A ‘non-compete right’ is not an ‘intangible asset’ and therefore not eligible for depreciation

A ‘non-compete right’ is not an ‘intangible asset’ and therefore not eligible for depreciation

The taxpayer, a joint venture of Sharp Corp, Japan, and L&T Ltd, paid L&T, a consideration for not competing with it for seven years. The taxpayer claimed that the non-compete fee was revenue in nature. It also claimed, alternatively, that the rights under the non-compete agreement were an ‘intangible asset’ under Section 32(1)(ii) of the Act, eligible for depreciation. The AO rejected the taxpayer’s claim.
The High Court held that the advantage derived by the taxpayer from the non-compete agreement entered into with L&T is for a substantial period of seven 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 and profitability. The advantage falls in the capital field. With regard to depreciation on an ‘intangible asset’, the High Court held that the non-compete rights cannot be treated as an ‘intangible asset’ under Section 32(1)(ii) of the Act because the nature of the rights mentioned in the definition of an ‘intangible asset’ spell out an element of exclusivity which inures to the taxpayer as a sequel to the ownership. The ‘intangible asset’ should be such that, but for the ownership of the ‘intangible asset’, the taxpayer would be unable to either access the advantage or assert the right ‘in rem’ i.e. as against the world. In the case of a non-competition agreement, it is a right ‘in personam’ where the advantage is restricted and does not confer an exclusive right to carry-on the primary business activity. The rights under a non-competition agreement cannot be transferred; the same is purely personal. As a result of the above the said right cannot be termed as an ‘intangible asset’.

Sharp Business System v. CIT [ITA 492/2012 & CM APPL. 14836/2012, dated 5 November 2012]
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