|CORAM:||Amit Shukla (JM), P. K. Bansal (AM)|
|CATCH WORDS:||Depreciation, intangible asset, non-compete fee|
|COUNSEL:||Prakash Chand Yadav|
|DATE:||September 22, 2017 (Date of pronouncement)|
|DATE:||December 30, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 32(1)(ii) Depreciation on non-compete fee: The AO should consider whether the verdict in Sharp Business System 211 TM 576 (Del) that non-compete rights are not intangible assets for depreciation can apply to a case where there is no joint venture between the person paying the non-competition fee and the recipient and both parties are outsiders. Law laid down in Nat Steel Equipments vs. CCE AIR 1988 SC 631 on the meaning of the term "similar" to be considered|
(i) Ground no.3 relate to the claim of depreciation u/s 32(1)(ii) and treating the non computation right as intangible capital assets.
(ii) The Ld.DR before us in this regard relied on the decision of Hon’ble Jurisdictional High Court in ITA no. 492/2012 in the case of Sharp Business System vs. CIT-III  211 Taxman 576/27 taxmann.com 50 (Delhi), in which the Hon’ble High Court vide order dt.05.11.2012 in respect of claim of depreciation, on the consideration paid towards right to compete, held as under.
“12. It is, therefore, apparent that the ruling in Techno Shares & Stocks Ltd. (supra) was concerned with an extremely limited controversy, i.e. depreciability of stock exchange membership. This Court observes that such nature was held to be akin to a license because it enable the member, for the duration of the membership, to access the Stock Exchange. Undoubtedly, it conferred a business advantage and was an asset which and was clearly an intangible asset. The question here, however, is whether a non-compete right of the kind acquired by the assessee against L&T for seven years amounts to a depreciable intangible asset. As discussed earlier, each of the species of rights spelt-out in Section 32(1)(ii), i.e. know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of 5 similar nature has to be “intangible asset”. The nature of these rights mentioned clearly spell-out an element of exclusivity which ensures to the assessee as a sequel to the ownership. In other words, but for the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance “in rem”. However, in the case of a non-competition agreement or covenant, the advantage is a restricted one, in point of time. It does not necessarily – and not in the facts of this case, confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right “in personam”. Indeed, the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in Section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred – a proposition fully supported by the controlling object clause, i.e. intangible asset. Every species of right spelt-out expressly by the Statute – i.e. of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the Revenue.”
(iii) Ld. AR on the other hand vehemently contended that against the said order of the Delhi High Court an SLP has been admitted by the Hon’ble Supreme Court in SLP CC No.19939/2015 which was listed last on 19.9.2017 and admitted on 16.11.2007. The Ld.AR before us also referred to a chart mentioning therein that the facts of this case are different from the facts in the case of Sharp Business Systems. This chart gives the following reasons.
|Facts of Sharp||Facts of assessee|
|Assessee i.e. Sharp and the seller of non-compete rights i.e. L&T were associated with each other by virtue of a joint venture.||Assessee and the seller i.e. M/s STIPL were completely separate entities not associated with each others.|
|In that joint venture M/s L&T was having only 26% of shares (see page 9 of judgement)||No such fact is there|
|The presence of L&T was not completely eliminated and it was free to produce the goods similar to the goods, restricted under the non compete agreement See para 10 of the judgment||The seller was completely eliminated from the market and its affiliates were also debarred from manufacturing and trading in the goods for which non compete fee was paid See page Clause A-B-E Affiliates
(defined at page no.50)
|The rights transferred under the non compete agreement were not exclusive rights See page 13 of the decision||The rights transferred under the non compete agreement were exclusively as is evident from the fact that not only the seller but also its affilaiates were debarred from carrying out the same business.|
(iv) After hearing the rival submissions, we do agree that each decision has to be applied on the facts and context therein. In the case of the assessee, we noted that the terms and conditions of the agreement has not been examined by A.O. to the right perspective and has not been compared with the facts and circumstances in the case of Sharp Business Systems (supra). We, therefore, in the interest of justice set aside the order of Ld. CIT(A) and restore this issue to the file of the Assessing Officer with the direction that the Assessing Officer shall redecide this issue afresh after comparing the facts in the case of the assessee with the case of Delhi High Court in Sharp Business Systems (supra) in accordance with law and give clear finding how the case of assessee is covered or not covered by the decision of Delhi High Court in the case of Sharp Business Systems. We may point out that in the case of the assessee there was no joint venture between the person paying the non competition fee and the person receiving the non competition fee. Both the parties were entirely outsiders and the time of the continuity of the agreement was also 10 years not 07 years. We also direct the Assessing Officer that while considering the decision of Delhi High Court he should also consider the decision of Hon’ble Supreme Court in the case of Nat Steel Equipments vs. Collector of Central Excise reported in AIR 1988 SC 631 as in our opinion this decision will also have bearing in the case of the assessee. The A.O. is also directed to give proper and sufficient opportunity to the assessee to produce all the relevant evidences and the case laws on which he may rely in this regard. Thus in the result the appeal filed by the revenue is allowed for statistical purposes.
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