Non-compete right’ acquired by an assessee is eligible for depreciation under clause (ii) of section 32(1) of IT Act

CASE LAW DETAILS
Decided by:. ITAT, BENCH `A’ CHENNAI, In The case of: ITO v Medicorp Technologies India Ltd., Appeal No. : ITA No. 2328/Mds/2007, Decided on: January 16, 2009

SUMMARY OF CASE LAW

Capability to have a market value, assignability, transferability, diminution in value, are no more the touch stones on which the admissibility for depreciation under section 32 has to be tested; consequently, if the business/commercial right of a patent, copy right, trade mark, license and franchise fulfills the conditions of being intangible asset as mentioned in clause (ii) of section 32(1), then surely the business/commercial right by way of non-compete right acquired by the assessee also fulfills that condition, by way of a logical corollary.

RELEVENT PARAGRAPH
12.2 One can see very clearly that the clause (ii), introduced in section 32(1), w.e.f.01-04- 1999, not only extended the benefit of section 32 to the `intangible assets’ but also gave therein an `inclusive’ definition of the `intangible assets’, for this purpose.

15.4 It becomes clear from the above discussion that capability to have a market value, assignability, transferability, diminution in value, are no more the `touch stones’ on which the admissibility for depreciation u/s 32 of the Act has to be tested. We are living in the commercial world of `e-banking’, `e-commerce’ , and `e-governance’ , the old, archaic, traditional concepts have undergone a sea change, and our law-makers have truly kept pace with the change.


21. It is 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. The relevant clause (6) of paragraph III of the agreement dated 12-07-2000, reads as under

`IIII——- ——— —–

(6) Non-compete obligation: MS shall not, for a period of 10 years from the date of this agreement-

(a) directly or indirectly sell, market, initiate steps for registration of products in foreign markets-

(b) conduct business outside India on its own, or with a partner-in-bulk drugs, pharmaceuticals products and formulations” .

21.1 There is no ambiguity or controversy with regard to these facts. Therefore, it can 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.

22. It is clear from the language of the clause (ii) to section 32(1) that each the terms, know-how, patents, copyright, trade mark, licenses, or franchise, represents a `business or a commercial right’. Our job will be 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 is a `similarity’ . It is like comparing the shade of the colour of two objects. In this exercise we will take the help of the principle of ejusdem generic.

23. The principle of ejusdem generic 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.

28. In the case of copy right, trade mark, license, and franchises also the owners have exclusive business/commercial rights, and if there is a breach they can sue.

29. And, consequently, if the business/commercial right, of a patent, copy right, trade mark, license, and franchise, fulfills the conditions of `being intangible asset’, then surely the impugned business/commercial right acquired by the assessee also fulfills that condition, by way of a logical corollary.

31. We, therefore, hold that the impugned `non-compete right’ acquired by the assessee-company, was eligible for depreciation under clause (ii) of section 32(1) of the Act. The order of Commissioner (Appeals) is, accordingly, upheld