Arkema Peroxides India (P) Ltd. v. Asstt. CIT

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The Tax Publishers2013 TaxPub(DT) 0211 (Chen-Trib) : (2013) 049 (II) ITCL 0401 : (2012) 020 ITR (Trib) 0225 INCOME TAX ACT, 1961 --DepreciationAllowability Non-compete fee under agreement vis-a-vis intangible assets--One 'S' was holding 49 per cent share capital of assessee-company and balance 51 per cent was held by 'A', a foreign company. Under the agreement 'S' transferred its 49 per cent interest in assessee-company in favour of 'A', from which a certain sum was paid by 'A' to 'S' to disengagement of 'S' from the business of assessee-company for a period of 5 years not to carry peroxide business in India. Apart from this a separate agreement was entered to between assessee and 'S' whereby a certain sum was paid to not to carry on business in India. This payment made by assessee was treated as intangible assets and claimed depreciation which was disallowed by the revenue authorities. *Held:* Non-compete fee paid under agreement was not an intangible asset and depreciation was, therefore, not allowable thereon. An asset whether tangible or intangible must be one for which a market value can be ascertained. There is no dispute that know-how, patents, copyrights, trademarks, licences/franchises, etc., are intellectual property rights, which can be transferred/assigned/leased out to any other parties for a price. Non-compete agreement between two parties is like personal services contract which is unassignable. Personal services contract cannot survive on the demise of either of the parties. Similarly the non-compete agreement between two parties will come to an end on the demise of either of the parties. While intangible assets like know-how, patents, copyrights, trademarks, licences/franchises, etc., can be sold/assigned to any other person for a value but non-compete right acquired on payment cannot be transferred for a price. No third party can be roped in, in the agreement for non-compete by way of sale/assignment as it is non-saleable/unassignable. Similarly, the right to trade freely or to compete in the market is not an asset. Hence, a right arising out of an agreement of non-compete or not to trade freely will not constitute a commercial right falling in the category of intangible assets. [Para 18] The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copyrights, trademarks, licences, franchises, etc., Non-compete agreement would not create an asset of intangible nature eligible for depreciation under section 32(1) (ii). [Para 13] Income Tax Act, 1961, Section 32, Explanation 3 SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0211 (Chen-Trib) : (2013) 049 (II) ITCL 0401 : (2012) 020 ITR (Trib) 0225

INCOME TAX ACT, 1961

--DepreciationAllowability Non-compete fee under agreement vis-a-vis intangible assets--One 'S' was holding 49 per cent share capital of assessee-company and balance 51 per cent was held by 'A', a foreign company. Under the agreement 'S' transferred its 49 per cent interest in assessee-company in favour of 'A', from which a certain sum was paid by 'A' to 'S' to disengagement of 'S' from the business of assessee-company for a period of 5 years not to carry peroxide business in India. Apart from this a separate agreement was entered to between assessee and 'S' whereby a certain sum was paid to not to carry on business in India. This payment made by assessee was treated as intangible assets and claimed depreciation which was disallowed by the revenue authorities. Held: Non-compete fee paid under agreement was not an intangible asset and depreciation was, therefore, not allowable thereon.

An asset whether tangible or intangible must be one for which a market value can be ascertained. There is no dispute that know-how, patents, copyrights, trademarks, licences/franchises, etc., are intellectual property rights, which can be transferred/assigned/leased out to any other parties for a price. Non-compete agreement between two parties is like personal services contract which is unassignable. Personal services contract cannot survive on the demise of either of the parties. Similarly the non-compete agreement between two parties will come to an end on the demise of either of the parties. While intangible assets like know-how, patents, copyrights, trademarks, licences/franchises, etc., can be sold/assigned to any other person for a value but non-compete right acquired on payment cannot be transferred for a price. No third party can be roped in, in the agreement for non-compete by way of sale/assignment as it is non-saleable/unassignable. Similarly, the right to trade freely or to compete in the market is not an asset. Hence, a right arising out of an agreement of non-compete or not to trade freely will not constitute a commercial right falling in the category of intangible assets. [Para 18] The non-compete fee is outcome of an agreement entered into between two parties. It does not represent any intangible asset, such as, know-how, patents, copyrights, trademarks, licences, franchises, etc., Non-compete agreement would not create an asset of intangible nature eligible for depreciation under section 32(1) (ii). [Para 13]

Income Tax Act, 1961, Section 32, Explanation 3