Non-compete fees recorded in books: Claim of depreciation considering such fees as an intangible asset
- The Assessee was engaged in the business of providing pest control services. It claimed depreciation on customer list and goodwill at the rate of 25% treating them as an intangible asset.
- While making the assessment, the Assessing Officer required the Assessee to explain the claim of depreciation. The Assessee submitted that it wanted to expand its pest management and control service operations and for that it had acquired business of M/s. Maykar Pest Control for a total consideration of Rs. 1.6 crores by entering into a Business Transfer Agreement. The consideration was allocated to tangible assets based on the valuation carried out by individual valuer and the balance consideration was allocated towards customer list and goodwill. According to Accounting Standard 26, the Assessee had capitalized customer list and goodwill as intangible asset and claimed depreciation @ 25% as per the Income tax rules for intangible assets.
- The Assessee further contended before the Assessing Officer that the customer list and goodwill would fall within the definition of intangible assets being payment for acquisition of business or commercial rights.
- However, the Assessing Officer held that the purchase price paid was nothing but non-compete fee paid to the transferor by the Assessee and the Assessee had renamed it as customer right/ goodwill. Therefore, he disallowed the depreciation claimed by the Assessee.
- The provisions of Section 32(1) Explanation 3 shows that the expression asset meant to include intangible assets being knowhow, patents, copyrights, trademarks…. any other business or commercial rights of similar nature.
- The provisions of Section 92B in respect of international transactions under the Explanation thereto has provided that the expression intangible property would include under clause-(f) “customer related intangible assets such as customer list, customer contacts, …”, thus, the legislature in its wisdom in respect of the international transactions provided for the expression intangible property to include intangible assets such as customer list in Section 92B then an interpretation difference from the same cannot be taken under the same applicable act and that too to the detriment of local business and citizens.
- Further, the Tribunal placed reliance on the decision of the Hon’ble Madras High Court in the case of M/s.Pentasoft Technologies Ltd. wherein it was observed that the agreement therein was a composite agreement and under the agreement, the transferor had transferred all its rights, copy rights to the transferee and in order to strengthen those rights transferred, the non-compete clause was supporting the clause to strengthen the commercial right which was transferred in favour of the transferee.
- In the present case of the case also, the Business Transfer Agreement was a composite agreement and the non-compete clause therein was supporting clause to strengthen the commercial rights which had been transferred to the Assessee herein.
- Further, a perusal of the decision of the in the case of M/s. Cosmos Co-op Bank Ltd. showed that even the customer list was treated as falling within the expression “business or commercial rights of similar nature” contained in Section 32(1)(ii) of the Act.
- Therefore, considering the same in the present facts of the case, the Assessee was entitled to claim the depreciation on the intangible asset viz., goodwill/ customer list.