Non-compete fee is a capital expenditure eligible for depreciation

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:-