ITAT (DEL):- Non-compete fees taxable,

Non-compete fees are capital expenditure and therefore liable to tax, according to a recent ruling by the Income-tax Appellate Tribunal, Delhi.

The special bench of ITAT, Delhi gave this ruling on July 30, 2010, on an appeal filed by Tecumseh India, the Indian arm of the US-based Tecumseh. The transaction in question was the acquisition of Whirlpool assets at Faridabad and Ballabgarh and the non-compete fees it paid to Whirlpool. The assets were purchased on July 2, 1997 but the agreement for non-compete fees of Rs 2.65 crore was signed on July 10, 1997.

Since the non-compete fee was claimed by Tecumaseh as revenue expenditure, it accordingly deducted the amount from computation of taxable income. The I-T department did not agree with the taxpayer's contention and held that the payment of non-compete fee was capital expenditure and therefore tax has to be paid. The assessing officer, therefore added the expenditure back into the income computed for purpose of levying tax.

The company had cited the Delhi High Court decision in the case of Eicher to support its case. In the case of Eicher, the Delhi High Court had held that the non-compete fees are mainly for protecting the profitability and business interest of the company.

Further, since no profit-making apparatus was created through the payment of non-compete fees, such expenditures could be classified as revenue expenditure, and therefore tax was not payable on this count. The tax payer company had also argued that the acquisition of Whirlpool assets and the agreement for the non-compete fee were made on different dates and therefore the latter could not be construed as part of the acquisition.

The I-T department contented that though MoU and the agreement for paying non-compete fees, are signed on separate dates, they are part of the same transaction that could be classified as capital expenditure.

The I-T department cited section 6 of the Indian Evidence Act which stipulates that courts should take note of facts which formed part of the same transaction though they may have occurred at different places and time. It said the non-compete clause was part of the same transaction.