Payment of non-compete fees for acquisition of business is capital expenditure

Court: Special Bench of Delhi Income-tax Appellate Tribunal

Citation: Tecumseh India Pvt. Ltd. Vs. ACIT [2010-TIOL-408-ITAT-DEL-SE3]

Brief : In a recent decision in the case of Tecumseh India Pvt. Ltd. Vs. ACIT [2010-TIOL-408-ITAT-DEL-SE3], the Special Bench of Delhi Income-tax Appellate Tribunal (the Tribunal) has held that non-compete fees inextricably linked with the acquisition of a business constitute capital expenditure.

Facts

• Tecumseh Product Company Michigan (“Tecumseh USA”), a company incorporated in the USA and a leading manufacturer of compressors worldwide, entered into a Memorandum of Understanding dated 4 November, 1996 (“MOU”), with Whirlpool India Ltd. (‘Whirlpool India”) and Whirlpool Corporation, USA (‘Whirlpool USA”) whereby it agreed to purchase compressor and related operations of Whirlpool India through its `to be established Indian entity’ for a total sum of INR 525 million.
• It was also agreed in the MOU that Whirlpool India and Whirlpool USA would not manufacture or repair compressors during the term of the Compressor Supply Agreement to be entered into with Tecumseh.
• To implement the MOU, Tecumseh USA established a wholly owned subsidiary (“Tecumseh India” or “the assessee”) on 30 January, 1997 which entered into an Asset Purchase Agreement dated 2 July, 1997 (“APA”) with Whirlpool India for the purchase of land, buildings, all compressor machinery, equipment, tooling related compressor components, etc. Under the APA, Whirlpool India also agreed to sign and deliver a non-compete agreement (“NCA”) against the receipt of the full consideration as started therein.
• Tecumseh India also entered into a Compressor Supply Agreement dated 2 July, 1997 (“CSA”), with Whirlpool India for strategic sale and purchase of compressors. As per the CSA, Whirlpool India agreed to purchase a specified number of compressors from Tecumseh India and sell the same to the specified persons.
• Further, as per the terms of the MOU, Tecumseh India entered into a NCA dated 10 July, 1997, with Whirlpool India & Whirlpool USA whereby it was agreed, for a total consideration of INR 26.5 million, that the latter would not compete with Tecumseh India in the manufacture, sale or repair of compressors in India except for the strategic sale of compressors to specified persons as per the CSA.
• The Assessing Officer (“AO”) disallowed the payment of INR 26.5 Million made under the NCA in the hands of Tecumseh India on the grounds that the same constituted capital expenditure. On appeal, the Commissioner of Income Tax (Appeals) (“CIT(A)”) upheld the aforesaid dis allowance. Considering the issue involved, the Special Bench was constituted to adjudicate the issue.

Assessee’s Contentions