Pitney Bowes India Pvt. Ltd. vs Commissioner Of Income Tax
2011 Latest Caselaw 5820 Del

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

+                             ITA No.784 of 2011

                             Reserved on:       13th September, 2011
%                          Pronounced on:       30th November, 2011


      PITNEY BOWES INDIA PVT. LTD.                  . . . APPELLANT

                              Through:    Mr.   C.S.  Aggarwal, Sr.
                                          Advocate with Mr. Prakash
                                          Kumar, Advocate for the
                                          appellant.

                               VERSUS

      COMMISSIONER OF INCOME TAX                   . . .RESPONDENT

                              Through:    Mr.   M.P.   Sharma,        Sr.
                                          Standing Counsel.
      CORAM :-
      HON'BLE THE ACTING CHIEF JUSTICE
      HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

1. Whether Reporters of Local newspapers may be allowed to see the Judgment?

2. To be referred to the Reporter or not?

3. Whether the Judgment should be reported in the Digest?

A.K. SIKRI,ACTING CHIEF JUSTICE:

1. The facts leading to the filing of this appeal may first be

recapitulated and these are as follows:

The appellant/assessee company was incorporated on

23.4.2004 under the Companies Act, 1956 and is a wholly

owned subsidiary of Pitney Bowes Inc., USA. The assessee

is engaged in the business of wholesale trading, selling and

marketing of hi-tech documents and providing maintenance

and after sales service of its products. During the year

under consideration, the assessee company had acquired

mailing business from M/s. Kilburn Office Automation Limited

(hereinafter referred to as „KOAL‟) as a going concern on a

slump sale basis pursuant to Business Transfer Agreement

dated 15.10.2004 entered into by the appellant with the

later. The consideration for such transfer was stated as

`18.92 Crores which included a sum of `5.94 Crores by way

of non-compete fee which was limited for a period of 5

years. Seller Company (KOAL) before the transfer of said

business has been acting as a distributor of Pitney Bowes‟

products in India and Nepal. In the year under

consideration, the Pitney Bowes Inc., USA (holding company

of the assessee) had decided to enter in the Indian market

directly and consequently has caused the incorporation of

the assessee company as its wholly owned subsidiary.

2. For the instant assessment year 2005-06, the assessee

company filed its return of income, declaring a total loss of

`2,59,84,980/- as was computed in the computation of

income.

3. In the said return, the assessee claimed deduction of non-

compete fee of `5.94 Crores as business/revenue

expenditure in the computation of income filed with the

return of income. The Assessing Officer (AO), however,

disallowed the same on the ground that the payment of non-

compete fee was a capital outlay, non-allowable under

Section 37 of the Act. The assessee filed appeal against this

order before the CIT (A). The CIT (A) held that the

expenditure incurred on non-compete fee by the assessee

needs to be allowed on deferred revenue basis, i.e., in five

years as the period of non-compete fee agreement is for five

years. As such, the CIT (A) allowed `1,18,89,458/- being

1/5th of the total amount of `5,94,47,290/- paid to KOAL by

the assessee as non-compete fee.

4. The Revenue preferred an appeal before the Tribunal. The

assessee filed a cross-objection.

5. The Income Tax Appellate Tribunal („the Tribunal‟ for

brevity) held that non-compete fee paid by the assessee is

capital in nature, as such disallowed the claim. Further,

while dealing with the cross-objection filed by the appellant,

the Tribunal restored the alternate plea in respect of

allowance of depreciation under Section 32(1)(ii) of the Act,

to the file of the Assessing Officer for deciding it.

6. It is in this backdrop that the present appeal is filed.

Submitting that the non-compete fee, in the circumstances

of this case, was to be treated as revenue expenditure and

non-compete expenditure. It is also submitted that in any

case, the Tribunal should have accepted the alternate plea to

allow depreciation @ 25% under Section 32(2) (ii) of the

Income Tax Act (hereinafter referred to as „the Act‟) instead

of remitting the case back to the AO for decision on this

issue. The appeal was accordingly admitted on the following

substantial questions of law:

"1. Whether the Income Tax Appellate Tribunal was correct in law in holding that the claim of deduction of expenditure incurred as non-compete fee aggregating to Rs.5,94,47,290/- could not be allowed to it either in the instant year or even in five years on deferred basis?

2. Whether the Income Tax Appellate Tribunal was justified in law in remanding the issue in respect of alternate plea of the assessee, instead of directing the Assessing Officer to allow depreciation @25% under Section 32(1)(ii) of the Income Tax Act, 1961?"

Re: Non-compete fee, whether capital or revenue:

7. It was submitted in this behalf that under the agreement

entered with KOAL, the assessee did not acquire the

business of photocopiers and drawing office equipment

business of the seller. In consideration for the sale of the

business by the seller including the transfer of assets, the

assessee agreed to pay `17,91,15,000/-. Under this

Business Transfer Agreement, KOAL had agreed that it shall

not compete with the assessee for a limited period of five

years, who has acquired the running mail business as a

going concern. Clause 33.2 of the Agreement provided for

certain adjustments and deductions to be made at closing,

from the aforesaid consideration. Under the aforesaid

agreement, Clause 7 provided that the seller shall comply

with the non-compete obligations set forth in Annexure

1.1(B). From the perusal of the Annexure 1.1(B), it would

be seen that it was specifically provided that there is a non-

compete obligation of the transferor when it undertook that

it shall not either on its own account or in conjunction with

any of its affiliates or others and whether directly or

indirectly for a period of five years from the closing date

establish, develop, carry on or assist in carrying on or be

engaged, concerned, interested, or employed in or provide

technical, commercial or professional advice to any other

business enterprise or venture which supplies goods and/or

services which are competitive with or are of the type

supplied by the business at the closing date within the whole

of India. It is, thus, evident that the assessee company

incurred an expenditure to eliminate the competition for a

limited period of five years and was part of lump sum

consideration of `17,91,15,000/-. It is, thus, crystal clear

that there existed an obligation of the transferor, who could

not enter into a competition to carry on the business of

trading for a limited period of five years to establish,

develop, carry on or assist in carrying on or be engaged,

concerned, interested or employed in or provide technical

commercial or professional advice to any other business

enterprise or venture which supplies goods and/or services

which are competitive with or are of the same type as

supplied by the business.

8. It was, thus, the non-compete fee which had been incurred

as a consideration to eliminate competitionwith the

transferor for a limited period of five years and such an

expenditure could not be treated as capital in nature. The

learned counsel referred to the following judgments in

support of his submission:

(i) CIT (A) Vs. COAL Shipment (P) Ltd., 82 ITR

902;

(ii) CIT Vs. Eicher Ltd., 302 ITR 249.

9. Learned counsel argued that in COAL Shipment (P) Ltd.

(supra), the Apex Court has held that although payment

made toward off competition in business to a rival dealer

would constitute capital expenditure if the object of making

that payment was to derive an advantage by eliminating the

competition over some length of time, the same result would

not follow if there was no certainty of the duration of the

advantage and the same could be put to an end at any time.

It specifically held that how long the period of contemplated

advantage should be in order to constitute enduring benefit

would depend upon the circumstances and the facts of each

individual case. This Court in Eicher Ltd. (supra) reported

in 302 ITR 249, has held, after applying the principles laid

down by the Apex Court in the case of CIT Vs. Madras

Auto Services Pvt. Ltd. reported in 233 ITR 468 that since

the assessee did not acquire any capital asset by making the

payment of non-compete fee, it merely eliminates

competition in the two wheeler business, for a while. In the

said case, t was not clear how long the restrictive covenant

was to last but it was held that the same was neither

permanent nor ephemeral. It was argued that in the instant

case, the situation is identical and in fact, far-better namely

that the benefit was to be derived only for a period of five

years and was not ephemeral. It is also undisputed that by

incurring the expenditure to eliminate competition it was

able to deter M/s KOAL who was trading in the same

automation equipment. It was able to increase its revenues

thereby earning profits, which is the revenue profit and,

thus, the expenditure incurred was in the commercial field.

10. The learned counsel for the Revenue, on the other hand,

relied upon the reasons given by the Tribunal in holding the

expenditure to be capital in nature. He drew our attention to

Para 3 of the impugned order of the Tribunal where the

Tribunal had recorded that both the parties agreed that the

issue about the non-compete fee by the assessee was

covered by the decision rendered by the Tribunal, Principal

Bench, Delhi vide judgment dated 30.7.2010 in the case of

M/s Tecumesh India Pvt. Ltd. Vs. Addl. CIT, 132 TTJ

129.

11. We have considered the submissions of both the parties. We

find that in the return filed by the assessee, it had given its

Notes to the computation and Note file pertained to non-

compete fee, which was stated in the following terms:

"5. Non-Compete fee paid to KOAL

During the year, the Company had acquired the mailing business from KOAL as a going concern in pursuance of the BTA on a slump sale basis for a total purchase consideration of Rs. 1892 lacs. A part of the purchase consideration so paid was also towards non-compete fee which restricts the KOAL and its directors to engage itself in the competing business for a period of 5 years. The value of the non- compete fee has been considered as per the valuation report and has been treated as a capital expenditure in the books of account. It is paid to KOAL for the loss of business that they would suffer for not competing with the Company and therefore, it is in the nature of revenue expenditure. Accordingly, the same has been treated as revenue expenditure in the tax return. Reliance in this regard is placed on the judgment of Smartchem Technologies Ltd. v. ITO [2005] 97 TTJ 818 (Ahmedabad Tribunal)."

(emphasis supplied)

12. Thus, the assessee itself treated the expenditure as capital

in the books of accounts. However, at the same time, it was

maintained that since it was paid for loss of business that

KOAL would suffer for non-compete fee, the same was

treated as revenue in nature. Likewise, in Schedule 2 to the

balance sheet disclosing „fixed assets‟, payment of non-

compete fee is treated as „intangible assets‟. This also

shows that the assessee treats this as asset acquired, which

is intangible in nature. The issue regarding forwarding of

payment was discussed by the Special Bench of the Tribunal

in M/s Tecumesh India Pvt. Ltd. (supra) in greater

details and after applying the ratio of various judgments of

different High Courts including jurisdictional Court as well as

the Supreme Court, the Tribunal summarized in the

following terms:

"129. According to above observations it can be seen that warding off competition in business even to a rival dealer will constitute capital expenditure and to hold them capital expenditure it is not necessary that non- compete fee is paid to create monopoly rights.

130. The assessee also cannot get any help from the decision of Hon‟ble Delhi High Court in the case of CIT vs. Eicher Company Ltd. (supra) as in that case their Lordships have clearly found from the record that it was not clear that how long the restrictive covenant was to last and what the assessee had done was that it eliminated the competition in the two-wheeler business for a while. Their Lordships have also found that the benefit received by the assessee in that case was neither permanent nor ephemeral. Therefore, the said decision is not applicable to the facts of the present case as in the case of assessee the non compete agreement is applicable for 5 years, which period has been considered to be sufficient to give enduring benefit in the case of Assam Bengal (supra).

131. With these observations we hold that the expenditure of Rs.2.65 crore claimed by the assessee in pursuance of non-compete agreement dated 10th July, 1997 are capital expenditure, the deduction of

which cannot be granted to the assessee as revenue expenditure. The main issue is decided against the assessee and in favour of the revenue."

13. The position in the instant case is almost identical. That was

a reason that even the learned counsel for the appellant had

conceded before the Tribunal that the matter was covered

by the aforesaid Special Bench decision.

14. Agreeing with the aforesaid view, we are of the opinion that

the Tribunal rightly held that the expenditure was capital in

nature. Question No.(1) is answered accordingly.

Re: Applicability of Section 32(1)(ii):

15. Alternate submission of the learned counsel for the appellant was that no doubt, once the expenditure is held capital in nature, the assessee would be entitled to depreciation. The AO had allowed 1/5th of the fee treating the same as deferred revenue expenditure, as this fee was for five years. The argument of the learned counsel for the appellant was that when the expenditure was treated as capital in nature, there was no question of treating the same as deferred revenue expenditure. In such circumstance, the depreciation was allowable under Section 32 of the Act. The reason, which is given by the Tribunal for remitting the issue back is that this alternate plea has not been decided by any of the Authorities below, i.e., either the AO or the CIT (A). For this reason, the Tribunal felt it appropriate that the

matter needed to be heard by the AO afresh along with verification of the records by the Revenue Authorities.

16. No doubt, the Tribunal had itself determined the nature of

payment, viz., treated the non-compete fee as capital in

nature. The order of the Tribunal would further reflect that

the alternate submission of the assessee was countered on

the ground that no asset was created by making the said

payment and there was no question of allowing the

depreciation. It was also argued that non-compete fee was

for five years and the assessee itself had been pleading that

it was revenue expenditure. Such a contention of the

Revenue cannot be allowed, which is self-contradictory.

When nature of payment is discussed and at that stage,

Department pleads that the expenditure is not revenue in

nature, but is of capital nature, there is no reason to remit

the case back to the AO to determine the nature of

expenditure. At the same time, it is still a moot question as

to whether depreciation can be allowed thereupon under

Section 31(1)(ii) of the Act or not. We may note here that

the learned counsel for the Department had referred to the

judgment of the Kerala High Court in the case of B.

Raveendran Pillai Vs. CIT, 332 ITR 531 (Ker.), on the

basis of which, argument was raised that goodwill is not

specifically mentioned in Section 32(1)(ii) of the Act and

depreciation is allowable, apart from tangible assets, on such

intangible assets, which are specifically enumerated in the

said Clause. Though the AO would not have to consider the

nature of expenditure, as that has been determined by the

Tribunal, at the same time, whether depreciation thereupon

is to be allowed or not under Section 32(1)(ii) of the Act has

to be decided.

17. We, thus, find no fault in the order of the Tribunal remitting

the case back on this aspect to the AO. As a result, question

No.(2) is decided in the affirmative, consequence would be

to dismiss this appeal. We order accordingly.

ACTING CHIEF JUSTICE

(SIDDHARTH MRIDUL) JUDGE NOVEMBER 30, 2011 pmc