Thursday 19 July 2012

Non compete fee transaction within the group entities- Not Acceptable

In Pentamedia Graphics Ltd. V. Dy. CIT (2012) 22taxmann.com216 the assessee being engaged in the business of multimedia computer graphics and animation hived off software and training division to its sister concern and claimed a part of the consideration towards brand name "Pentasoft", transfer of IPRs in the software developed by the assessee and also towards non compete fee. On the other hand the AO worked out a portion attributable to the transfer of goodwill of the software division of
the assessee company and further valued the same at Rs. 126 crores. He thus levied short term capital gain tax on the same

The Chennai Tribunal accepted the stand of the revenue that the assessee has made an attempt to suppress the true colour of the payment towards the goodwill by stating that payments were made towards non compete fee, IPR on brand/brand value, etc. especially since the assessee as well as its sister concern M/s. Pentafour Technologies Limited had a common CEO and the companies were working under a common management. There was interlacing of activities and interlocking of funds. More so for the fact that the group concerns were not working at loggerheads there was thus according to the bench no de facto situation which demands payment of non-compete fee by the assessee's sister concern to the assessee company. The bench however directed the AO to tax such gain as long term capital gain as the assessee was in the business for five years.

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