INCOME TAX ACT, 1961

--Capital or revenue expenditure--Non-compete fee Payment to ward off competition for 7 years--Assessee-company used to import, market and sell electronic office products and equipment in India at the relevant time, was incorporated as a joint venture of M/s. S, Japan and L&T. Assessee during relevant year paid Rs. 3 crores to L&T as consideration to latter for not setting up or undertaking or assisting in setting up or undertaking any business in India of selling, marketing and trade of electronic office equipment for 7 years. This amount was treated as deferred revenue expenditure in books and written off over a period of 7 years. Assessing officer treated non-compete fee as capital expenditure. Commissioner (Appeals) upheld order of assessing officer and he also rejected alternative plea regarding allowance of depreciation. Tribunal also upheld order of Commissioner (Appeals). Held: Amount paid as a non-compete fee for 7 years was not a revenue expenditure and also same was not entitled to depreciation as it was not an intangible right/under section 32(1)(ii).

In the present case, the appellant is a joint-venture between M/s. Sharp & L&T. Apparently, the agreement entered into with the L&T in view of the changed relationship ensures that the latter does not enter into the same business. Although it is contended that the advantage is only by way of facilitation of the appellant's business and ensuring greater efficiency as well as profitability, on the other side, what can be seen is that the arrangement is to endure for a substantial period, i.e., 7 years. Coupled with the fact that the L&T has its own presence in consumer goods sector and would be, if it chooses – able to put up an effective competition for business engaged in by the assessee, there is no doubt that the amount is to ensure a certain position in the market by keeping-out L&T. Applying the test indicated in the Empire Jute Co. Ltd., Alembic Chemical Works Co. Ltd. and Coal Shipments P. Ltd., this Court is of the opinion that the deduction cannot be claimed as a revenue expenditure; it clearly falls within the capital field. [Para 10] As would be evident from section 32(1)(ii), depreciation can be allowed in respect of intangible assets. Parliament has spelt-out the nature of such assets by express reference to know-how, patents, copyrights, trademarks, licenses and, franchises. So far as patents, copyrights, trademarks, licenses and franchises are concerned, though they are intangible assets, the law recognizes through various enactments that specific intellectual property rights flow from them. Licenses are derivative and often are the means of conferring such intellectual property rights. The enjoyment of such intellectual property right implies exclusion of others, who do not own or have license to such rights from using them in any manner whatsoever. Similarly, in the matter of franchises and know-how, the primary brand or intellectual process owner owns the exclusive right to produce, retail and distribute the products and the advantages flowing from such brand or intellectual process owner, but for the grant of such know-how rights or franchises. In other words, out of these species of intellectual property like rights or advantages lead to the definitive assertion of a right in rem. [Para 11] The question here, however, is whether a non-compete right of the kind acquired by the assessee against L&T for seven years amounts to a depreciable intangible asset. Each of the species of rights spelt-out in section 32(1)(ii), i.e., know-how, patent, copyright, trademark, license or franchise as or any other right of a similar kind which confers a business or commercial or any other business or commercial right of similar nature has to be intangible asset. The nature of these rights mentioned clearly spell-out an element of exclusivity which ensures to the assessee as a sequel to the ownership. In other words, but for the ownership of the intellectual property or know-how or license or franchise, it would be unable to either access the advantage or assert the right and the nature of the right mentioned or spelt-out in the provision as against the world at large or in legal parlance 'in rem'. However, in the case of a non-competition agreement or covenant, the advantage is a restricted one, in point of time. It does not necessarily and not in the facts of this case, confer any exclusive right to carry-on the primary business activity. The right can be asserted in the present instance only against L&T and in a sense, the right 'in personam'. Indeed, the 7 years period spelt-out by the non-competing covenant brings the advantage within the public policy embedded in section 27 of the Contract Act, which enjoins a contract in restraint of trade would otherwise be void. Another way of looking at the issue is whether such rights can be treated or transferred a proposition fully supported by the controlling object clause, i.e., intangible asset. Every species of right spelt-out expressly by the Statute i.e., of the intellectual property right and other advantages such as know-how, franchise, license etc. and even those considered by the Courts, such as goodwill can be said to be alienable. Such is not the case with an agreement not to compete which is purely personal. As a consequence, it is held that the contentions of the assessee are without merit; this question too is answered against the appellant and in favour of the revenue. [Para 12] Words 'similar business or commercial rights' have to necessarily result in an intangible asset against the entire world which can be asserted as such to qualify for depreciation under Section 32(1)(ii). [Para 13]