Case Law Details

Case Name : Saraf Chemicals Ltd. Vs DCIT (ITAT Mumbai)
Appeal Number : ITA Nos. 1135 & 1136/Mum/2010
Date of Judgement/Order : 30/06/2011
Related Assessment Year : 2003- 04
Courts : All ITAT (4266) ITAT Mumbai (1423)

Saraf Chemicals Ltd. Vs DCIT (ITAT Mumbai)- If the expenditure is made for the initial outlay or for the expansion of the business or a substantial replacement of the equipment, then it would fall under the capital expenditure. It was not an expenditure incurred while the business was being carried on. Though it had been the contention of the assessee that non-compete agreement was executed subsequent to the date of main agreement, yet such contention of the assessee could not be accepted as in the main agreement itself the non-compete agreement was appended as ‘M’ without which the transaction was not complete, as by including the amount paid for non-compete agreement the purchase price as stated in MoU could be arrived at.

The incurring of expenditure also brought an enduring benefit to the assessee if the same was examined from the proposition of law laid down in the case of Assam Bengal Cement Co. Ltd. v. CIT [1995] 27 ITR 34 (SC) wherein their Lordships have considered the period of five years as providing an enduring advantage to the assessee irrespective of the fact that the payment was to be made annually.It is well-settled that expenditure incurred on warding off competition in the business even to a rival dealer will constitute capital expenditure and to hold it as capital expenditure it is not necessary that non-compete fee be paid to create monopoly rights.

In view of aforesaid, it was to be held that the expenditure of Rs. 2.65 crores claimed by the assessee in pursuance of non-compete agreement dated 10.07.1997 was capital expenditure, the deduction of which could not be granted to the assessee as revenue expenditure.”

Whether when the entire business is taken over as a going concern, and a composite fee is paid for the same, the plea that the fee paid for use of trade mark is different from non-compete fee is sustainable?

Assessee acquired the business as a going concern including its right to use trade mark and this agreement entered in as early as 01.09.1996 was interpreted and the payments were considered as capital expenditure. As already stated, for the reasons best known to assessee, the supplementary deed supposed to have been entered on 01.04.2000 was not placed before the Honourable ITAT nor there was any attempt to bring its notice the judgement of the Honourable Supreme Court rendered as early as 15.01.1992. Even at the time of entering into the original agreements the parties are aware about the judgement now relied upon. When the parties themselves are unable to segregate the amount originally and decided to collect the lump sum payment over a period of 15 years regularly on monthly basis, the argument of the learned counsel that the ITAT should have apportioned the amount has no logic. Since the present label given by assessee for bifurcating the amount towards use of trade mark and non-compete fees can only be stated to be self serving as there is no basis for such segregation undertaken by assessee. Moreover, whether the amount is paid towards use of trade mark or for non-compete fees, the entire amount arose from the original agreement which was entered at the time of taking over of the erstwhile proprietary concern as a going concern and on the basis of facts and law, the amount paid or payable was considered to be capital expenditure, therefore, in our view there is no need to differentiate or distinguish the present payments in any other manner. For the reasons stated above, we uphold the order of the CIT(A) and dismiss the grounds raised by assessee.
ITAT Mumbai
ITA Nos. 1135 & 1136/Mum/2010 & 7193/Mum/2008
(Assessment Years: 2003- 04, 2004-05 & 2005-06)

M/s. Saraf Chemicals Ltd.  Vs.  DCIT

ORDER

Per B. Ramakotaiah, A.M

These are assessee’s appeals for assessment years 2003-04, 2004-05 and 2005-06 against the orders of the CIT(A) VII, Mumbai dated 03.11.2008 for A.Y. 2005-06 and 06.11.2009 for other two assessment years.

2.Assessee raised common grounds in all the appeals which are as under:

“1. The learned Commissioner of Income Tax (Appeals) VII, Mumbai [CIT(A)J erred in confirming the dis-allowance of Rs. 3,00,000/- per month and Rs. 1,75,000/- per month paid to Mr. M. G. Saraf and M/s. M.G. Saraf (HUF) treating the same as capital in nature.

Your appellant submits that under the facts and circumstances of the case the above payments made ought to have been held as revenue in nature and thus allowed.

2. The learned CIT(A) further erred in confirming the dis-allowance of an amount of Rs. 50,000/- per month and an amount of Rs. 25,000/- per month paid to Mr. M.G. Saraf and M.G. Saraf (HUF) towards agreeing and undertaking not to compete and cease to carry on the business treating the amounts paid as per capital in nature.

The appellant submits that under the facts and circumstances of the case the amounts paid should have treated as revenue in nature.

3. The learned CIT(A) further erred in not taking into account the supplementary deed and clarificatory deed dated 1.4.2002 entered into by the appellant with the above parties for the apportionment of payments between right to use Trade Name and Non compete fees.

Your appellant submits that under the facts and circumstances of the case it was not open to the Assessing Officer to give a different interpretation to the agreement entered into by the appellant with the above mentioned parties.

4. Without prejudice to the above claim that the learned CIT(A) should have taken into account the supplementary and clarificatory deed entered into by the assessee with the above parties, the learned CIT(A) further erred in not following the “Principle of Apportionment” and treating the total amount of Rs.3,50,000 per month and Rs. 2,00,000 per month to Mr. M.G. Saraf and M/s. M.,G. Safar (HUF) respectively towards Non compete fees only.

Your appellant submits that under the facts and circumstances if the case the amounts paid should have been duly apportioned between the right to use Trade Name and Non compete fees and the amount so apportioned towards right to use Trade Name should have been allowed as revenue in nature.”

Consequent to the decision of the Special Bench in the case of Tecumseh India P. Ltd. vs. ACIT 127 ITD 1 (SB) (Del) assessee filed additional grounds of appeal for the respective assessment years as under: –

“1. The learned Assessing Officer ought to have granted depreciation u/s. 32 of the Act on payment in respect of non-compete covenant treated by him as capital expenditure.

2. The learned Assessing Officer ought to have granted depreciation u/s. 32 of the Act on the total payments under the agreement treated as capital expenditure and ought not restrict the same to the payment of the year under consideration.”

3. Briefly stated, assessee company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Assessee company entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns, viz., Supertex (India) Corporation (proprietor M.G. Saraf) and Super chem (prop. M.G. Saraf, HUF), which were engaged in trading of chemicals in earlier years for a long period. As per the agreements the assets of the proprietary concerns were valued and the business was taken over as a going concerns. In addition to the amounts paid on the basis of valuation reports towards acquiring the assets and liabilities of the two proprietary concerns, the company also undertook to pay a sum of 3.5 lakhs per month to Shri M.G. Safar and a sum of 2,00,000/- per month to M.G. Saraf, HUF for a period of 15 years starting from 01.09.1996 to 31.08.2011. These amounts were payable as per the relevant clauses of agreements in consideration of the transfer and assignment of specific business as going concern and considering the non-compete obligation undertaking by the aforesaid two proprietary concerns. Accordingly assessee claimed the total amount of 66,00,000/- as deduction in the respective assessment years, stated to be amount of 9,00,000/- towards assignment fees and royalty of 57,00,000/-. This claim was for the first time made in A.Y. 1997-98 and in subsequent years and the A.O. in the respective scrutiny assessments held the amount as capital expenditure and disallowed the same. This matter was carried to the ITAT, which by the orders in ITA 2218/Mum/2002 for A.Y. 1997-98 and ITA No. 3170/Mum/2002 for AY 1998-99 and ITA no. 3171/Mum/2002 for A.Y. 1999-2000 dated 17th October 2005 held that the amounts were capital in nature. However, during the impugned assessment years assessee made a separate claim on the basis of the supplementary agreement entered into by assessee company w.e.f. the first day of April 2002 with the above said two persons on the basis of which the payment of 3, 50,000/- and 2,00,000/- payable to the respective parties were in turn bifurcated as 3,00,000/- towards use of trade name Supertex and 50,000/- towards non compete fees in the case of M.G. Saraf and 1,75,000/- towards use of trade name Super chem and 25,000/- towards non-compete fees to M.G. Saraf, HUF. On the basis of these supplementary agreements assessee claimed the amounts as assignment fees and royalty for the use of trade name. The A.O., while relying on the findings of the ITAT with reference to the original agreement also held that the supplementary agreements in the name of making a clarificatory deed was a colour-able transaction and the real purpose was to scuttle the legal and factual conclusion taken by the ITAT. Further he also held that the clarificatory deed was a sham transaction and was stage-managed merely with a view to evade income-tax, vide para 4.17 and 4.18 of the assessment order. Thus upholding the stand taken earlier AO disallowed the amount paid to the tune of 66,00,000/- holding it for non-compete fees and as capital expenditure. Aggrieved by the said order assessee preferred appeals before the CIT(A). The CIT(A) in the respective orders not only relied on the findings of the ITAT in earlier years but also agreed with the Assessing Officer’s contentions that supplementary/ clarificatory deed does not change the issue during this year as the same is an afterthought of assessee and which have been rightly held by the A.O. as a sham transaction and stage managed just to escape from the ITAT order against assessee in its own case. Thus holding, the CIT(A) rejected assessee’s contentions more so relying on the order of the ITAT.

4. The learned counsel reiterated the submissions made before the A.O. and relying on the supplementary deeds submitted that the intention to pay the amounts by 3,00,000/- and 2,50,000/- per month to the two proprietary concerns have led to certain complications, therefore, before the issue was finalised by the ITAT, vide agreement dated 01.04.2002 assessee  has clarified and bifurcated the amount towards assignment fees and royalty for use of trade name and relied on the clauses of the supplementary deed to submit that the royalty for use of trade name is revenue expenditure. While admitting that the Special Bench of the ITAT in the case of Tecumseh India P. Ltd. vs. ACIT 127 ITD 1 (SB) (Del) held that non-compete fees being in the nature of capital expenditure cannot be allowed as revenue expenditure, the learned counsel however, submitted that assessee is entitled to depreciation on the portion of non-compete fees and relied on the orders of the ITAT in the case of Real Image Tech P. Ltd. 177 Taxman 80 (Chennai) for the proposition that the right acquired by assessee by payment of non-compete fees is in the nature of an intangible asset and assessee is entitled to depreciation thereon. He also relied on the decision in the case of ITO vs. Medicrop Technologies India Ltd. 30 SOT 506 (Chennai) to submit that even though the claim was not originally made assessee is entitled to make an alternative claim of depreciation under section 32(1) on non-compete fees, therefore, assessee has raised the additional ground regarding the claim of depreciation. He also relied on the decision of the ITAT Chennai Bench in the case of Orchid Chemicals and Pharmaceuticals Ltd. vs. SCIT 7 ITR (Trib) 601 (Chennai) that the additional grounds raised are grounds involving the question of law which can be raised at any stage of appeal proceedings and therefore the additional grounds are to be admitted and adjudicated upon.

5. Continuing the arguments the learned counsel placed on record the annual reports of assessee from financial year 2000-01 to 2004-05 to submit that upto annual report 200 1-02, i.e. before entering into the supplementary agreement the claim was as non-compete fees made in the books of account whereas w.e.f. 2002-03 on wards the claim was made on the basis of the supplementary agreement as assignment fees of 9,00,000/- and royalty for use of trade name of 57,00,000/- and submitted that this transaction was not a colour-able transaction or sham transaction as the supplementary agreement was entered only to clarify the basis for the payment being made in the original agreement. He submitted that even the Honourable Supreme Court in the case of Continental Construction Ltd. vs. CIT 60 Taxman 429 held that where there is a composite agreement it was the duty of the Revenue and the right of assessee to see that the consideration paid under the contract legitimately attributable to such information and services was apportioned and assessee was given the benefit of the deduction available under the section to the extent of such consideration (60 Taxman 429, pg. 433). Relying on the above principles the learned counsel particularly submitted that if a litigation is partly for the purpose of preserving or maintaining assessee’s assets and partly for another purpose, i.e. to acquire individual assets without apportion of expenditure which is incurred for former purposes should be allowed as revenue expenditure (relied on Transport Co. Ltd. vs. CIT 31 ITR 259) and other portion should be disallowed as being capital gain (Indian Copper Corporation Ltd. vs. CIT 110 ITR 434). It was the submission of the learned counsel that the amount was paid both for the use of trade mark and for non-compete fee, the amount to the extent of use of trade mark should be allowed as Revenue and the amount to the extent of non-compete fees, even though considered as capital expenditure should be considered for allowance of depreciation, the additional grounds raised on that issue.

6. The learned D.R. while admitting that the annual reports placed on record by assessee have been verified from the assessment records and assessee has shown bifurcation of assignment fees of 9.00,000/- and royalty of 57,00,000/- from the year 2002-03, it was his submission that the supplementary deed does not change the contents of original agreements and the entire payment made as per the agreements effective from 01.09.1996 was entirely for acquiring the business as such which included non-compete clause for a period of 15 years. It was his submission that even though the payments were made periodically the amounts were crystallised by the original agreement, the agreement of which was considered by the ITAT in its wisdom and held that the payments are entirely capital in nature. Therefore the present agreement relied upon by assessee as supplementary/ clarificatory agreements does not change the original nature of the payments and relying on the orders of the ITAT in earlier years the amount has to be considered as capital expenditure, even if the present agreements were considered. It was his case that the supplementary clarificatory deeds will naturally acquire its legitimacy on the terms originally agreed between the parties and since the original agreement was already considered by the ITAT in its entirety the nature of the payment even though now treated by the party differently cannot be changed. It was further submitted that the ITAT Special Bench in the case of Tecumseh India P. Ltd. vs. ACIT 127 ITD 1 (SB) (Del) has considered various case law on the issue and held that non-compete fees is capital in nature and since this agreement was entered and the businesses were acquired prior to the 1st of April 1998, provisions of section 32(1)(ii) with reference to intangible assets does not apply to the facts of the case. The original rights were acquired as early as 01.09.1996, therefore, the depreciation on the non-compete fees was not eligible even though the payments are made regularly in respective assessment years. It was his submission that the case laws relied upon by the learned counsel are distinguishable on the fact that they were given in the context of intangible assets being allowed for depreciation which are acquired after 01.04.1998. Since the original agreement was prior to that assessee is not eligible for depreciation on the non-compete fees treated as capital expenditure. Therefore assessee’s grounds are to be rejected.

7. The learned counsel in reply further submitted that the Tribunal has not considered the Hon’ble Supreme Court judgement in the case of Continental Construction Ltd. and it should have apportioned the amount towards use of trade mark and use of non-compete fees and accordingly the order requires modification so as to be in conformity with the judgement of the Hon’ble Supreme Court relied upon (60 Taxman 429 dated 15.0 1.1992).

8. We have considered the issue and arguments of the rival parties and examined the record. As stated earlier the agreement effective from 0 1.09.1996 was considered by the ITAT vide order dated 17.10.2005 and held that the payment is capital in nature. Not only that at the time of considering the issue for A.Y. 1997-98 the supplementary deeds which were entered w.e.f. 0 1.04.2002 have not been placed on record for the reasons best known to assessee and so not considered by the ITAT, even though the said agreements were supposed to have been entered and acted upon. Be that as it may, we have considered whether the supplementary agreement will modify the terms of the issue and the expenditure can be considered as revenue in nature. We are afraid that the supplementary/clarificatory deeds does not change the nature of payments, as the ITAT has considered the issue in its entirety. At the time of arguing the matter it was submitted that the payment of 66,OO,OOO/- comprises of the following considerations: (a) right to use trade marks and trade names, (ii) right to use premises of Kaka Chambers, Worli, and (iii) non-compete fees payment. These arguments of assessee were extracted in para 8 of the order. The ITAT had considered the contentions and held as under: –

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“9. We have given a careful consideration to the elaborate submissions made before us by both the sides. We have also carefully gone through the facts as emerging from the record and have considered the precedents cited before us. “First of all, it would be fruitful to refer to the relevant agreements entered into by the assessee company with the two proprietary concerns. These agreements are, mutatis mutandis, similarly drafted and therefore we will refer to the relevant clauses of the agreement dated 2.9.96 entered into by the assessee company with Shri M.G. Saraf. In the preliminary clause, the purpose of the agreement is indicated at page 4 of the agreement, relevant part of which may be reproduced below.

“Whereas with a view to achieve its ultimate objective, the party hereto of the second part approached the party hereto of the first part with a proposal to takeover as a running business/going concern the running business and infrastructural facilities, including the continued use of the registered trade name of the business of dealing in textile chemicals & auxiliaries carried on under the name of Supertex (India) Corporation (hereinafter referred to as specified business) from the party hereto of the first part.

Whereas the parties hereto of both the parts had a number of meeting for discussion and negotiating the terms and conditions of such assignments and have arrived at the terms on which the party of the first part has agreed to transfer and assign as a going concern with all assets, rights, properties and liabilities including all the other fixed assets, current assets uninterrupted services of the employees and all other facilities as owned by the party hereto of the first part in his capacity as a proprietor of Supertex and the party hereto of the second part has agreed to acquire the same on the basis of the terms and conditions agreed upon by and between the parties and recorded hereafter.”

From the above, it may be seen that as a result of executing both the agreements, the proprietary business, for all practical and legal purposes, has o come to an end. In other words, these business would completely get merged with the assessee company with all assets, rights, properties, liabilities, etc. Apparently, this is a case where the proprietary business has been acquired by the assessee company as a going concern.

10. The ‘non-compete’ obligation is stipulated in clause 2 of the agreement, which is as under:

“From the date of transfer of business by Supertex to the company in terms hereof, the proprietor shall not compete with the company, neither on his own account nor through any proprietary or partnership concern with the company in respect of the business assigned and transferred by the party hereto of the first part to the party of the second part for a period of fifteen years from the date of transfer and assignment of the specified business in all the territories.”

It may be seen that in clear terms, the proprietary concerns have undertaken not to compete with the assessee company in any way for a period of 15 years. In clause 5 of the agreement, it was further stipulated that with the transfer and assignment of the business of Supertex, the proprietor shall cease to carry on the business of dealing in textile chemicals and auxiliaries either in the name of Supertex or in any other name. The consideration receivable by the proprietary business is stipulated in clause 6 and 7 of the agreement, which are as under:

“The proprietor agrees to transfer and the company agrees to acquire the fixed assets of the specified business as described in annexure A to this agreement at a value as may be arrived at on the basis of the report of a valuer and pay for the said value so determined within three months from the date of the valuation report, which in any case shall not be later than 31.12.97.

In consideration of the transfer and assignment of the specified business as a going concern and considering the ‘no compete’ obligation undertaken by the proprietor, the company shall pay to the proprietor a sum of Rs. 3,50,000/- per month for a period of 15 years starting from 1.9.96 till 31.8.2011. Subject to deduction of tax, if any, under the relevant provisions of the IT Act. The said sum of Rs. 3,50,000/- shall accrue and become due at the end of each calendar month.”

From the above, it may be seen that all fixed assets as per annexure A have to be valued by a valuer. Clause 7 mentions that in consideration of the transfer and assignment of the specified business as a going concern and considering the ‘no compete’ obligation undertaken by the proprietor, the company shall pay a sum of Rs.3.50 lakhs per month for a period of 15 years. It is true that the assessee company would also get the benefit of the exclusive use of trademarks as also the tenanted premises, which are inseparable part of the proprietary business as a going concern. The agreement ensures that the erstwhile proprietor shall cease to have any interest whatsoever in this business or in the trademarks etc. The proprietor has also been debarred to carry on such business in any name for a period of 15 years. It is notable that this is a composite agreement for acquisition of the proprietary business as a going concern as well as for debarring the erstwhile proprietary concerns competing with the assessee company for a period of 15 years. The consideration for this obligation has to be calculated as per clauses 6 and 7 reproduced above. All fixed assets have to be valued and such value determined by the valuer has to be paid by the assessee company. Over and above this payment, the consideration of the transfer and assignment of the business as a going concern and in consideration of ‘no compete’ obligation undertaken by the proprietor, the assessee company has undertaken to pay a sum of Rs. 3.5 lakhs per month for a period of 15 years during which ‘no compete’ agreement shall be in force.”

9. After that the ITAT considered various case laws relied upon by both the parties from para 11 to 15, which we do not intend to extract here.Findings by the ITAT in paras 16 & 17, which are material for deciding the issue are as under: –

“16. On a careful consideration of the legal position as applied to the facts of the assessee’s case, in our view, the payment made by the assessee company to the two proprietary concerns for a period of 15 years as per the terms and conditions of the agreement cannot be treated as revenue expenditure. The proprietary concerns have been acquired by the assessee company as going concerns. The two proprietors, by virtue of this agreement, have transferred the respective business along with rights, assets and liabilities which included trademarks etc. In addition to the value of the assets, the assessee company has undertaken to pay a sum of Rs. 3.5 lakhs per month to one proprietor and another sum of Rs.2 lakhs per month to another proprietor which is clearly for eliminating competition in the same line of business for a sufficiently long period of 5 years. The user of trademark, if any, by the assessee company is only an inseparable part of the entire arrangement. By the ‘non-compete’ clause of the agreement, the erstwhile proprietors are automatically excluded from use of such trademarks and they have bound themselves contractually not to carry on similar business activity in whatever names for a period of 15 years. As a consideration, the impugned monthly payments are to be paid by the assessee company for a period of 15 years. This means that on the expiry of the non-compete period of 15 years, the payments would also cease to be made. We do not find much merit in the arguments of the ld. counsel for the assessee that the payments are partly attributable to the benefit acquired by the assessee company by way of use of the tenanted premises at a nominal rent. There is no reference to this fact in the agreement. Further, the landlord or owner of such premises is not a party to the agreement and even if some benefit has accrued to the assessee company, it is entirely on account of the Rent Control Act, which may be applicable. The business premises either owned or rented have been taken over by the assessee company as part of the overall agreement or arrangement for purchase of proprietary business as going concern along with all assets and liabilities.

17. Another argument submitted by the ld. counsel for the assessee that one of the proprietors, viz. M. G. Saraf, HUF agreed for inclusion of the amount in its total income for taxation purposes, in our view, has only some persuasive value. In our view, the treatment given in the hands of the recipient does not determine the nature of the payment in the case of the payee. The various cases which have been referred to above and which are directly on the point, make it abundantly clear that non-compete fees have to be treated as capital expenditure. We, therefore, reverse the finding of the ld. CIT(A) on the issue and the AO is directed to disallow the relevant expenditure treating it to be capital expenditure.”

As can be seen from the above the ITAT considered the entire agreement and held that use of trade mark, if any, by the assessee company is only an inseparable part of the entire agreement. By the non-compete clause of the agreement erstwhile owners are automatically excluded from use of such trade mark and they have bound themselves contractually not to carry on similar activities in whatever name for a period of 15 years. In view of this, since the payment was composite payment at the time of acquiring the business, eventhough payable over a period of 15 years in monthly instalments, the ITAT came to a conclusion that the amount has to be treated as capital expenditure.

10. In view of the clear findings of the ITAT on the original agreement, we are of the opinion that the supplementary agreement bifurcating the monthly payments into use of trade mark and non-compete fee does not help assessee’s case. Since the payments were also held to be capital in nature, respectfully following the Coordinate Bench decision we agree with the findings of the CIT(A) that the amounts cannot be allowed a revenue expenditure. In the course of argument the learned counsel tried to distinguish the facts in the present issue with that of the earlier year when the ITAT has considered the issue. It was his submission that consequent to the principles established by the Hon’ble Supreme Court in the case of Continental Construction Ltd. vs. CIT 60 Taxman 429, the ITAT is bound to apportion the amount paid towards various services and accordingly the amount paid towards use of trade marks should be considered as revenue and the amount paid for non-compete fees should be considered as capital expenditure. We are unable to pursue ourselves with the argument of the learned counsel. First of all, as seen from the agreements entered with the erstwhile proprietary concerns by Assessee Company dated 02.09.1996 effective from 01.09.1996 the agreements were very clear that the entire specified business was transferred as ongoing concern to that of the company. This aspect was also discussed by the ITAT in its order in para 10, which was extracted above. The specified business as defined in the agreement includes the running business and infrastructural facilities, including continued use of registered trade names of the companies, i.e. the name of Supertex and Superchem in the respective cases. Not only that vide clause 1, the specified business with its assets and liabilities as a running business/going concern including without limiting the generality thereof, was taken over by assessee. Clause 1.1 is for right to use the trade name Supertex/Superchem. Clause 1.2 is for assets, which are free from all liens and encumbrances, whether legal or otherwise including the rights, title and interest of the proprietors in Supertex/ Super chem. Clause 1.6 & 1.7 are specific with reference to trade marks and right to use trade mark which are as under: –

“1.6 The Trade Mark and Trade name registered by Supertex for the product sold by it.

1.7 The rights to use the name of Supertex registered by the PROPRIETOR with the Registrar of Trade Marks.”

The same is reiterated in the so called supplementary and confirmation deed entered on the first day of April 2002. Through this supplementary and conformation deed the rights, title and benefits, which are accrued in the original agreement continues to be available with assessee company. In the guise of clause 7 of the supplementary and confirmation deed only bifurcates the monthly payment towards use of trade name and towards non-compete fees but this bifurcation at present does not change the original agreement, which were interpreted to be acquisition of the business including its rights and title, assets and liabilities, trade mark usage as going concern and also for non-compete fees for which a lump sum amount was paid on the revaluation of assets and liabilities specified, which was acknowledged having received in lump sum in supplementary agreement and monthly payment for a period of 15 years at a fixed amount quantified therein. Since the supplementary agreement only tries to bifurcate the amounts payable into two components for usage of trade name and non‑ compete fee, in our view, it does not change the terms and conditions originally agreed upon  which are for acquiring the entire business as a going concern for which the payments were being made for a period of 15 years. Since the parties have agreed on the terms and conditions originally which were already considered to be capital in nature towards non-compete clause while acquiring the business, the supplementary deed cannot be considered now so as to differ from the interpretation and findings already given. Moreover the judgement of the Hon’ble Supreme Court in the case of Continental Construction Ltd. vs. CIT 60 Taxman 429 was given in the context of deduction under section 80-0 and in that context the Hon’ble Supreme Court considered that apportionment can be done to certain part of the services which can be considered for the benefit of the deduction available. The Honourable Supreme Court has considered and stated as under: –

“It is a well settled principle that exigibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties. An assessee cannot claim deduction under section 80-0 in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the source indicated in the section. Contracts of the type envisaged by section 80-0 are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contracts. If the contracts in the present case obliged the assessee to make available information and render services to the foreign Government of the nature outlined in section 80-0, it was the duty of the revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services was apportioned and the assessee given the benefit of the deduction available under the section to the extent of such consideration.”

11. In fact the above judgement of the Honourable Supreme Court supports the contentions of the Revenue that the present label given by the parties in bifurcating the amount towards use of trade name and use of non-compete clause are not relevant for considering the items as eligible for deduction. It is also on record that assessee acquired the business as a going concern including its right to use trade mark and this agreement entered in as early as 01.09.1996 was interpreted and the payments were considered as capital expenditure. As already stated, for the reasons best known to assessee, the supplementary deed supposed to have been entered on 01.04.2000 was not placed before the Hon’ble ITAT nor there was any attempt to bring its notice the judgement of the Honourable Supreme Court rendered as early as 15.01.1992. Even at the time of entering into the original agreements the parties are aware about the judgement now relied upon. When the parties themselves are unable to segregate the amount originally and decided to collect the lump sum payment over a period of 15 years regularly on monthly basis, the argument of the learned counsel that the ITAT should have apportioned the amount has no logic. Since the present label given by assessee for bifurcating the amount towards use of trade mark and non-compete fees can only be stated to be self serving as there is no basis for such segregation undertaken by assessee. Moreover, whether the amount is paid towards use of trade mark or for non-compete fees, the entire amount arose from the original agreement which was entered at the time of taking over of the erstwhile proprietary concern as a going concern and on the basis of facts and law, the amount paid or payable was considered to be capital expenditure, therefore, in our view there is no need to differentiate or distinguish the present payments in any other manner. For the reasons stated above, we uphold the order of the CIT(A) and dismiss the grounds raised by assessee.

12. One of the additional grounds raised is with reference to the claim of depreciation. During the pendency of the appeal assessee sought adjournment on the reason that the issue of non-compete fees was pending before the Special Bench in the case of Tecumseh India P. Ltd. vs. ACIT. Consequent to the order rendered by the Special Bench 127 ITD 1 (SB) (Del) assessee filed additional grounds with reference to claim of depreciation. In the above referred case the issue of non-compete fees was considered and held to be capital in nature. In that case assessee, who was only a subsidiary of Tecumseh-USA entered into MOU with Whirlpool-India Ltd. through which Whirlpool India decided to sell compressors and related operations owned by it at Faridabad. In accordance with the MOU both the parties entered into asset purchase agreement and the total amount paid to Whirlpool India was an amount of 52.5O crores. The said amount included an amount of 2.65 crores toward non-compete fees. This amount was claimed by assessee to be non-compete fees as revenue expenditure. The A.O. as well as the CIT(A) rejected the claim considering the entire gamut of case laws and the agreement entered into by the parties. The Hon’ble Special bench considered and held as under: –

“The assessee’s parent company being a leading manufacturer of compressors worldwide, had desired to enter into the Indian market for that activity and, for the purpose of effectuating such desire that company entered into a MoU with the Whirlpool India Ltd. and its parent company in which it was clearly stated in clause 1.1 that Tecumseh and Whirlpool would enter into an asset purchase agreement whereby Tecumseh (through to be established local Indian entity) would purchase all compressor machinery, equipment and tooling located at Whirlpool’s Faridabad facility as well as related compressor component assets located at Whirlpool’s Ballabgarh facility [including lamination, wire drawings, central tool room, overhead protectors and relays] and all such assets were to be fully identified in such asset purchase agreement or other appropriate local Indian documentation required to detail such sale and purchase agreement. Similarly, in clauses 12 and 12.1 the mention was made regarding non-compete agreement whereby Whirlpool-India and Whirlpool-USA (including its wholly owned subsidiaries) agreed not to manufacture or repair compressors during the term of global sourcing agreement with Tecumseh. However, whirlpool had been given a right to sell refrigerator compressors to service partners purchased from Tecumseh subject to provisions of clause 6.1 of the agreement.

Looking into the above clauses of the MoU it could be observed that principally both the parties had agreed to pass on a total consideration of Rs. 52.5 crores. Allocation of purchase price for various assets was to be determined at the further meeting of the parties and according to clause 3.5, the base price retained for purchase of raw material and work-in-progress were kept at Rs. 5.25 crores, being 10 per cent of the total purchase price agreed.

To ascertain as to what for the total payment of Rs. 52.5 crores was made, one had to look into the agreement dated 2-7-1 997 which was entered into in the furtherance of MoU by the ‘to be established local Indian entity, namely, the assessee and Whirlpool India Ltd. wherein a total sum of Rs.49.85 crores was determined for the various assets.

Broadly stated, the purchase price paid for the sale and purchase of Compressor Davison and related operations and facilities excluding the raw materials, work-in-progress and the land and building at Ballabhgarh was a sum of Rs. 19.50 crores, purchase price for inventory, i.e., raw material and work-in-progress was a sum of Rs.5.25 crores, purchase price of the land for an aggregate amount of Rs.25. 10 crores which made the total of these assets at Rs.49.85 crores. If a further sum of Rs.2. 65 crores paid on account of non-compete fee was added to the same, the total would come to Rs. 52.50 crores.

Thus, it would be incorrect to say tht the non-compete agreement should be considered on stand alone basis as the reference to non-compete agreement was not coming for the first time in the agreement dated 2-7-1997, but it originated from the MoU dated 4-11-1996 wherein as per clause 12, it was clearly stated that these parties would enter into a non-compete agreement and aggregate amount of transfer of all these assets was stated to be Rs. 52.50 crores. All other events had proceeded on the basis of MoU only as there was no significant change in what was stated in the MoU as a total consideration for the whole of the transaction and what was subject to transfer.

While considering the facts and arriving at a legal conclusion from those facts, it was necessary to go into the entire transaction for proper appreciation of the facts as well as law.

From the facts it was clear that for entire transaction which included non-compete agreement an aggregate sum of Rs. 52.5 crores was agreed to be paid as per clause 3.1 of the Mou. As per clause 3.4 of the MoU parties were to meet for determining the proper allocation of the purchase price for various assets. The allocation of price for various assets had been described which included a sum of Rs.2. 65 crores called as ‘non-compete fee’. Therefore, the very basis of payment of so-called non-compete fees could not be detached from the Memorandum of Understanding being part and parcel of the initially aggregated agreed purchase price. Clause D of non-compete agreement clearly stated that execution & delivery of non-compete agreement was a condition precedent for the assessee’s obligation to consummate the transaction described in the purchase agreement. Therefore, all these agreements formed one transaction and they were interwoven by a common thread. These agreements were not mutually exclusive so as to say that one could be fulfilled without fulfilling the other. Thus, there was no force on the contention of the assessee that the non-compete fees payment should be considered and viewed on stand alone basis. The same was to be rejected.

It would also be incorrect to say that the Assessing Officer had considered such payment on stand alone basis as all the agreements, namely, MoU final agreement, non-compete agreement and supply agreement were produced before the Assessing Officer and he had discussed all these agreements in the assessment order. ~t was mentioned by the Assessing Officer in the assessment order that the assessee-company was incorporated on 30-1 -1 997 and it was a fully owned subsidiary of the non-resident company known as Tecumseh, USA. The company started business of acquiring the Compressor Division of Whirlpool India in the month of July, 1997. For such purchase, the assessee entered into a MoU on 4-11-1 996 and a final agreement was executed on 2-7-1997 according to which an amount of Rs.46.25 crores was paid to Whirlpool India Ltd. for various items like inventory, building, land and plant and machinery. ~t was further started by the Assessing Officer that included in that amount was a sum of Rs.2. 56 crores (actual amount was Rs.2. 65 crores) and Whirlpool was to sign a non-compete agreement after receiving full consideration. It was further stated by the Assessing Officer that the assessee did not file Appendix-M, but filed a non-compete agreement dated 10-7-1997. Therefore, it could not be held that the Assessing Officer had considered the payment of non-compete fee on strand alone basis. The consideration thereof was for the purpose of determining the allow-ability or otherwise thereof from income-tax point of view, as other payments were never claimed by the assessee on revenue account. But that did not mean that the Assessing Officer had considered non-compete agreement on stand alone basis.

As pointed out earlier, to arrive at a proper conclusion, it was necessary to go into the entirety of facts and even if it was the case of the assessee that the Assessing Officer and the Commissioner (Appeals), both had considered the non-compete agreement on stand alone basis, even then the Tribunal was not precluded from going into the MoU and main agreement to decide the question relating to allow-ability or otherwise of such a claim of the assessee. Therefore also, the contention of the assessee, that non-compete agreement should be considered on stand alone basis could not be accepted.

Coming to the nature of expenditure in question, it can be seen from the various tests laid down in the earlier decided cases that broadly the basic tests to determine the nature of an expenditure remain the same even in the context of a modern situation and those tests include the test of initial outlay of the business, the aim and object of the expenditure, enduring benefit test and the test of fixed and circulating capital.

Applying the aforementioned tests to the fact of the instant case, it may be stated that the so-called ‘non-compete agreement’ was part & parcel of the entire transaction. The assessee had acquired a business concern in India with its outlay (more particularly described elsewhere in this order) and the entire transaction was outlined in the MoU dated 4-11-1 996. the aggregate amount of Rs.52.5 crores was determined as the total purchase price for the Compressor Division’s assets referred to the article 1 and the Ballabgarh land and building referred to in article 2. The purchase price itself stated that the amount of Rs. 52.5 crores was to be paid as total purchase price for the Compressor Division’s assets and Ballabgarh land and building.

It can be seen that non-compete agreement was made Appendix ‘M’ to the agreement dated 2-11-1 997 and was, thus, part and parcel of the main agreement, the signing and execution whereof was a condition precedent.

It could be mentioned here that the total purchase price of Rs. 52.5 crores envisaged in MoU vide clause 3 included a sum of Rs.2. 65 crores which was to be paid for non-compete agreement. The other sum of Rs. 49.85 crores which was to be paid in respect of various assets. If these two sums were aggregated, then the total amount would come to Rs. 52.5 crores which was the agreed purchase price. The assessee-company was incorporated for the purpose of effectuating the transactions agreed in the MoU. The purpose of the assessee-company for which it was incorporated was that ‘Tecumseh UAS’, being a leading global compressor manufacture, was interested in purchasing compressor related operations of Whirlpool India for the Indian compressor market. Thus, the very intention and purpose was to establish business in India by taking over the compressor and related operations of Whirlpool India in India. The non-compete agreement was part and parcel of the whole transaction and could not be treated to be a separate transaction.

The case of the assessee would fall under the test which describes that if the expenditure is made for the initial outlay or for the expansion of the business or a substantial replacement of the equipment, then it would fall under the capital expenditure. It was not an expenditure incurred while the business was being carried on. Though it had been the contention of the assessee that non-compete agreement was executed subsequent to the date of main agreement, yet such contention of the assessee could not be accepted as in the main agreement itself the non-compete agreement was appended as ‘M’ without which the transaction was not complete, as by including the amount paid for non-compete agreement the purchase price as stated in MoU could be arrived at.

The incurring of expenditure also brought an enduring benefit to the assessee if the same was examined from the proposition of law laid down in the case of Assam Bengal Cement Co. Ltd. v. CIT [1995] 27 ITR 34 (SC) wherein their Lordships have considered the period of five years as providing an enduring advantage to the assessee irrespective of the fact that the payment was to be made annually.

It is well-settled that expenditure incurred on warding off competition in the business even to a rival dealer will constitute capital expenditure and to hold it as capital expenditure it is not necessary that non-compete fee be paid to create monopoly rights.

In view of aforesaid, it was to be held that the expenditure of Rs.2.65 crores claimed by the assessee in pursuance of non-compete agreement dated 10.07.1997 was capital expenditure, the deduction of which could not be granted to the assessee as revenue expenditure.”

13. In view of this, the non-compete fees paid by assessee cannot be allowed as revenue expenditure. Now the issue is whether assessee is entitled for depreciation on the same as claimed in additional grounds. This asset, if at all to be considered as intangible asset, was acquired w.e.f. 01.09.1996. Section 32(1) (ii) allowed depreciation on intangible assets acquired on or after 1st of April 1998. Since the assets / so called intangible assets were acquired before the aforesaid date, provisions of section 32(1)(ii) are not applicable to the facts of the case. Eventhough assessee is paying various amounts over the years as per the agreement, it can only be considered as deferred payment for the rights acquired w.e.f.01.09.1996. Since the provisions are not applicable to the so called intangible assets acquired by assessee before 0 1.04.1998 assessee’s additional grounds for allowing depreciation on monthly payments being made towards non-compete fees cannot be allowed. In view of this, the grounds on allowance of depreciation on the non compete fees also stand dismissed.

14. In the result, all the appeals are dismissed.

Order pronounced in the open court on 30th June 2011.

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