a know-how, patents, copyrights, trademarks, licences, franchises is to carry on business against rivals in the same business in a more efficient manner or to put it differently in a best possible manner. The object of entering into a non-compete agreement is also the same ie., to carry on business in a more efficient manner by avoiding competition, atleast for a limited period of time. On payment of non-compete, the payer acquires a bundle of rights such as restricting receiver directly or indirectly participating in a business which is similar to the business being acquired, from directly or indirectly soliciting or influencing clients or customers of the existing business or any other person either not to do business with the person who has acquired the business and paid the non-compete fee or to do business with the person receiving the non-compete fee to do business with a person who is directly or indirectly in competition with the business which is being acquired. The right is acquired for carrying on the business and therefore it is a business right. The word ‘commercial” is defined in Black’s Law Dictionary as related to or connected with trade and commerce in general’, ‘commerce’is defined as ‘the exchange of goods, productions or properly of any kind; the buying, selling and exchanging of articles’. A right by way of non-compete is acquired essentially for trade and commerce and therefore it will also qualify as a commercial right. A right acquired by way of non-compete can be transferred to any other person in the sense that the acquirer gets the right to enforce the performance of the terms of agreement under which a person is restrained from competing. When a businessman pays money to another businessman for restraining the other businessman from competing with the assessee, he gets a vested right which can be enforced under law and without that, the other businessman can compete with the first businessman. When by payment of non-compete fee, the businessman gets his right what he is practically getting is kind of monopoly to run his-business without bothering about the competition. Generally, non-compete fee is paid for a definite period. The idea is that by that time, the business would stand firmly on its own footing and can sustain later on. This clearly shows that the commercial right comes into existence whenever the assessee makes payment for non-compete fee. Therefore that right which the assessee acquires on payment of non­ compete fee confers in him a commercial or a business right which is held to be similar in nature to know-how, patents, copyrights, trademarks, licences, franchises. Therefore the commercial right thus acquired by the assessee unambiguously falls in the category of an ‘intangible asset’. Their right to carry on business without competition has an economic interest and money value. The term ‘or any other business or commercial rights of similar nature’ has to be interpreted in such a way that it would have some similarities as other assets mentioned in Cl. (b) of Expin. 3. Here the doctrine of ejusdem generis would come into operation and therefore the non-compete fee vests a right in the assessee to carry on business without competition which in tum confers a commercial right to carry on business smoothly. When once the expenditure incurred for acquiring the said right is held to be capital in nature, consequently the depreciation provided under Sec. 32(1) (ii) is attracted and the assessee would be entitled to the deduction as provided in the said provision i.e., precisely what the Tribunal has held.”

In our considered opinion, the aforesaid decision of the Hon ‘ble Kamataka High Court, squarely settles the issue in faovur of the assessee. Therefore, respectfully following the aforesaid decision of the Hon ‘ble Karnataka High Court, we hold that the assessee is entitled to depreciation on the payment of non-compete fee as the assessee has acquired intangible asset in the nature of any other business or commercial right.”

42. Respectfully following the decision of the Tribunal in assessee’s own case, we hold that assessee is eligible for consequential depreciation on non-compete fees in the AY 2003-04. We direct accordingly.

43. Assessee is also aggrieved for not allowing consequential adjustment in opening stock of AY 2003-04 amounting to Rs.36,34,884/-. We have considered rival contentions and found that the assessee had changed the method of valuation of closing stock of manufactured goods from actual cost method to standard cost method of valuation and closing stock of trading items from weighted average cost method to standard cost method of valuation in AY 2002-03. The said change in the method of valuation resulted into a decrease in the profit for the captioned AY by INR 36,34,884. The Assessing Officer made an addition of INR 36,34,884 to the total income of Appellant for AY 2002-03 (reassessment proceedings). However, the Commissioner of Income tax Appeals while upholding the addition made by the Assessing Officer for AY 2002-03 (reassessment proceedings), has directed to adjust the opening stock for AY 2003-04 to that effect as per the order dated 25 October 2007.

44. In view of the above order of the CIT(A), we direct the AO to allow consequential adjustment in the opening stock of AY 2003-04 amounting to Rs.36,34,884/-.

45. Assessee is also aggrieved for the addition of an amount of Rs. 25,71,438 being an amount of notional commission income while determining the arms’ length price under the transfer pricing regulation. We have considered rival contentions. The facts in brief are that assessee a joint venture between Medtronic International Limited (‘MIL’), US which a wholly owned subsidiary of Medtronic Inc., US, holding 51% and balance 49% is held by India Bio-Medical investments Limited, US. Medtronic Group had its presence in India through a Liason Office (‘LO’) of Medtronic International MIL-HK. Upto January 2003, the LO was engaged in promoting specific therapies and market education for specific range of products. LO was instrumental in co-ordinating between MIL-HK and customers [including Medtech Devices Ltd (Medtech’) and distributors (hospitals and institutions)] in India on orders placed directly with MIL-HK by such distributors/ customers In 1998-99, the Assessee started its distribution activities with the distribution of surgical equipments by developing new markets in India. It subsequently introduced the other business segments in its distribution network which were part of the LO activities. The Assessee has started distribution for those products, which were not represented by LO. MIL-HK has sold goods in India through IMPL and also directly to customers (typically hospitals! intuitions at their own behest). “MIL-HK had entered into an exclusive distribution agreement with Medtech on 1 May 1999 for distribution of products which was to continue in effect until 30 April 2002. This agreement was amended on 1 May 2001. As per the amendment, Medtech is eligible to earn commission for sales directly made by MIL-HK to customers introduced by Medtech. The learned Additional Commissioner of Income tax, TP-1 (TPO’) has made an adjustment of INR 25,71,438 for notional commission income while determining the arm’s length price under the transfer pricing regulations.

Particulars Amount in INR
Gross Margin on direct sales by MIL-HK in India 48,48,969
Gross Marqln on direct sales by Sofamor Danek in India 2,86,4 13
Less: Commission paid to distributors by IMPL 25,63,944
Notional Income 25,71,438

46.  The learned TPO held the following while making transfer pricing adjustment:

  • The learned TPO held that since IMPL is undertaking marketing and distribution of the products, for which benefit is received by MIL-HK, therefore IMPL should be compensated by MIL-HK on the same terms as agreed with Medtech.
  • Further, the learned TPO did not allow the claim of IMPL for deduction of the notional freight outward since customer has agreed to bear the freight, the sale price of MIL-HK would be accordingly adjusted.
  • Accordingly, the learned TPO made an adjustment of INR 25,71 ,438.

47. By the impugned order, CIT(A) confirmed the action of the TPO. It was contended by learned AR that no efforts were undertaken by IMPL on account of direct sales made by AE to third parties in India. It was further submitted that Medtronic had its presence in India through a Liaison Office of MIL-HK which was set up in 1979. LO was engaged in promoting Medtronic Products upto January 2003.

  • IMPL was incorporated in 1993 but its distribution activates were started only in FY 1998- 99. Accordingly, its only 4 years since IMPL started its distribution activities.
  • It is humbly submitted that the appellant initially was engaged in assembly of heart valves and custom packs and started the cardiac surgical therapies by developing new markets in India. It introduced other business segments of Medtronic in its distribution network. In fact, the appellant found it easier to sell Medtronic products in Indian  market as it leveraged on the market and distribution network already developed by LO.
  • Accordingly, since IMPL was getting benefit from the marketing activities of LO / relationship with customers MIL-HK; it would be illogical and incorrect to state that MIL-HK was benefitted from marketing efforts of IMPL.

49. Learned AR placed on record the order of the Tribunal in assessee’s own case for the AY 2002-03 wherein Tribunal observed as under:-

“We have considered the submissions of the patties and perused the material available on record. On a careful reading of the order passed by the Transfer Pricing Officer under section 92 CA(3), it is patent and obvious that while determining the commission supposedly earned by the assessee towards direct sales effected by the overseas entity to hospitals in India, he has not resorted to any of the methods approved under section 92C of the Act. At least, we have not found any such observations of the Transfer Pricing Officer in the order passed by him. As could be seen, the Transfer Pricing Officer has not disputed that the sales were directly made by overseas entity to the hospital in India. Therefore, there must be some basis for the Transfer Pricing Officer to conclude that the assessee has rendered services of any manner in relation to such transactions. Without bringing any material on record or applying any of the approved method for determining the arm’s length price of the international transaction, if at all there is any, the Transfer Pricing Officer cannot determine the arm’s length price on notional basis. We have noted that the Transfer Pricing Officer has not brought on record even a single comparable to justify the price determined by him. In the case of CIT v/s C.A. Computer Associates India Pvt. Ltd., the Hon’ble Jurisdictional High Court held that arm’s length price of an international transaction has to be determined in terms of section 92C. In view of the aforesaid, we are inclined

to restore the issue to the file of the Assessing Officer/ Transfer Pricing Officer with a direction to adjudicate the issue afresh and if in reality the assessee is in any way involved in international transaction in relation to supply of medical devices by the overseas entity to hospitals in India, he shall determine the arm’s length price after selecting an appropriate method as provided under section 92C of the Act and keeping in view all other facts and materials on record and after providing due opportunity of being heard to the assessee. Ground No. 3, is allowed for statistical purposes.”

50. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal, we direct AO to follow the direction given by the Tribunal in the order for AY 2002-03. We direct accordingly.

AY 2004-05

51. Ground No. 1 with regard to depreciation on plant and machinery are common as taken in the AY 2003-04. Following the reasoning given in the AY 2003- 04, we direct the AO to allow assessee’s claim of depreciation.

52. Ground No. 2 was not pressed by learned AR, the same is therefore, dismissed in limini as not pressed.

53. Ground No. 3 is with regard to contribution to the group gratuity Since AO has given relief in the order passed u/s.154, learned AR did not press this ground, the same is therefore, dismissed in limini.

54. Ground No. 4 relates to disallowance of 20% of expenditure incurred on gifts. Similar ground has been discussed in the AY 2003-04. Following the same reasoning, we direct the AO to allow the entire expenditure incurred on gift article. We direct accordingly.

55. Ground No. 5 relates to disallowance of expenditure incurred on purchase of catalogues and brochures. We have considered rival contentions and found that the AO has disallowed on the ground that the assessee has not been able to substantiate that the expenses were incurred wholly and exclusively for the purpose of business. The CIT(A) held that the argument and submission of the assessee appear to be non-convincing and contrary to the market practices for such high value items, accordingly, upheld the action of the AO.

56. We have considered rival contentions and found that expenditure has been incurred under the commercial expediency. Relying on the decision of Supreme Court in case of Dhanarajgirji Raja Narsingirji (91 ITR 544) Panipat Woolen and general Mills (103 ITR 66), Eastern Investments (20 ITR 1) and the decision of Bombay High Court in case of Dinshaw (F.E) Ltd., 36 ITR 114, we do not find any merit for disallowance of expenditure incurred on purchase of catalogues and brochures, which were wholly and exclusively for the purpose of business. Accordingly, AO is directed to delete the same.

57. Ground No.6 relates to disallowance of 50% of expenditure incurred for sponsoring the foreign trips of doctors. We have considered rival contentions and found that the AO disallowed the expenditure contenting that the assessee has not proved that the expenses were incurred wholly and exclusively for the purpose of business as the assessee has not adduced any evidence on record to show that such education imparted by it abroad t the medical professionals would culminate in assured business from these professionals upon their return. The CIT(A) held that while the assessee has failed to justify the real intended purpose behind such expenditure, it is also true that such expenses on foreign trips of professionals generate goodwill for the company and lead to future business growth. Accordingly, the CIT(A) held that 50% of the disallowance is justified and granted relief for the balance 50%. We found that expenditure were incurred wholly and exclusively for the purpose of business. A company being an artificial juridical person cannot have personal expenses. All the expenses incurred by the company has to be for the purpose of the business of the company. Accordingly no adhoc disallowance can be made, for which reliance can be placed on Johnson & Johnson Ltd., (39 CCH 58), Johnson & Johnson Ltd., (35 CCH 275) and Sayaji Iron and Engg. Co., (172 CTR 339). We accordingly direct the AO to delete the disallowance of expenditure incurred on foreign trips of doctors.

58. Ground No.7 pertains to disallowance of expenditure incurred in respect of in- house IT resources Center for abandoned project. The learned AO has disallowed the said expenditure contending that the expenditure would have found its place in the pre- operative expenditure which would have stood capitalized in the event of the project commencing its business operations. The CIT(A) upheld the decision of the AO holding that the said expenditure was capital in nature and thus the abandonment of such project would be a capital loss not allowable under the provisions of the Act. We have considered rival contentions and found that expenditure incurred was not for new business, but was essentially a new venture undertaken by the existing business, accordingly same is liable to be allowed as revenue expenditure. The AO is directed to allow the same.

59. AO has also disallowed Rs.16,000/- incurred on software development as revenue expenditure treating the same as capital in nature and only allowing depreciation on the same. We have considered rival contentions and found that CIT(A) has already allowed 60% depreciation on the amount so incurred. We do not find any valid reason to interfere in the order of CIT(A).

60. Ground No. 9 relates to addition of Rs. 3485/- arising during the year in various modules of the ERP accounting system. In view of the finding of AO on page 18 & 19 and CIT(A) at page 21, which has not been controverted by learned AR, we upheld the action of CIT(A) for disallowing the same.

61. Ground No. 10 relates to addition of notional commission income while determining the arm’s length price. The issue under consideration is covered by the decision of Tribunal in assessee’s own case for the AY. 2002- 03 in ITA No. 811/Ahd./2008 dated 25/10/2016. Respectfully following the order of the Tribunal, we direct the AO to consider the same accordingly.

62. With regard to the payment non-compete fee, the ITAT has already allowed depreciation holding that IMPL has acquired intangible assets in nature of any other business of commercial rights. We accordingly direct the AO to allow depreciation on the non-compete fee so incurred by the assessee as per direction of the Tribunal.

63. In the result, appeal of the assessee is allowed in part in terms indicated hereinabove, whereas appeal of the Revenue is dismissed on the ground of Tax Effect.

Order pronounced in the open court on this 25/05/2017

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One response to “Non-compete fee is a capital expenditure eligible for depreciation”

  1. Gopal Bhutara says:

    Hiii Dear,

    The above judgement on non compete fee is filed in Ahmedabad ITAT but ruling has been given by Mumbai ITAT.

    Can u explain ? how this happened?

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