Sharp Business System vs. CIT
The assessee, a joint venture of
Sharp Corp, Japan, and L&T Ltd, paid Rs. 3 crores to L&T as
consideration for the latter not competing with the assessee for 7 years. The
assessee claimed that the non-compete fee was revenue in nature. It also
claimed, in the alternative, that the rights under the non-compete agreement
were an “intangible asset” u/s 32(1)(ii) eligible for depreciation. The
AO, CIT(A) & Tribunal rejected the assessee’s claim. On further appeal by
the assessee before the Tribunal, HELD dismissing the appeal:
(i) The advantage derived by the
assessee from the non-compete agreement entered into with L&T is for a
substantial period of 7 years and ensures a certain position in the market by
keeping out L&T. The advantage cannot be regarded as being merely for
facilitation of business and ensuring greater efficiency & profitability.
The advantage falls in the capital field (Eicher 302 ITR 249 (Del)
distinguished; Pitney Bowles 204 Taxman 333 (Del) followed);
(ii) The non-compete rights cannot
be treated as an “intangible asset” u/s 32(1)(ii) because (a) the nature
of the rights mentioned in the definition of “intangible asset” spell
out an element of exclusivity which enures to the assessee as a sequel to the
ownership. But for the ownership of the intellectual property or know-how or
license or franchise, it would be unable to assert the right “in rem”,
as against the world. In the case of a non-competition agreement, it is a right
“in personam” where the advantage is restricted & does not confer an
exclusive right to carry-on the primary business activity. (b) Another way of
looking at the issue is whether such rights can be treated or transferred.
Every species of right spelt-out such as know-how, franchise, license etc. and
even those considered by 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
(Techno Shares & Stocks 327 ITR 323 (SC), Hindustan Coco Cola
Beverages 331 ITR 192 (Del) & B. Ravindran Pillai 332 ITR 531
(Ker) distinguished)
Note: The judgement in CIT vs. Smifs Securities Ltd
(Supreme Court) was not considered. See also ACIT vs. GE Plastics
India Ltd (ITAT Ahmedabad) where the law is considered.
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