Whether when entire business is taken over as going concern, and a composite fee is paid for same, plea of assessee that fee paid for use of trade mark is different from non-compete fee can be sustained - NO, says ITAT
MUMBAI : THE issues before the Tribunal are - Whether trade mark is inseparable from business and hence when the entire business is taken over as a going concern the trademark alone holds no meaning and whether when the entire business is taken over as a going concern, and a composite fee is paid for the same, the plea that the fee paid for use of trade mark is different from non-compete fee is sustainable. NO is the Tribunal's order.
Facts of the case
The assessee company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Assessee entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns, viz., Supertex (India) Corporation (proprietor M.G. Saraf) and Superchem (prop. M.G. Saraf, HUF), which were engaged in trading of chemicals in earlier years for a long period. As per the agreements the assets of the proprietary concerns were valued and the business was taken over as a going concerns. In addition to the amounts paid on the basis of valuation reports towards acquiring the assets and liabilities of the two proprietary concerns, the company also undertook to pay a sum of Rs 3.5 lakhs per month to Shri M.G. Safar and a sum of Rs 2,00,000/- per month to M.G. Saraf, HUF for a period of 15 years starting from 01.09.1996 to 31.08.2011. These amounts were payable as per the relevant clauses of agreements in consideration of the transfer and assignment of specific business as going concern and considering the non-compete obligation undertaking by the aforesaid two proprietary concerns. Accordingly assessee claimed the total amount of Rs 66,00,000/- as deduction in the respective assessment years, stated to be amount of Rs 9,00,000/- towards assignment fees and royalty of Rs57,00,000/. This claim was for the first time made in A.Y. 1997-98 and in subsequent years and the A.O. in the respective scrutiny assessments held the amount as capital expenditure and disallowed the same. This matter was carried to the ITAT, which by the orders in ITA 2218/Mum/2002 for A.Y. 1997-98 and ITA No. 3170/Mum/2002 for AY 1998-99 and ITA no. 3171/Mum/2002 for A.Y. 1999-2000 dated 17th October 2005 held that the amounts were capital in nature. However, during the impugned assessment years assessee made a separate claim on the basis of the supplementary agreement entered into by assessee company w.e.f. the first day of April 2002 with the above said two persons on the basis of which the payment of Rs 3, 50,000/- and Rs 2,00,000/- payable to the respective parties were in turn bifurcated as Rs 3,00,000/- towards use of trade name Supertex and Rs50,000/- towards non compete fees in the case of M.G. Saraf and Rs1,75,000/- towards use of trade name Superchem and Rs25,000/- towards non-compete fees to M.G. Saraf, HUF. On the basis of these supplementary agreements assessee claimed the amounts as assignment fees and royalty for the use of trade name. The A.O., while relying on the findings of the ITAT with reference to the original agreement also held that the supplementary agreements in the name of making a clarificatory deed was a colourable transaction and the real purpose was to scuttle the legal and factual conclusion taken by the ITAT. Further he also held that the clarificatory deed was a sham transaction and was stage-managed merely with a view to evade income-tax, vide para 4.17 and 4.18 of the assessment order. Thus upholding the stand taken earlier AO disallowed the amount paid to the tune of Rs66,00,000/- holding it for non-compete fees and as capital expenditure. Aggrieved by the said order assessee preferred appeals before the CIT(A). The CIT(A) in the respective orders not only relied on the findings of the ITAT in earlier years but also agreed with the Assessing Officer's contentions that supplementary/clarificatory deed does not change the issue during this year as the same is an afterthought of assessee and which have been rightly held by the A.O. as a sham transaction and stage managed just to escape from the ITAT order against assessee in its own case. Thus holding, the CIT(A) rejected assessee's contentions more so relying on the order of the ITAT.
After hearing the parties the ITAT held that,
++ the ITAT considered the entire agreement and held that use of trade mark, if any, by the assessee company is only an inseparable part of the entire agreement. By the non-compete clause of the agreement erstwhile owners are automatically excluded from use of such trade mark and they have bound themselves contractually not to carry on similar activities in whatever name for a period of 15 years. In view of this, since the payment was composite payment at the time of acquiring the business, eventhough payable over a period of 15 years in monthly instalments, the ITAT came to a conclusion that the amount has to be treated as capital expenditure;
++ in view of the clear findings of the ITAT on the original agreement, we are of the opinion that the supplementary agreement bifurcating the monthly payments into use of trade mark and non-compete fee does not help assessee's case. Since the payments were also held to be capital in nature, respectfully following the Coordinate Bench decision we agree with the findings of the CIT(A) that the amounts cannot be allowed a revenue expenditure. In the course of argument the learned counsel tried to distinguish the facts in the present issue with that of the earlier year when the ITAT has considered the issue. It was his submission that consequent to the principles established by the Supreme Court in the case of Continental Construction Ltd. vs. CIT (2002-TIOL-661-SC-IT), the ITAT is bound to apportion the amount paid towards various services and accordingly the amount paid towards use of trade marks should be considered as revenue and the amount paid for non-compete fees should be considered as capital expenditure. We are unable to pursue ourselves with the argument of the learned counsel. First of all, as seen from the agreements entered with the erstwhile proprietary concerns by Assessee Company dated 02.09.1996 effective from 01.09.1996 the agreements were very clear that the entire specified business was transferred as ongoing concern to that of the company. This aspect was also discussed by the ITAT in its order in para 10, which was extracted above. The specified business as defined in the agreement includes the running business and infrastructural facilities, including continued use of registered trade names of the companies, i.e. the name of Supertex and Superchem in the respective cases.
MUMBAI : THE issues before the Tribunal are - Whether trade mark is inseparable from business and hence when the entire business is taken over as a going concern the trademark alone holds no meaning and whether when the entire business is taken over as a going concern, and a composite fee is paid for the same, the plea that the fee paid for use of trade mark is different from non-compete fee is sustainable. NO is the Tribunal's order.
Facts of the case
The assessee company is engaged in the manufacturing and trading of textile chemicals and auxiliaries including export thereof. Assessee entered into separate agreements effective from 01.09.1996 with the proprietors of two sister concerns, viz., Supertex (India) Corporation (proprietor M.G. Saraf) and Superchem (prop. M.G. Saraf, HUF), which were engaged in trading of chemicals in earlier years for a long period. As per the agreements the assets of the proprietary concerns were valued and the business was taken over as a going concerns. In addition to the amounts paid on the basis of valuation reports towards acquiring the assets and liabilities of the two proprietary concerns, the company also undertook to pay a sum of Rs 3.5 lakhs per month to Shri M.G. Safar and a sum of Rs 2,00,000/- per month to M.G. Saraf, HUF for a period of 15 years starting from 01.09.1996 to 31.08.2011. These amounts were payable as per the relevant clauses of agreements in consideration of the transfer and assignment of specific business as going concern and considering the non-compete obligation undertaking by the aforesaid two proprietary concerns. Accordingly assessee claimed the total amount of Rs 66,00,000/- as deduction in the respective assessment years, stated to be amount of Rs 9,00,000/- towards assignment fees and royalty of Rs57,00,000/. This claim was for the first time made in A.Y. 1997-98 and in subsequent years and the A.O. in the respective scrutiny assessments held the amount as capital expenditure and disallowed the same. This matter was carried to the ITAT, which by the orders in ITA 2218/Mum/2002 for A.Y. 1997-98 and ITA No. 3170/Mum/2002 for AY 1998-99 and ITA no. 3171/Mum/2002 for A.Y. 1999-2000 dated 17th October 2005 held that the amounts were capital in nature. However, during the impugned assessment years assessee made a separate claim on the basis of the supplementary agreement entered into by assessee company w.e.f. the first day of April 2002 with the above said two persons on the basis of which the payment of Rs 3, 50,000/- and Rs 2,00,000/- payable to the respective parties were in turn bifurcated as Rs 3,00,000/- towards use of trade name Supertex and Rs50,000/- towards non compete fees in the case of M.G. Saraf and Rs1,75,000/- towards use of trade name Superchem and Rs25,000/- towards non-compete fees to M.G. Saraf, HUF. On the basis of these supplementary agreements assessee claimed the amounts as assignment fees and royalty for the use of trade name. The A.O., while relying on the findings of the ITAT with reference to the original agreement also held that the supplementary agreements in the name of making a clarificatory deed was a colourable transaction and the real purpose was to scuttle the legal and factual conclusion taken by the ITAT. Further he also held that the clarificatory deed was a sham transaction and was stage-managed merely with a view to evade income-tax, vide para 4.17 and 4.18 of the assessment order. Thus upholding the stand taken earlier AO disallowed the amount paid to the tune of Rs66,00,000/- holding it for non-compete fees and as capital expenditure. Aggrieved by the said order assessee preferred appeals before the CIT(A). The CIT(A) in the respective orders not only relied on the findings of the ITAT in earlier years but also agreed with the Assessing Officer's contentions that supplementary/clarificatory deed does not change the issue during this year as the same is an afterthought of assessee and which have been rightly held by the A.O. as a sham transaction and stage managed just to escape from the ITAT order against assessee in its own case. Thus holding, the CIT(A) rejected assessee's contentions more so relying on the order of the ITAT.
After hearing the parties the ITAT held that,
++ the ITAT considered the entire agreement and held that use of trade mark, if any, by the assessee company is only an inseparable part of the entire agreement. By the non-compete clause of the agreement erstwhile owners are automatically excluded from use of such trade mark and they have bound themselves contractually not to carry on similar activities in whatever name for a period of 15 years. In view of this, since the payment was composite payment at the time of acquiring the business, eventhough payable over a period of 15 years in monthly instalments, the ITAT came to a conclusion that the amount has to be treated as capital expenditure;
++ in view of the clear findings of the ITAT on the original agreement, we are of the opinion that the supplementary agreement bifurcating the monthly payments into use of trade mark and non-compete fee does not help assessee's case. Since the payments were also held to be capital in nature, respectfully following the Coordinate Bench decision we agree with the findings of the CIT(A) that the amounts cannot be allowed a revenue expenditure. In the course of argument the learned counsel tried to distinguish the facts in the present issue with that of the earlier year when the ITAT has considered the issue. It was his submission that consequent to the principles established by the Supreme Court in the case of Continental Construction Ltd. vs. CIT (2002-TIOL-661-SC-IT), the ITAT is bound to apportion the amount paid towards various services and accordingly the amount paid towards use of trade marks should be considered as revenue and the amount paid for non-compete fees should be considered as capital expenditure. We are unable to pursue ourselves with the argument of the learned counsel. First of all, as seen from the agreements entered with the erstwhile proprietary concerns by Assessee Company dated 02.09.1996 effective from 01.09.1996 the agreements were very clear that the entire specified business was transferred as ongoing concern to that of the company. This aspect was also discussed by the ITAT in its order in para 10, which was extracted above. The specified business as defined in the agreement includes the running business and infrastructural facilities, including continued use of registered trade names of the companies, i.e. the name of Supertex and Superchem in the respective cases.
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