Document Fragment View

Matching Fragments

10. Ground No. 2 is with respect to disallowance of Rs. 5 lakh paid by the Assessee to M/s. GS Lightning Pvt. Ltd towards non compete fees which was treated by the ld AO and confirmed by the ld CIT(A) as capital expenditure. Therefore, the Assessee is in appeal before us.

11. The facts leading to the above disallowances shows that the assessee has acquired 24% of equity capital in one company i.e. GS Lighting Pvt. Ltd. The assessee also entered into a manufacturing agreement on 11.09.2003 with the above company, which is engaged in the manufacturing of various lights and its components, accessories having factory at Gurgaon under brand name of ―polestar'. That company offered exclusive manufacturing of lighting components etc for the assessee. The agreement shows that assessee in the name of its subsidiary company has acquired and now owns Intellectual property, technical, information relating to design, style, specifications and manufacturing process of this ‗Polstar' lighting to be manufactured. By that manufacturing agreement, GS Lightings P Ltd and its shareholders and some other persons also have undertaken to not to use the trademark etc relating to this product. During the continuation of this agreement and after termination thereof, GSl and those persons will not use brand name or product, which is identical to the trademark or trade name acquired by assessee. On expiry of the manufacturing agreement, GSL is further to move the appropriate authority for cancellation of in its name and get registration in the name of assessee's group of approval granted to it for manufacturing of the above product. The agreement also says that GSL do not have any right in the intellectual property right pertaining to that product after this agreement. In this manufacturing agreement, the assessee guaranteed minimum turnover of the above product and remuneration to the GSL. As per this agreement, all the employees and the technical representative of GSL factory would also remain as employee of the assessee. Along with this manufacturing agreement, the assessee also entered on the same date an assignment deed Page | 6 in favour of the one QRG Enterprise Ltd, which is also the group company [subsidiary] of the assessee. In this assignment deed along with GSL Lighting Ltd, partners of another partnership firm M/s. GS Electricals also joined. This agreement was entered in terms of memorandum of understanding entered into by the assessee on 01.08.2003 wherein, GSL Lighting and partnership firm agreed to assign all proprietary and ownership rights in the registered trade mark and design registration along with all common law rights including the goodwill to the QRG Enterprises. The assessee also entered on the same date i.e. 11.09.2003, a non competition agreement with GS Lighting Pvt. Ltd, Mr. Kishan Mehta (partner) of the GS Electronics and Director of this company and other shareholders whereby the assessee agreed to pay non compete fee of Rs. 5 lakh. This non compete fees was claimed by the assessee as revenue expenditure but held by the ld AO as capital expenditure. During the course of assessment proceedings the assessee invoked provision of section 144A of Act to seek direction of the Additional Commissioner to the ld AO which was issued on 26.12.2006 holding that the above non compete fees paid by the assessee is capital expenditure. The reasons given by ld Additional Commissioner, which is binding on the ld AO, that assessee, acquired all electrical consumable turnovers under the brand name ‗Polstar' acquired by the assessee and renamed it as ‗Havells Polstar'. The assessee entered into a manufacturing agreement, agreement for transfer of IPR and by acquiring 24% stake in GS Lighting Ltd paid a non-compete fees of Rs. 5 lakhs. The ld Addl CIT held that payment of such non compete fees resulted into a benefit of enduring nature in the hands of the assessee and therefore, it is capital expenditure. The ld Addl. CIT also relied on the decision of the Kolkata High Court in 139 ITR 581 and Karnataka High Court in 201 ITR 25. The ld CIT (A) also noted that the agreement clearly shows that the expenditure incurred by the assessee is capital in nature. The ld AO based on the above direction disallowed the above sum.

ii. It is pertinent to mention here that on 11th August, 2003, three separate agreements were entered into with GSL:

a) Assignment Deed between GSL and M/s. QRG Enterprises Limited, subsidiary of the appellant, for assigning of trademark/ brand ―Pole Star‖ owned by GSL;
b) Exclusive Manufacturing Agreement between appellant and GSL where under GSL agreed to exclusively manufacture products of the appellant at its factory at Gurgaon;
c) Appellant also assured minimum gross margin on the products manufactured by GSL for and on behalf of the appellant. d) Appellant assured continuous business for the first three years of the operations of the exclusive manufacturing agreement inasmuch as the parties were barred from terminating the agreement for the first three years.

On perusal of the previously mentioned, he submitted that aforesaid exclusive manufacturing agreement was a commercial agreement entered into by the appellant to assure itself continued manufacturing of its product at the factory premises of GSL, thereby resulting in commercial/ business advantage in the form of assured supplies. In continuance of the said agreement, the appellant also entered into a noncompetition agreement with GSL where under GSL was, during the continuance of the exclusive manufacturing agreement (with no specific time limit being prescribed in the said agreement), barred from manufacturing products with the brand name ―Pole Star‖. The said non- competition agreement, it is emphatically reiterated, specifically provided that the same shall continue to be in operation only till the tenure of the exclusive manufacturing agreement. Therefore, payment under non-competition agreement was in essence part and parcel of the exclusive manufacturing agreement, which was Page | 9 entered into merely to derive commercial advantage in the form of assured manufacturing and supply from GSL. In case exclusive manufacturing agreement was to be terminated by the parties, for whatever reason, non-competition agreement would also stand terminated. Thus, life/tenure of the non-competition agreement was dependent upon the life/ tenure of the exclusive manufacturing agreement. In view of the aforesaid, it is submitted that payment under the non-competition agreement was in essence payment made for obtaining commercial advantage in the form of continued manufacturing and supply by GSL, thereby ensuring smooth operations of the appellant. As a result of such payment, no enduring benefit in capital field and/ or no capital asset was brought into existence; on the contrary payment was for a bulk deal of GSL agreeing to enter into exclusive manufacturing agreement with the appellant. It is, thus, submitted that the amount paid to GSL was in the ordinary course of business and for carrying on the business more profitably and not for acquisition of any asset or any right of a permanent nature. In pursuance of the aforesaid agreements, the manufacturing facilities of GSL were exclusively reserved for manufacturing the appellant's products/orders.

iii. Third agreement, Simultaneously a non-compete agreement was also entered on the same date between the appellant on one part and GS Lightings Pvt. Ltd, Mr. Krishan Mehta himself and other shareholders of GSL Lightings Pvt. Ltd on the other part. According to that all the other parties representing GSL Lightings Pvt. Ltd , G S Electricals, Shareholders of GS Lighting Pvt Ltd were collectively referred to as ―GSL‖. They also agreed to not to compete with respect to the product manufactured by GSL [naturally, as GSL was to manufacture for appellant] or appellant. It also prohibits them to carry out such business by forming any subsidiary or associated companies or a firm, which are to compete with the product manufactured by GSL or appellant. All existing shareholders and their family members also bound them to not to do any such activity. In consideration for doing so GSL and its shareholders authorized Mr. Krishan Mehta to receive consideration on their behalf for non competition. A sum was paid of Rs. 5 lakhs on 11.08.2003 which is held by the revenue authorities as capital expenditure.