30 SOT 506 (CHENNAI)
IN THE ITAT CHENNAI BENCH ‘A’
Income-tax Officer (OSD), Company Circle IV(2), Chennai
Medicorp Technologies India Ltd.
H.S. SIDHU, JUDICIAL MEMBER
AND AHMAD FAREED, ACCOUNTANT MEMBER
IT APPEAL NO. 2328 (MAD.) OF 2007
[ASSESSMENT YEAR 2002-03]
JANUARY 16, 2009
Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment year 2002-03 - Whether allowance for ‘depreciation’ under section 32 is a statutory allowance, and it is not confined, to diminution in value of asset by wear and tear - Held, yes - Whether capability to have a market value, assignability, transferability and, diminution in value, are not ‘touch stones’ on which admissibility for depreciation under section 32 has to be tested - Held, yes - Assessee-company was engaged in business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to USA, Canada, Europe and Australia - It wanted to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs and medicines - Another company (MS) was engaged in business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South-East Asian countries - MS agreed to transfer its export business to assessee vide agreement dated 12-7-2000 - Consideration payable by assessee to MS for transfer of its export business was an amount of Rs. 5,33,00,000 of which Rs. 200 lakhs were towards compensation for acceptance of non-compete obligation, in respective exports of bulk drugs, pharmaceutical products and formulations - Assessee claimed deduction of impugned payment of Rs. 2 crores as revenue expenditure - Assessing Officer rejected assessee’s claim on plea that expenditure of Rs. 2 crores was purely capital in nature - Assessing Officer also rejected assessee’s alternative claim that depreciation be allowed under section 32(1) on non-compete fee- Commissioner (Appeals) held that assessee was entitled to depreciation on non-compete fee of Rs. 2 crores at rate of 25 per cent inasmuch as through payment of non-compete fee, assessee-company acquired a commercial or business right similar to intangible assets enumerated in section 32(1)(ii) - He also held that right acquired by payment on non-compete fee was a business or commercial right similar to know-how, patents, copyrights, trademarks, licences, and franchisees and, accordingly, allowed depreciation to above extent - Whether Commissioner (Appeals) was justified in his view - Held, yes
Interpretation of statutes : Rule of ejusdem generis
The assessee-company (MTIL) was engaged in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these products to USA, Canada, Europe and Australia. The assessee wanted to expand its market reach to South American and African countries, for its own products as well as for other formulations, drugs and medicines.
Another company (MS) was engaged in the business of development and production of medical and pharmaceutical formulations and had been exporting it to various South American, African and South-East Asian countries. MS agreed to transfer its export business to the assessee-company vide agreement dated 12-7-2000.
The consideration payable by the assessee to MS for transfer of its export business, was an amount of Rs. 5,33,00,000 of which (a) Rs. 200 lakhs, were towards compensation for acceptance of non-compete obligation, in respective exports of bulk drugs, pharmaceutical products and formulations, (b) Rs. 200 lakhs were towards the use of brand name in countries other than India, and (c) Rs. 133 lakhs were towards transfer and assignment of product registration, business agreements, dossiers and licences, including dossiers pending approval.
In the computation of total income filed with the return, the assessee had claimed the impugned payment of Rs. 2 crores, towards compensation for acceptance of non-compete obligation, as revenue expenditure. The Assessing Officer rejected this claim on the plea that since the payment of Rs. 2 crores was towards off competition in the export business, the expenditure was purely capital in nature.
The assessee made an alternative claim before the Assessing Officer, saying that depreciation be allowed under section 32(1) on the non-compete fee. The Assessing Officer rejected this claim also. On appeal, the Commissioner (Appeals) held that the assessee was entitled to depreciation on the non-compete fee of Rs. 2 crores at the rate of 25 per cent inasmuch as through payment of non-compete fee, the assessee-company acquired a commercial or business right similar to the intangible assets enumerated in section 32(1)(ii). He also held that the right acquired by payment of non-compete fee was a business or commercial right similar to know-how, patents, copy-rights, trade marks, licences and franchisees.
On revenue’s appeal:
The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective life time and the amount written off during an accounting period is intended to represent the proportion of such expenditure, which has expired during that period. For the purpose of determining the true profits in the commercial sense or under the principles of accountancy, the wear and tear of the assets utilized by the assessee, for the purpose of earning his profit, is considered and a deduction is made in the computation of profit. [Para 14]
But the allowance for ‘depreciation’ under section 32 is a statutory allowance, and it is not confined, necessarily, to the diminution in the value of the asset by wear and tear. The provisions relating to allowance of ‘depreciation’ in a taxing statute like the Act, also contain elements of incentives and are governed by the considerations of the policy of the tax and do not reflect purely economic criteria. The grant of exemptions and the benefit of depreciation and the extent of that benefit are part of the economic wisdom of taxation determined by the law-makers. [Para 15]
The provisions of section 32 do not necessarily follow the traditional concept of an ‘asset’, and an accountant’s approach to ‘depreciation’. It is also clear from the above discussion that capability to have a market value, assignability, transferability and diminution in value, are not ‘touch stones’ on which the admissibility for depreciation under section 32 has to be tested. [Paras 15.3 and 15.4]
Therefore, in order to examine the claim for ‘depreciation’ under the Act, one has to confine himself to the language of the provisions of section 32 and need not take the help of a dictionary meaning, particularly when there is no ambiguity in the language of the section. In a taxing statute, one has to look merely at what is clearly said. One has to look fairly at the language used. [Para 16]
The words ‘being intangible assets’ appear in clause (ii) of section 32(1) by way of a nomenclature, to contradistinguish the items appearing in clause (ii)from those appearing in clause (i). One can also say that clause (ii) contains an ‘inclusive’ definition of ‘intangible assets’, for the purpose of section 32. [Para 19]
It was an admitted fact that the payment of Rs. 2 crores was made by the assessee-company to ward off competition in the export business which was acquired by it from MS. Therefore, it could be safely concluded, without any further discussion, that what was acquired by the assessee by paying this amount of Rs. 2 crores was a business commercial right. [Para 21.1]
It is clear from the language of the clause (ii) to section 32(1) that each of the terms, know-how, patents, copyright, trade mark, licenses, or franchise, represent a ‘business or a commercial right’. Hence, one has to examine the ‘nature’ of these business/commercial rights and compare with the ‘nature’ of the impugned business/commercial right which was acquired by the assessee, and see whether there was a ‘similarity’. It is like comparing the shade of the colour of two objects. In this exercise, one is to take the help of the principle of ejusdem generis. [Para 22]
The principle of ejusdem generis applies where the mention of specific items of the same genus is followed by an expression of a general or a residuary nature pertaining to the same genus. The scope of this rule is that words of a general nature following specific and particular words should be construed as limited to things which are of the same nature as those specified. It signifies a principle of construction. [Para 23]
If a group or family of ‘genus describing terms’ are followed by general or sweeping or residuary words, then the verbal context and the linguistic implications of the preceding words limit the scope of such general words. The preceding words, in the statutory provision which, under this particular rule of construction, control and limit the meaning of the subsequent words, must represent a genus or a family which admits of a number of species or members. It is essential for the application of the rule of ejusdem generis that the specific items before the general words constitute a category or a genus. [Para 23.1]
A ‘patent’ gives its owner an exclusive right to make and sell the subject-matter of the ‘patent’ for a particular period of time. The grant of a ‘patent’, to any individual or a firm, provides an individual or a firm competitive advantage over others within a given industrial field. [Para 24]
A ‘patent’ is intended to protect the commercial exploitation of ideas, which are original, new and unobvious. It is a Government supported monopoly. It ensures that those who incur a cost of ‘inventing’ will reap its reward if users find the result worth paying for. This cannot occur if others reap where the inventor has sown. The ‘patent’ system is designed to stop the ‘free riding’ by non-patentees. [Para 24.1]
A ‘copyright’ means a right conferred upon its owner in respect of his literary, dramatic, musical or artistic work. It does not really mean a right to do something, but only the right to exclude others from the doing of certain specific acts and things. A ‘patent’ is distinguishable from a ‘copyright’. The owner of the ‘copyright’ has a sole right and he has the right to exclude all others from reproducing his work without his permission. The ‘copyright’ gives protection to its owner from the necessity of having to compete with the product of his own effort. [Para 25]
A ‘trade mark’ is a symbol attached to goods or services that adds or creates a distinctive quality to the product by associating it in the buyer’s mind with some manufacturer or distributor. Its main purpose is to eliminate ‘free riding’ by other manufacturers of similar goods and services. The property consists in the right of the owner to use the ‘trade mark’ in relation to specified goods and under certain circumstances to prevent others from using it. It ensures that the established reputation of one manufacturer is not appropriated by another by ‘passing off’, or misrepresentations. It is essentially part of a marketing strategy. The owner is granted excluded right to control the use of his ‘trade mark’ and the articles to which it is attached. [Para 26]
A person who buys a ‘patent’ acquires an exclusive business/commercial right, and if there is a breach, he can sue. In the instant case also, the assessee-company acquired an exclusive business/commercial right, and in the case of a breach, the assessee could sue. Therefore, the business/commercial right acquired by the assessee was of the ‘same nature’ as the business/commercial right of a ‘patent’. [Para 27]
In the case of copyright, trade mark, license and franchisees also, the owners have exclusive business/commercial rights; and if there is a breach, they can sue. [Para 28]
Consequently, if the business/commercial right of a patent, copyright, trade mark, license and franchise, fulfils the conditions of ‘being intangible asset’, then surely the impugned business/commercial right acquired by the assessee also fulfilled that condition, by way of a logical corollary. [Para 29]
Therefore, the impugned ‘non-compete right’ acquired by the assessee-company, was eligible for depreciation under clause (ii) of section 32(1). The order of the Commissioner (Appeals) was, accordingly, upheld. [Para 31]
A.B. Mauria India (P.) Ltd. [IT Appeal No. 1293/(Mad.) of 2006, dated 23-11-2007]; Guruji Entertainment Network Ltd. v. Asstt. CIT  14 SOT 556 (Delhi); Bharatbhai J. Vyas v. ITO  97 ITD 248 (Ahd.) and M.M. Nissim & Co. v. Asstt. CIT  18 SOT 274 (Mum.) (para 7) distinguished.
CASES REFERRED TO
Bharatbhai J. Vyas v. ITO  97 ITD 248 (Ahd.) (para 2), A.B. Mauria India (P.) Ltd. [IT Appeal No. 1293 (Mad.) of 2006, dated 23-11-2007] (para 7), Guruji Entertainment Network Ltd. v. Asstt. CIT  14 SOT 556 (Delhi) (para 7) and M.M. Nissim & Co. v. Asstt. CIT  18 SOT 274 (Mum.).
K. Ravi for the Appellant. Shaji P. Jacob for the Respondent.