Ratio Decidendi: Non-Compete Fee, paid to the seller on acquisition of their business , is not eligible for depreciation or amortisation over the non-compete period, as done when calculating revenue deduction.
CLR Editorial Note: The assessee and subsequent appellant acquired the glass manufacturing business from Piramal Enterprises Ltd. and entered into a non-compete agreement with them for a period of 18 year. The assessee and Piramal Enterprises agreed a sum of Rs. 18 crores to be paid to Piramal for agreeing not to carry on a competing business for the period decided under the non-compete agreement.
The assessee claimed this non-compete payment as revenue deduction and in the alternate as a depreciable asset. These claims were rejected by the Assessing Officer. The CIT(Appeals) then held that though the non-compete fee was not a depreciable asset, the amount paid for the same was entitled to be amortized over the period of the non-compete agreement.
The assessee filed an appeal before the IT Appellate Tribunal thus challenging this non-grant of depreciation. On the other hand, the department filed an appeal challenging the grant of amortization of the non-compete money.
Assessee’s appeal: The Tribunal rejected the assessee™s plea by relying on the Third Member verdict in Paper Products. This verdict was not put to the assessee, and hence the matter was reposted for the hearing.
Department’s appeal: The assessee relied on Smifs Securities 348 ITR 302 (SC) where goodwill was held to be eligible for depreciation and several other judgements.
The Tribunal rejected the department’s plea and held:
The expression, any other business or commercial rights of similar nature in the definition of intangible asset in s. 32 (1)(ii) shows that the initial part, i.e. know how, patents, copyrights, trademarks, license, franchises, has been disjointed by the conjunction ˜or. The use of the disjunction ˜or™ has a very relevant role, because, the legislature accepts the difference and distinction of intangibles and rights. The legislature has used ˜or™ in the provision for explaining the distinction of application of like nature with that of the unlike nature, which is an accepted principle i.e. doctrine of ejusdem generis. Taking note of the word ˜or™, used as a disjunction is essential to carve out a meaningful genus. The argument whether non compete rights constitute is a right in rem or a right in personam is a matter to be decided by an appropriate higher judicial forum. The judgement of the Supreme Court in Smifs Securities 348 ITR 302 (SC) that goodwill is an intangible asset eligible for depreciation is not applicable to a non-compete right. Non-compete fee does not fall within the ambit of any other commercial or business rights. As regards the claim of amortization, since the payment of Rs. 18 crores is a capital expenditure, it cannot be allowed as an expense and also can(not) be amortized (Sharp Business System 254 CTR 233(Del) followed. Real Image Tech 120 TTJ 983)(Che), Medicorp Technologies 30 SOT 506 (Che), Bunge Agribusiness 132 lTD 549 (Mum), Serum Institute 135 ITD 69 (Pune) treated as not good law).
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The Full Case Document is available for download
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Main Case File :
- Case File – Gujarat Glass Private Limited vs. ACIT (ITAT Mumbai)
Reference Cases:
- Case File – CIT vs. Smifs Securities Ltd (Supreme Court)
- Case File – Sharp Business System vs. CIT (Delhi High Court)
