Income Tax Appellate Tribunal - Mumbai
Acg Pampac Machines P.Ltd, Mumbai vs Dcit Cen Cir 42, Mumbai on 11 July, 2018
ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 आयकर अपीलीय अिधकरण "ए"
ायपीठ मुंबई म ।
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH, MUMBAI ी सी .नाग साद, ाियक सद एवं ी मनोज कुमारअ वाल, ले खा सद के सम ।
BEFORE SHRI C.N. PRASAD, JM AND SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपीलसं ./I.T.A. No.7765/Mum/2014 (िनधा रणवष / Assessment Year:2010-11) ACG Pampac Machines Private Limited Deputy Commissioner of Income Tax 1001, Dalamal House, 10th Floor बनाम/ Central Circle-42 Nariman Point Vs. Aaykar Bhavan, M.K.Marg Mumbai-400 021 Mumbai-400 020 !थायीले खासं ./जीआइआरसं ./P AN/GIR No. AAACP-4134-F (अपीलाथ$/Appellant) : ( %थ$ / Respondent) Revenueby : Rajesh Kumar Yadav, Ld.DR Assessee by : Manish Shah, Ld.AR सुनवाईकीतारीख/ : 02/07/2018 Date of Hearing घोषणाकीतारीख / : 11/07/2018 Date of Pronouncement आदे श / O R D E R Per Manoj Kumar Aggarwal (Accountant Member)
1. Aforesaid appeal by assessee for Assessment Year [AY] 2010-11 contest the order of the Ld. Commissioner of Income-Tax (Appeals)-38 [CIT(A)], Mumbai, Appeal No.CIT(A)-38/IT-37/2013-14 dated 28/10/2014. The assessment for impugned AY was framed by Ld. Deputy Commissioner of Income Tax, Central Circle-42, Mumbai u/s 143(3) of the Income Tax Act, 1961 31/01/2013 wherein the income of the assessee was 2 ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 determined at Rs.19.01 Crores after certain disallowances as against returned income of Rs.18.41 Crores e-filed by the assessee on 27/09/2010. Although initially the assessee had raised only one ground of appeal, however, an additional alternative ground of appeal has been filed vide letter dated 29/07/2016. The same being alternative ground which do not require appreciation of new facts is admitted in terms of judgment of Hon'ble Supreme Court rendered in NTPC Co. Ltd. Vs. CIT [229 ITR 383]. Accordingly, the original grounds and additional grounds read as under:-
1. The learned Commissioner of Income Tax (Appeals) -38 Mumbai ["the CIT(A)"] erred in upholding the action of the Dy. Commissioner of Income tax, Central Circle-42 Mumbai ("the A.O.") in disallowing Non-compete fees of Rs.29,70,000.
2. He failed to appreciate and ought to have held that he Non-compete fees is revenue expenses.
3. On the facts & circumstances of the case, if the non-compete fees is treated as a capital in nature, then depreciation should be allowed on the same u/s 32(1)(ii) of the Act.
4. The appellant humbly prays that the Assessing Officer be directed to allow depreciation on non-compete fees paid.
As evident from grounds of appeal, the only issued involved under the appeal is claim of the assessee on account of non-compete fees paid by it in the impugned AY.
2. Facts leading to the dispute are that the assessee being resident corporate assessee was engaged in the business of manufacturing of Blister Packing machines and cartooning machines during impugned AY. Upon perusal of Tax Audit Report, it was noted that the assessee paid an amount of Rs.29.70 Lacs as non-compete fees which was classified as capital expenditure by the Tax Auditor. However, the same was claimed as 3 ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 revenue expenditure. The assessee justified the claim vide its letter dated 22/01/2013. However, not convinced, Ld. AO concluded that the said expenditure was incurred to ward off the competition and brought enduring benefit to the assessee by eliminating competitors in the market and hence, capital in nature and therefore not allowable.
3. Aggrieved, the assessee contested the same without any success before Ld. CIT(A) vide impugned order dated 28/10/2014, where Ld. CIT(A) after considering assessee's submissions and judicial pronouncements on the issue, concluded the matter against the assessee in the following manner:-
Decision:
10.0 I have carefully examined the facts of the case, the stand taken by the A.O in the assessment order, the grounds of appeal and the written submissions filed by the appellant.
10.1 The appellant's reliance placed on the Supreme Court judgments in the cases of Empire Jute Co. Ltd vs CIT [124 ITR 69] and Madras Industrial Corporation. Ltd. Vs CIT[225 ITR 802] are not directly on the issue of non-compete fee. The appellant had cited some of the decisions which are in its favour. However, there are also contrary decisions available on the matter. The Delhi High Court vide its recent judgment in the case of Sharp Business System vs CIT 133 ITD 275 dated 05.11.2012 held that non-
compete fees are neither allowed as revenue expenditure nor eligible for depreciation. Depreciation is not an issue in this case and the issue involved is allowance of non- compete fee.
10.2 The issue of allowability of non-compete fee varies from case to case. The ITAT, Mumbai in the case of Ind Global Corporate Finance Private Ltd. Vs ITO (ITA No.1258/MUM/08) held that non-compete fee is not a deductible expenditure since it is capital in nature. It is also held by ITAT that non-compete right is an "intangible asset"
eligible for depreciation under the IT act, 1961. The Hon'ble Tribunal further held that Non-compete agreement was valid for a period of three years which has to be considered as sufficient length of time to treat the expenditure as capital in nature. The Tribunal held that the protection acquired by the taxpayer from competition was not part of the working of the business, as held by the Hon'ble Supreme Court in the case of Assam Bengal Cement Co.Ltd. Therefore, the ITAT held that the expenditure has to be disallowed since it a capital expenditure. The Hon'ble Tribunal followed the decision of 4 ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 Delhi Special Bench Tribunal in the case of Tecumseh India Private Ltd., wherein the provision for payment of non-compete fee was contained in the agreement for transfer of business. Since the facts are similar the ITAT, Mumbai followed the Delhi Tribunal Special Bench decision in the case of Tecumseh India Private Ltd. 10.3 The facts in the case of Tecumseh India Private Ltd. [127 ITD 1] and Ind Global Corporate Finance Pvt. Ltd. are identical to the facts in the case of the appellant company. The appellant paid non-compete fee to Indtech Systems and Manufacturing Pvt.Ltd. pursuant to the business transfer agreement dated 27.11.2009. The Indtech Systems and Manufacturing Pvt.Ltd transferred the business to the appellant company on a slump sale basis. Since the facts are identical, respectfully following the decision of the ITAT, Mumbai in the case of Ind Global Corporate Finance Pvt. Ltd. The expense incurred on account of non-compete fee are held to be capital in nature and therefore not allowed as deductible expenditure.
Aggrieved, the assessee is in further appeal before us.
4. The Ld. Auhtorized Representative for assessee [AR], Shri Manish Shah, contesting the disallowance, submitted that in view of the conflicting decisions, a view favorable to the assessee should be taken and at least the depreciation, on the same be allowed. The same was controverted by Ld. Departmental Representative [DR], Shri Rajesh Kumar Yadav, by submitting that the assessee did not acquire any right by making the aforesaid payment and therefore, depreciation against the same could not be allowed to the assessee.
5. We have carefully heard the rival contentions and perused relevant material on record including case laws cited before us. The undisputed fact remain that the assessee made the aforesaid payment as non-compete fees to director of the vendor company namely Indtech Systems and Manufacturing Private Limited in terms of business transfer agreement dated 27/11/2009 wherein the assessee purchased the business of the 5 ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 vendor on slump sale basis. There is no separate agreement with the director as such for the impugned payment which lead us to inevitable conclusion that the aforesaid payment was part and parcel of the acquisition agreement and was made in the course of acquiring new source of income i.e. business of the vendor company. Hence, the same, in our opinion, was clearly a capital expenditure in nature. The assessee's claim, to that extent as raised in ground numbers 1 & 2 stand dismissed.
6. The only question that survives for our consideration is that whether the assessee could be allowed depreciation against the same or not in terms of the argument of Ld. DR that the said expenditure did not bring into existence any business or commercial right of similar nature within the meaning of Section 32(1)(ii) and rather the aforesaid payment was made for a negative covenant i.e. to restrict the director of the vendor company to compete with the assessee's business for certain period of time. We are of the opinion that the said expenditure brought enduring benefit for the assessee in the sense that it eliminated assessee's potential competitor in the market particularly when the payee was the director of the vendor company, whose business the assessee acquired during the year. Therefore, the same, in our view, was valuable right for the assessee and constitute an intangible asset in the hands of the assessee.
7. So far as the judicial pronouncements in this regard are concerned, we find that there are contrary decisions by the Tribunal as well as Hon'ble 6 ITA No.7765/Mum/2014 ACG Pampac Machines Private Limited Assessment Year-2010-11 High Courts in this regard. The decisions by Hon'ble High Courts which stood in assessee's favor could be tabulated in the following manner:-
(i) Pentasoft Technologies Ltd. [41 Taxmann.com 120 Madras High Court]
(ii) Ingersoll Rand International Ind. Ltd. [48 Taxmann.com 349 Karnataka High Court] Per Contra, Hon'ble Delhi High Court in Sharp Business System Vs CIT [2012 254 CTR 233] has taken contrary decision. No decision of our jurisdictional High Court has been brought on record. It is noted that both the decisions rendered in assessee's favor are subsequent decisions in comparison to contrary decision rendered by Hon'ble Delhi High Court.
Keeping in view the conflicting decisions of Hon'ble High Court, we are inclined to take a view more favorable to the assessee in terms of ratio of decision of Hon'ble Supreme Court rendered in CIT Vs. Vegetable Products Limited [1973 88 ITR 192].
8. Keeping in view the above facts and circumstances and keeping in view the fact that the genuineness of the expenditure is not in dispute, we hold that the aforesaid payment, being an intangible asset for the assessee, was eligible for the depreciation in the impugned AY. We order so. The Ld. AO is directed to re-compute the income of the assessee in terms of our above order. This ground of assessee's appeal stands allowed.
7 ITA No.7765/Mum/2014ACG Pampac Machines Private Limited Assessment Year-2010-11
9. Resultantly, the assessee's appeal stand partly allowed.
Order pronounced in the open court on 11th July, 2018 Sd/- Sd/-
(C.N.Prasad) (Manoj Kumar Aggarwal)
ाियकसद / Judicial Member लेखासद / Accountant Member
मुंबई Mumbai; दनांकDated : 11.07.2018
Sr.PS:-Thirumalesh
आदे शक
त
ल पअ े षत/Copy of the Order forwarded to :
1. अपीलाथ-/ The Appellant
2. 12यथ-/ The Respondent
3. आयकरआयु9त (अपील)/ The CIT(A)
4. आयकरआयु9त/ CIT- concerned
5. Cवभागीय1GतGनHधमुंबई ,आयकरअपीलKयअHधकरण ,/ DR, ITAT, Mumbai
6. गाडOफाईल /Guard File आदे शानस ु ार/ BY ORDER, उपसहायकपंजीकार/ (Dy./Asstt.Registrar) आयकरअपील.यअ/धकरण ,मुंबई / ITAT, Mumbai