To be an “intangible asset” u/s 32(1)(ii), the rights must be “in rem” & transferable. A “non-compete right” is not an “intangible asset” though “goodwill” is

Sharp Business System vs. CIT (Delhi High Court)

 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)