ORDER

Ahmad Fareed, Accountant Member. - This appeal by the department is directed against the order of CIT(A) dated 25-6-2007, for assessment year 2002-03.

2. The only issue involved in this appeal, by the department, relates to the claim of depreciation on non-compete fee paid by the assessee. The grounds raised by the department in this appeal are as under:

1. The order of the learned CIT(A) is contrary to law and facts of the case.

2.1 The learned CIT(A) erred in directing the Assessing Officer to allow depreciation on the non-compete fee of Rs. 2 crores at the rate of 25 per cent by holding that 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) of the Income-tax Act.

2.2 Having regard to the exposition of the phrase, "any other business or commercial rights of similar nature" found in section 32(1)(ii) by the Hon'ble Ahmedabad Tribunal in the case of Bharatbhai J. Vyas v. ITO [2005] 97 ITD 248 , in the context of allowability of depreciation for goodwill under section 32(1)(ii), the learned CIT(A) ought not to have held that the right acquired by payment of non-compete fee is a business or commercial right similar to know-how, patents, copyrights, trade marks, licences, franchises.

3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.

3. The assessee-company (MTIL) is in the business of manufacture and distribution of bulk drugs and intermediaries, and exporting these pro-ducts 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.

4. Another company, Medispan Limited (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 the business and activities of its export division to assessee-company (MTIL) vide agreement dated 12-7-2000.

5. The consideration paid by the assessee (MTIL) to MS for transfer of its export business aggregated to Rs. 5,33,00,000. The paragraph III of the agreement dated 12-7-2000 reads as under:

"...........

III. In the above background the parties to the agreement agree as follows.—

1. That the subject-matter of this agreement is the export business of MS Transfer of the export business of MS would include transfer and assignment of :—

(a) all export business rights, registrations, licenses and dossiers including documentation related to product development, master formula and related validation documents for products contained in Annexure-I,

(b) registrations pending approval contained in Annexure-II, including dossiers and product information submitted.

(c) products for which registration dossiers are under preparation for submission contained in Annexure-III.

(d) use of registered brand names contained in Annexure-IV, in all countries other than India.

(e) assignment of business arrangements with existing export business associates contained in Annexure-V.

(f) transfer of man power of export department of MS and MTIL reserves the right to select the personnel of its choice from among—

******

2. The parties further agree that none of the current assets and the fixed assets of the export business of MS form part of the activity and business proposed to be transferred by MS to MTIL pursuant to this agreement.

3. MS shall, forthwith on signing of this agreement, transfer/assign all its rights relating to the export business of MS (as stated in Clause III(1) of this agreement) and initiate all actions to change the product registrations and pending registration applications standing in the name of MS to MTIL.

4. MTIL shall become the sole and legal owner of all the export business rights, registrations, licenses and dossiers including documentation, master formula and related validation documents for products contained in Annexure I to Annexure IV, as soon as they are transferred/assigned to MTIL.

5. MTIL shall have the right to use the manufacturing facility of MS situated at Moogappair Industrial Estate, Chennai for manufacture of formulations on terms and conditions to be agreed upon mutually, for a maximum period of three years from the date of this agreement.

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.

7. That the consideration, payable by MTIL to MS for transfer of its export business is an amount of Indian Rupees Five Hundred and Thirty Three Lakhs (Rs. 5,33,00,000) of which:—

(a) Rs. 200 lakhs, is towards compensation for acceptance of non-compete obligation, in respective exports of bulk drugs, pharmaceutical products and formulations.

(b)Rs. 200 lakhs is towards the use of brand name in countries other than India, and

(c) Rs. 133 lakhs is towards transfer and assignment of product registration, business agreements, dossiers and licences including dossiers pending approval."

6. 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, at clause 7(a) above, as revenue expenditure. The Assessing Officer rejected this claim.

6.1 The assessee made an alternative claim before the Assessing Officer, saying that depreciation be allowed under section 32(1) of the Act on the non-compete fee. The Assessing Officer rejected this claim also. The CIT(A) confirmed the Assessing Officer's action and his order has been challenged by the assessee in the present appeal.

7. Shri Shaji P. Jacob, the ld. DR, assailed the order of the CIT(A), and vehemently supported that of the Assessing Officer. He filed a written submission during the hearing of the appeal. The submissions made by him are summarized below :—

♦ that section 32(1)(ii) uses the words 'any other business or commercial rights of similar nature'.

♦ that by using the words 'similar nature', the Legislature has restricted the scope of 'intangible assets' to the specified ones, i.e., know-how, patents, copy rights, trade marks, licences, franchises.

♦ that in the present case, the assessee had acquired 'non-compete obligation' which is not an asset.

♦ that he drew our attention to the definition of 'asset' given in Advanced Law Lexicon by P. Ramanatha Aiyer (3rd Edition, 2005).

♦ that the 'non-compete obligation' acquired by the assessee is not an asset since it has no market value, it could not be sold or assigned, and it was not a transferable right.

♦ that since the right acquired through non-competition agreement was not an asset, there was no question of discussing whether it was an intangible asset or not, or whether it was similar to, 'know-how, patents, copy rights, trade marks, licenses, franchises'.

♦ that, without prejudice to above, even if 'non-compete obligation' is treated as an asset, it is not of a similar nature as 'know-how, patents, copyrights, trade marks, licenses, franchises'.

♦ that there is no diminution in the value of these assets.

♦ that the issue is covered, in favour of the department, by the decision of ITAT, Chennai, in the case of A.B. Mauria India (P.) Ltd. [IT Appeal No. 1293 (Mad.) of 2006, dated 23-11-2007].

♦ that, he placed reliance on the decisions of the Tribunal in the following cases, where it was held that 'Goodwill' was not similar to the items-specified in clause (ii), and therefore, was not eligible for depreciation.

(i) Guruji Entertainment Network Ltd. v. Asstt. CIT [2007] 14 SOT 556 (Delhi).

(ii) Bharatbhai J. Vyas' case (supra).

♦ that reliance was also placed on the decision of ITAT in the case of M.M. Nissim & Co. v. Asstt. CIT [2007] 18 SOT 274 (Mum.)

♦ that the order of the CIT(A) needed to be reversed and that of the Assessing Officer be restored.

8. Shri K. Ravi, the ld. AR reiterated the arguments which were put forward on behalf of the assessee before the Assessing Officer and the CIT(A). He also filed a written submission before us. His arguments are summarized below:—

♦ that the assessee had acquired a bundle of rights from MS vide agreement dated 12-7-2000.

♦ that the assessee had paid Rs. 2 crores for acquiring 'non-compete obligation', by which MS was restricted, for a period of ten years, from selling, marketing, registering products in foreign markets, conducting business outside India on its own or with a partner, in bulk drugs, pharmaceutical products and formulations.

♦ that the 'non-compete obligation' acquired by the assessee was a business/commercial right, to be used as a tool to carry on the business.

♦ that the 'non-compete right' acquired by the assessee was similar to those mentioned in clause (ii) of section 32(1) of the Act.

♦ that the CIT(A) was right in allowing the assessee's claim, and his order needed to be confirmed.

9. We have considered the rival submissions in the light of material on record and the precedents cited. In a nutshell, the issue for consideration before us is, whether the non-compete fee, paid by the assessee, qualifies for depreciation under clause (ii) of sub-section (1) of section 32 of the Act.

10. The relevant part of section 32 of the Act, which needs to be examined and interpreted, in order to decide the above issue, is reproduced below:—

"32. (1) In respect of depreciation of—

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed—"

11. The main argument of the learned DR, as given in paragraph 8 of his written submission, was that the 'right' acquired by the assessee through the non-compete agreement, on the facts of the present case, was not an 'asset' at all. In order to buttress his contention he drew our attention to the definition of 'asset' given in Advanced Law Lexicon by P. Ramanatha Aiyer (3rd Ed. 2005), as under:

"An asset must be one for which a market value can be ascertained. A right to personal services under a contract of service is unassignable, it cannot be bought or sold. It cannot survive the demise of either of the parties. It can have no actual market value and so it cannot be an asset. [O' Brien (Inspector of Taxes) v. Bensons Hosiery (Holdings) Ltd. [1978] 3 All ER 1057, 1063]

The right to trade freely and to compete in the market place is not an asset [Kirby v. Thorn Emi Plc. [1988] 2 All ER 947, 959 (CA)]."

11.1 The line of argument, adopted by the learned DR, was that the provisions of clause (ii) of sub-section (1) of section 32 did not need to be applied to the 'non-compete right' acquired by the assessee vide agreement dated 12-7-2000, because it did not fall within the definition of 'asset', as given in Advanced Law Lexicon (supra).

11.2 He explained that the 'non-compete obligation' acquired by the assessee was not an 'asset' because it had no market value, it could not be sold or assigned, it was incapable of being transferred by MTIL to anybody else, and the agreement did not make it a transferable right.

11.3 He proceeded to argue that if the 'right' acquired through non-compete agreement was not an 'asset', there was no need to go into the question whether it was an 'intangible asset', or whether it was similar to 'know-how, patents, copyrights, trademarks, licenses, franchises'.

12. Before proceeding further, we consider it necessary to mention, briefly, the legislative history and the scope of the provisions dealing with the benefit of 'depreciation' provided under the Income-tax Act, 1961.

12.1 The scope of section 32(1) was widened by the Finance Act, 1998 by allowing depreciation in respect of 'intangible assets' with effect from 1-4-1999. It was achieved by introducing clause (ii) in section 32(1) of the Act. Prior to this, depreciation was allowable only in respect of the 'tangible assets' namely, buildings, machinery, plant, or furniture. With the passage of time there have been conceptual changes in all areas of the commercial world.

12.2 One can see very clearly that the clause (ii), introduced in section 32(1), with effect from 1-4-1999, 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.

12.3 The 'computer software' was included in the Table in Appendix I to Rule 5 of the Income-tax Rules, 1962 for and from assessment year 2003- 04.

12.4 Section 32 adopts two methods in allowing depreciation - a straight-line method for oceangoing ships and a written-down-value method for other assets.

13. It is no doubt true that 'Depreciation', according to Webster's New World Dictionary, means "a decrease in the value of property through wear, deterioration or obsolescence, and the allowance made for this in book-keeping, accounting, etc." But the concept of 'depreciation' under the Income-tax Act became broader, with the passage of time, based on considerations of the fiscal policy of the Government.

14. From the point of view of an accountant, 'depreciation' is a measure of the effective life of an 'asset' owing to use or obsolescence during a given period. 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.

15. But the allowance for 'depreciation' under section 32 of the Act 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 Income-tax Act, 1961, also contain elements of incentives and are governed by the consi-derations 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.

15.1 In the Table in Appendix I to Rule 5 of the Income-tax Rules, 1962, there are items of assets for which depreciation is allowed at 100 per cent; but it could not mean that the effective life of these items is only one year. Similarly, no depreciation was admissible in respect of a motor car, manufactured outside India and acquired between 28-2-1975 and 31-3-2001; and it could not be inferred from these provisions that such cars did not undergo any wear and tear. One of the reasons for such apparent inconsistencies could be that the Government wanted to encourage the use of a certain type of assets and to discourage the use of assets of certain other type.

15.2 One could also give the example of a 'computer software', which was included in the Table in Appendix I to Rule 5 of the Income-tax Rules, 1962, for and from assessment year 2003-04. A computer software is basically a set of instructions written in a language that a computer understands. A computer software, that is available in the market, is generally for a single use; it cannot be used on more than one computer. This is ensured by the manufacturer with the help of a distinctive key or a password. (We are not talking here about the pirated versions of computer software.) And, generally, once it is loaded on a computer it cannot be resold, and it loses its assignability, and transferability. It has, practically, no market value thereafter, but still it remains eligible for depreciation under section 32 of the Act, year after year.

15.3 The above examples, show that the provisions of section 32 do not necessarily follow the traditional concept of an 'asset', and an accountant's approach to 'depreciation'. In fact, the taxation laws are known to have been used as a tool for implementing the economic/fiscal policies of the state.

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 under section 32 of the Act has to 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.

16. It is, therefore, necessary to note that in order to examine the claim for 'depreciation' under the Income-tax Act, 1961, one has to confine himself to the language of the provisions of section 32 of the Act, and need not take the help of a Dictionary or a Law Lexicon, 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.

17. Therefore, in order to decide the above issue we have to simply examine the provisions of clause (ii) of section 32(1) of the Act and apply these provisions to the facts of the present case.

18. We have to see whether the 'non-compete right' acquired by the assessee vide agreement dated 12-7-2000 is a 'business or commercial right'. If the answer to this question is in the affirmative, then we have to proceed further and see whether it is of a 'similar nature' as 'know-how, patents, copyright, trade mark, licenses, or franchises', as mentioned in clause (ii) of section 32 (1) of the Act.

19. The words, 'being intangible assets' appear in clause (ii) by way of a nomenclature, to contradistinguish the items appearing in clause (ii) from those appearing in clause (i). One can also say that the clause (ii) contains an 'inclusive' definition of 'intangible assets', for the purpose of section 32.

20. In the computation of total income filed with the return, the assessee had claimed the impugned payment of Rs. 2 crores as revenue expenditure. The Assessing Officer, while rejecting this claim, observed in paragraph 8 of his order as under:

"8. As per the term of the above mentioned agreement what the assessee has acquired is the transfer of the export activities and business division of M/s. Medispan Ltd. for an agreed consideration of Rs. 5.33 crores. MTIL becomes the sole and legal owner of all the export business rights after the transfer. Accordingly, Medispan cannot sell/market its products in foreign markets and conduct business outside India. In view of the above judicial decisions and also considering that the non-compete fee is to ward off competition, the expenditure is purely capital in nature."

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 12-7-2000, reads as under:

"III ...............

(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.

21.2 Now, since the first question mentioned in the above paragraph is answered in the affirmative we have to proceed to examine the second question, namely, whether this 'business/commercial right', acquired by the assessee, is of a 'similar nature' as 'know-how, patents, copyright, trade mark, licenses, or franchises'.

22. 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 franchises 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 generis.

23. 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.

23.1 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.

24. 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 that individual or firm with competitive advantage over others within a given industrial field.

24.1 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.

25. A 'copyright' means rights 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 'copyright'. The owner of the 'copy right' 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 efforts.

26. A 'trade mark' is a symbol attached to goods or services that adds of creates a distinctive quality to the product by associating it in the buyers 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 exclusive right to control the use of his 'trade mark' and the articles to which it is attached.

27. A person who buys a 'patent' acquires an exclusive business/commercial right, and if there is a breach he can sue. In the present case also the assessee-company acquired an exclusive business/commercial right, and in the case of a breach the assessee could sue. Therefore, we have no doubt in our mind that, on the facts of the case, the business/commercial right acquired by the assessee is of the 'same nature' as the business/commercial right of a 'patent'.

28. In the case of copyright, 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, 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 fulfils that condition, by way of a logical corollary.

30. The learned DR placed reliance on the decision of the ITAT, Chennai, in the case of A.B. Mauria India (P.) Ltd. (supra). In that case the Assessing Officer had allowed depreciation on non-compete fee and this order was set aside by the CIT under section 263, on the ground that the deduction for depreciation was allowed by the Assessing Officer without verification. The Assessing Officer was, accordingly, directed by the CIT, to redo the assessment in accordance with law. The said order of the CIT under section 263 was confirmed by the Tribunal. We have, very carefully, perused the order of the Tribunal, and in view of the detailed discussions in the above paragraphs, we are of the opinion, that the decision of the Tribunal (supra) does not support the case of the department, on the facts of the case in the present appeal.

30.1 The learned DR mentioned one more decision of ITAT, Chennai, which was based on the aforesaid decision of the Tribunal in the case of A.B. Mauria India (P.) Ltd. (supra). And, the other decisions of the Tribunal, relied upon by him, are distinguishable on facts and therefore, we do not consider it necessary to discuss those cases.

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 CIT(A) is, accordingly, upheld.

32. In the result the appeal filed by the department is dismissed.