In M/s. Kapil Chits (Kakatiya) Private Limited v. ACIT, a division bench of the Hyderabad ITAT held that expenditure in respect of payment of non-competent fee paid by a subsidiary company to its parent company is ‘revenue’ in nature if the payer has availed certain other services under the agreement.
Assessee, was a subsidiary company of M/s. Kapil Chit Fund (P) Ltd. In the year 2008, the assesse was floated by its parent company to do the chit fund business exclusively in northern Telangana Districts. As per the non-competent agreement between the both companies, the assessee has to pay 1% of its annual turnover for a period of 5 years as “non-compete fee” to Kapil Chit Fund (P) Ltd for not carrying out its business in northern Telangana Districts.
Assesse claimed that though the resolutions passed by the Board of Directors of Kapil Chit Funds (P) Ltd was that the non-compete fee agreement is valid till 31.12.2060, the agreement was for a fixed period of 5 years only and the agreement was also liable to be terminated at any time with a notice of 10 months by either parties. It therefore, contended that the non-competent fee paid by it cannot be treated as ‘capital’ in nature since the benefit acquired by M/s. Kapil Chit Funds (P) Ltd by virtue of the agreement is not of enduring nature. It further contended that the assessee has availed various other services under the agreement and the payment for such services was included in the “non-compete fee”.
Therefore, according to him, the payment is not for acquiring of capital asset but was for earning of income and hence is allowable under Section 37(1) of the Income Tax Act.
The division bench, citing a plethora of decisions, noted that the restrictive covenant is only for a period of 5 years and is extendable by a further period as mutually agreed to by both the parties. The agreement is also liable to be terminated with prior notice of 10 months.
It further noted that the agreement also includes various other services to be provided by Kapil Chit Funds (P) Ltd to the assessee company and the payment was not just for non-competition.
It therefore, said that the payment of non-competent fee was revenue expenditure as without the said payment, the assessee could not have carried on its business more efficiently and profitably.
Read the full text of the Order below.
