Tax – 7 v. Purti Parab

PURTIPRASADPARAB Digitally signed byPURTI PRASADPARABDate: 2021.10.0413:47:36 +0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1453 OF 2017 Pr. Commissioner of Income Tax – 10 V/s. M/s. India Medtronic Pvt. Ltd. ….Appellant ….Respondent ----- Mr. Akhileshwar Sharma for Appellant. Mr. Nishant Thakkar a/w Mr. Hiten Chande i/b PDS Legal for Respondent. ----- CORAM : K.R. SHRIRAM &R.I. CHAGLA, JJ. DATED : 30[th] SEPTEMBER, 2021 P.C. : 1.Respondent is engaged in manufacturing and trading of lifesaving devices. For the assessment year 2002-2003 respondent had claimedexpenditure of Rs.4,73,00,000/- on account of amount payable to threedirectors of Medtech Devices Ltd., towards non-compete agreement enteredwith them. Respondent claimed payment of non-compete fee as revenueexpenditure. The Assessing Officer held that the amount paid was in thenature of capital expenditure and passed order under Section 143 (3) of theIncome Tax Act, 1961 (the Act) adding this amount of Rs.4,73,00,000/- tothe total income of respondent. 2.Aggrieved by this order respondent preferred an appeal to CIT(A). CIT (A) agreed that the payment of non-compete fee was on account of business necessity so as to prevent the directors of Medtech Devices Ltd.,from starting an alternative company on their own. But agreed with theAssessing Officer that the expenditure made towards non-compete fee wascapital in nature. Respondent impugned this order of CIT (A) before theIncome Tax Appellate Tribunal (ITAT). The ITAT partly allowed the appealand expressed a view that the assessee was entitled to depreciation on thepayment of non-compete fee as the assessee acquired intangible asset in thenature of any other business or commercial right. The ITAT directed theAssessing Officer to allow depreciation at the admissible rate on the non-compete fee of Rs.4,73,00,000/- paid by respondent. Impugning this orderof ITAT, appellant has approached this court and has proposed followingquestion of law. QUESTIONS OF LAW i.“Whether non-compete fees is an intangible asset of any otherbusiness or commercial rights of similar nature as per section 32 (1) (ii)of Income Tax Act, 1961?” ii.“Whether non-compete fees is an intangible asset as per section 32(1) (ii) of Income Tax Act, 1961?” 3. This issue is no more resintegra. The Division Bench of this Court in Income Tax Appeal No. 556 of 2017, Pr. Commissioner of Income Tax – 7 Vs. Piramal Glass Limited, Order dated 11[th] June, 2019 has heldthat the payment of non-compete fee would fall under the expression “orany other business or commercial rights of similar nature” used inexplanation 3 to Sub Section 32 (1) (ii) of the Act. Paragraph No.3, 4 and 5in the said order reads as under : 3.Question No. (a) noted above pertains to the decisionof the Tribunal to grant depreciation on the Assessee's payment ofnon-compete fees. According to the Revenue, this being anintangible asset, no depreciation under Section 32 of the IncomeTax Act, 1961 ('the Act' for short) was available. 4.We however notice that similar issue has beenconsidered by the different High Courts and held in favour of theAssessee. A reference can be made to the decision of the DivisionBench of the Gujarat High Court in the case of PrincipalCommissioner of Income Tax v. Ferromatice Milacron India (P.)Limited[1]. It was also the case where the Assessee had incurredexpenditure pursuant to the non-compete agreement and claimeddepreciation on such asset. While dismissing the Revenue's Appealagainst the Judgment of the Tribunal, following observations weremade : 4.We however notice that similar issue has beenconsidered by the different High Courts and held in favour of theAssessee. A reference can be made to the decision of the DivisionBench of the Gujarat High Court in the case of PrincipalCommissioner of Income Tax v. Ferromatice Milacron India (P.)Limited[1]. It was also the case where the Assessee had incurredexpenditure pursuant to the non-compete agreement and claimeddepreciation on such asset. While dismissing the Revenue's Appealagainst the Judgment of the Tribunal, following observations weremade : "We may recall the Assessing Officer does not disputethat the expenditure was capital in nature since bymaking such expenditure, the assessee had acquiredcertain enduring benefits. He was, however, of theopinion that to claim depreciation, the assessee mustsatisfy the requirement of Section 32(1)(ii) of the Act, inwhich Explanation 3 provides that for the purpose of thesaid sub-section the expression "assets" would mean ( asper clause (b) ) intangible assets, being known-how,patents, copyrights, trade marks, licenses, franchises orany other business or commercial rights of similarnature. In the opinion of the Assessing Officer, the non-compete fee would not satisfy this discrimination. Goingby his opinion, no matter what the rights acquired bythe assessee through such non-compete agreement, thesame would never qualify for depreciation in section32(1)(ii) of the Act as being depreciable intangibleasset. This view was plainly opposed to the well settledprinciples. In case of Techno Shares & Stocks Limited(supra) the Supreme Court held that payment foracquiring membership card of Bombay Stock Exchangewas intangible assets on which the depreciation can beclaimed. It was observed that the right of suchmembership included right of nomination as a licensewhich was one of the items which would fall underSection 32(1)(ii). The right to participate in the markethad an economic and money value. The expensesincurred by the assessee which satisfied the test of beinga license or any other business or commercial right ofsimilar nature. In case of Areva T & D India Limited (supra) DivisionBench of Delhi High Court had an occasion to interpret 1 (2018) 99 taxmann.com 154 (Gujarat) the meaning of intangible assets in context of section32(1)(ii) of the Act. It was observed that on perusal ofthe meaning of the categories of specific intangibleassets referred to in section 32(1)(ii) of the Actpreceding the term "business or commercial rights ofsimilar nature" it is seen that intangible assets are not ofthe same kind and are clearly distinct from one another.The legislature thus did not intend to provide fordepreciation only in respect of the specified intangibleassets but also to other categories of intangible assetswhich may not be possible to exhaustively enumerate. Itwas concluded that the assessee who had acquiredcommercial rights to sell products under the trade nameand through the network created by the seller for sale inIndia were entitled to deprecation. In the present case, Mr.Patel was erstwhile partner ofthe assessee. The assessee had made payments to himto ward of competence and to protect its existingbusiness. Mr.Patel, in turn, had agreed not to solicitcontract or seek business from or to a person whosebusiness relationship is with the assessee. Mr. Patelwould not solicit directly or indirectly any employee ofthe assessee. He would not disclose any confidentialinformation which would include the past and currentplan, operation of the existing business, trade secreteslists etc. It can thus be seen that the rights acquired by theassessee under the said agreement not only giveenduring benefit, protected the assessee's businessagainst competence, that too from a person who hadclosely worked with the assessee in the same business.The expression "or any other business or commercialrights of similar nature" used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the presentsituation." 5. No question of law in this respect therefore arises. It can thus be seen that the rights acquired by theassessee under the said agreement not only giveenduring benefit, protected the assessee's businessagainst competence, that too from a person who hadclosely worked with the assessee in the same business.The expression "or any other business or commercialrights of similar nature" used in Explanation 3 to sub-section 32(1)(ii) is wide enough to include the presentsituation." 5. No question of law in this respect therefore arises. 4.In our view, the Tribunal has not committed any perversity orapplied incorrect principles to the given facts and when the facts andcircumstances are properly analysed and correct test is applied to decide theissue at hand, then, we do not think that question as pressed raises any substantial question of law. The appeal is devoid of merits and it is dismissed with no order as to costs. (R.I. CHAGLA J.) (K.R. SHRIRAM, J.)