Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

CASE : Procter & Gamble Distribution Co Ltd Vs JCIT (ITAT Mumbai)

Issue : Whether the non-competition fee received by the assessee is permissible as revenue expenditure?

Facts:

In the case of Tecumseh, USA, a leading Global compressor manufacturer, the assessee had purchased the compressor related operations of Whirlpool India, a leading refrigerator manufacturer in India, for Indian compressor market. The assessee had paid the price of Rs.52.5 crores which included a sum of Rs.2.65 crores to be paid as non-compete fees. The issue was whether non compete fees which was in force for 5 years, could be allowed as revenue expenditure.

The Special Bench  in the above case after detailed examination held that the expenditure was capital in nature.

In arriving at its decision , the special bench cited the Supreme Court in CIT Vs Coal Shipment Pvt. Ltd. (82 ITR 902) in which it was held that payment to ward off completion in business to a rival dealer would constitute capital expenditure if the object of making that payment was to derive an advantage by eliminating competition over some length of time.

In Assam Bengal Cement Co. Ltd. (27 ITR 34), it was held that the assessee who was a manufacturer of Cement had paid protection fees to the lessor of quarries for lime stone, on annual payment of Rs.5000/- for the whole period of lease and another sum of Rs.35000/- p.a. as a further protection fees for five years for similar undertaking in respect of the whole district. The issue was whether the payment could be allowed as revenue expenditure. Supreme Court observed that the fact that the payment was recurring was immaterial. It was the nature of asset acquired which was material. The asset required was the right to carry on the business unfettered by any competition which was not a part of working of the business but went on to appreciate the whole of the capital asset and make it more profit yielding. The expenditure was thus hold as capital in nature by the Supreme Court.

Having considered the facts of the case , Commissioner of Income Tax (A) has allowed the claim of the assessee that it is a revenue expenditure on the ground that the said amount has been subjected to disallowance in the relevant assessment years and taxing the same in the year under consideration will be subjected to double addition.