Income-tax Act, 1961 — S. 32(1)(ii) — Depreciation on Intangible Assets — Payment for Non-compete fees — Whether by payment of non-compete fees the assessee can be said to have acquired a commercial or business right similar to the intangible assets enume

The assessee-company was in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to the USA, Canada, Europe and Australia. Another company, Medispan Limited (MS) was engaged in the business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South-East Asian countries. The assessee with an intention to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs and medicines, entered into an agreement dated 12-7-2000, whereby MS agreed to transfer the business and activities of its export division to assessee for a consideration of Rs.5.33 crores. Clause III of the agreement inter alia provided for break-up of various components of the consideration of Rs.5.33 crores. It was provided that the consideration of Rs.5.33 crores comprises Rs.2 crores towards compensation for MS accepting noncompete obligation in respect of export of bulk drugs, pharmaceutical products and formulations. In the computation of total income filed along with the return of income, the assessee had claimed the payment of Rs.2 crores towards non-compete obligation as revenue expenditure. The AO rejected the claim. The assessee made an alternative claim before the AO that depreciation be allowed u/s.32(1) of the Act on the non-compete fee. The AO rejected this claim also. The CIT(A) held that depreciation on this sum of Rs.2 crores be granted u/s.32(1) of the Act. Aggrieved the Revenue preferred an appeal to the Tribunal.

Held :

The Tribunal considered the legislative history and scope of the provisions dealing with the benefit of ‘depreciation’ under the Act. It noted that the scope of S. 32(1) was widened by the Finance Act, 1999 by allowing depreciation in respect of ‘intangible assets’ w.e.f. 1-4-1999. This has been achieved by introducing clause (ii) in S. 32(1) of the Act. Prior to this, depreciation was allowable only in respect of ‘tangible assets’ viz. buildings, machinery, plant or furniture. It stated that the words ‘being intangible assets’ appear in clause (ii) by way of a nomenclature, to contradistinguish the items appearing in clause (ii) from those appearing in clause (i). It noted that the provisions of S. 32(1)(ii) w.e.f. 1-4-1999 not only extended the benefit of S. 32 to the ‘intangible assets’ but also gave therein an ‘inclusive’ definition of the ‘intangible assets’, for this purpose. It stated that one can say that clause (ii) contains an ‘inclusive’ definition of ‘intangible assets’, for the purpose of S. 32.

The Tribunal found that it was an admitted fact that the payment of Rs.2 crores was made by the asses-see-company to ward off competition in the export business which was acquired by it from MS. Therefore, it concluded that what was acquired by the assessee by paying this amount of Rs.2 crores was a business/commercial right. It observed that it is clear from the language of clause (ii) of S. 32(1) that each of the terms, know-how, patents, copyright, trade mark, licences, or franchises represents a ‘business or a commercial right’. It then proceeded to examine the ‘nature’ of these business/commercial rights and compared their ‘nature’ with the ‘nature’ of the impugned business/commercial right which was acquired by the assessee and concluded that in the case of copyright, trade mark, licence, and franchises also the owners have exclusive business/ commercial rights, and if there is a breach they can sue. It held that similar was the nature of the impugned right acquired by the assessee. It further stated that if the business/commercial right of a patent, copyright, trademark, licence and franchise fulfils the conditions of being intangible asset, then surely the impugned business/commercial right acquired by the assessee also fulfils that condition by way of a logical corollary. The decision of Madras Tribunal in the case of A. B. Mauria India Pvt. Ltd. was held to be not applicable in the facts of the present case. The Tribunal held that the payment of Rs.2 crores made by the assessee under agreement dated 12-7-2000 to ward off competition was a business/commercial right which was similar in nature to copyright, trade mark, licence and franchises and therefore qualified for depreciation u/s.32(1)(ii) of the Act. The Tribunal observed that the decision of ITAT, Chennai, in the case of A. B. Mauria India Pvt. Ltd., on which reliance was placed on behalf of the Revenue, does not support the case of the Department on the facts of the case in the present appeal.

Case referred to :

1. A. B. Mauria India Pvt. Ltd. (ITA No. 1293/ Mds./2006, dated 23-11-2007)