Deductibility of expenses

Tax queries 628 views 2 replies

siddharth

C.A.

175 Points Joined June 2007

Facts of case:

There is Indian company which is in business providing the high-quality services in education, training and other related activities and method of training for impart of education for pre-schools for children. It proposes to enter contract with Educational trust ( Say X) to provide the aforesaid services for a period of thirty years on an exclusively basis. However, the Indian Co. is required to pay 5 crores as fixed fees to X since the X will avail educational services from Indian Co. only for 30 years. Also The Indian Co. is free to provide similar educational services to other Educational trust but it that other Educational trust should not be within 3 kilometer of X educationl service.

This fees is not in nature of non compete in nature as Indain Co is free to provide similar servies to other educational service provider subject to condition of 3 kilometer criteria as above.

Query

Whether the Fixed fee of 5 cores will be allowed as dedcution as revenue expenses under Income tax? Or will depreciation will be allowed under intangible asset? please provide your views in support of case law.

Regards

Siddharth

Replies (2)

Amir

Learner

4016 Points Joined December 2009

Hi Siddharth,

I want to confirm it, because after reading the fact I THINK WHAT U ARE TRYING TO SAY IS THAT

THERE IS COMPANY WHICH ENTERS INTO AN AGREEMENT FOR PROVIDING SERVICES OVER 30 YEARS AND FOR PROVIDING SERVICES IT IS PAYING RS. 5 CRORES...(AMAZING, COMPANY IS PROVIDING SERVICES AS WELL AS PAYING MONEY - don't mind brother i m not making fun of ur query it's just that somehow it is not making sense or may be i am not getting what u are trying to say)

ANYWAYS, LETS CONCENTRATE OVER THE MAIN ISSUE THAT WHAT SHOULD BE THE TREATMENT OF ONE TIME EXPENSE FOR 30 YEARS CONTRACT...

I DON'T THINK IT CAN BE TREATED AS "INTANGIBLE ASSET" SINCE THIS PAYMENT IS NOT IN ANYWAY CONFERRING ANY COMMERCIAL RIGHT ON THE COMPANY...

ONE IMPORTANT THING IS THAT EVEN IF CANNOT BE TREATED AS A INTANGIBLE ASSET THAT DOESN'T MEAN THAT IT HAS TO BE CHARGED TO REVENUE IN THE FIRST YEAR..

LET'S TAKE AN EXAMPLE OF PREPAID INSURANCE, THE PREMIUM OF UNEXPIRED PERIOD IS CARRIED AS AN ASSET THAT'S BECAUSE OF ACCOUNTING CONCEPTS..(NEEDLESS TO MENTION THAT IN INCOME TAX ALSO THE SAME TREATMENT IS FOLLOWED)

SIMILARLY, IF THIS ONE TIME PAYMENT OF 5 CRORES HAS SOME RELATION WITH THE TERM OF THE CONTRACT THEN IT CAN BE CHARGED TO REVENUE ON PRO RATA BASIS AND SAME WILL BE ALLOWED UNDER INCOME TAX ALSO..

HOWEVER IF THE SAID PAYMENT IS JUST A KIND OF BROKERAGE/COMISSION FEE FOR ACQISITION OF THE CONTRACT THEN IT SHOULD BE CHARGED TO REVENUE IN THE FIRST YEAR...

B.Harekrishna Acharya

Engineer

23 Points Joined February 2009

There cannot be a contract without "consideration". Company providing services as well as paying for the services means there is no consideration paid to the company for the services provided. Hence, its an invalid contract.