Non-Compete Fee Allowable as Revenue Expenditure | SC

Case Details: Sharp Business System vs. Commissioner of Income-tax - [2025] 181 taxmann.com 657 (SC)

Judiciary and Counsel Details

• Ujjal Bhuyan & Manoj Misra, JJ.
• Raj Bahadur Yadav, AOR, Ajay Vohra, Sr. Adv., Aniket Deepak Agrawal, Aor, Vaibhav Kulkarni & Akash Shukla, Advs. for the Appellant.
• Prakash Kumar, Amarjit Singh Bedi, Shreyash Kumar, Ms. Surekha Raman, Harshit Singh, Yashwant Sanjenbam, Sidharth Nair, Prashant Singh Ii, Siddharth Sinha, Ms. Sonali Jain, Sarthak Karol, Dr. Arun Kumar Yadav, Ms Aditi Dani, Abhyudey Kabra, Rajat Vaishnaw, Mudit Bansal, S Vijay Adithya, Prabhakar Yadav, Advs., Rahul Gupta, AOR, Arvind P. Datar, Sr. Adv. & S. Dwarakanath, A.S.G. for the Respondent.

Facts of the Case

Assessee, a public limited company, was engaged in the business of software development, hardware sales, technical training and engineering services. It filed its return of income for the relevant assessment year, declaring a net loss. During the assessment proceedings, the Assessing Officer (AO) computed the assessee’s total income and made several disallowances. One of the disallowances concerned the depreciation claim on the non-compete fee.

Aggrieved-assessee preferred an appeal to the CIT(A), where it contended that the non-compete fee was nothing but a license. Assessee could exclusively carry on the business of software development, training and export of technologies by restraining M/s. Pentamedia Graphics Limited is not allowed to carry out the same activities. Thus, the payment of the non-compete fee was held to be an intangible asset entitled to depreciation under Section 32(1)(ii).

The matter, after passing through the ITAT and the High Court, was carried in appeal before the Supreme Court.

Supreme Court Held

The Supreme Court ruled that non-compete fee is paid by one party to another to restrain the latter from competing with the payer in the same line of business. The restriction may be limited to a specified territory or otherwise; similarly, it can be for a specified period or otherwise. The purpose of a non-compete payment is to give the payer’s business a head start. It can also be for the purpose of protecting the payer’s business or enhancing its profitability by insulating it from competition.

Thus, the non-compete fee seeks only to protect or enhance the business’s profitability, thereby facilitating its carrying on more efficiently and profitably. Such payment neither results in the creation of any new asset nor accretion to the profit-earning apparatus of the payer. The enduring advantage, if any, of restricting a competitor in business is not in the capital field.

Following the judicial trend, it can be safely inferred that the length of time over which the enduring advantage may enure to the payer is not determinative of the nature of expenditure. As long as the enduring advantage is not in the capital field, where the advantage merely facilitates carrying on the business more efficiently and profitably, leaving the fixed assets untouched, the payment made to secure such advantage would be an allowable business expenditure, irrespective of the period over which the advantage may accrue to the payer (assessee) by incurring such expenditure.

Thus, the Supreme Court held that a payment made by the assessee as a non-compete fee is an allowable revenue expenditure under Section 37(1) of the Act.

List of Cases Reviewed

• Sharp Business System v. Commissioner of Income Tax [2012] 27 taxmann.com 50/254 CTR 233/211 Taxman 576 (Delhi) (para 30) set aside
• SA Builders Ltd. v. CIT [2007] 158 Taxman 74 (SC)/[2007] 288 ITR 1 (SC) (para 40) followed

List of Cases Referred to

• Sharp Business System v. CIT-III [2012] 27 taxmann.com 50/254 CTR 233/211 Taxman 576 (Delhi) (para 4)
• Pentasoft Technologies Ltd. v. DCIT [Tax Case APPEAL No. 1134 of 2008, dated 20-11-2013] (para 4.1)
• Pentasoft Technologies Ltd. v. DCIT [Tax Case Appeal No. 1195 of 2008, dated 29-10-2013] (para 4.2)
• Pr. CIT v. Piramal Glass Limited [IT Appeal No. 556 of 2017, dated 11-6-2019] [IT Appeal No. 556 of 2017, dated 11-6-2019] (para 4.3)
• (CIT, Chennai Vs. M/s. Pentasoft Technologies Limited Tax Case (Appeal) No. 600 of 2010, dated 11-1-2022] (para 4.4)
• Techno Shares & Stocks Ltd. v. CIT [2010] 193 Taxman 248 (SC)/[2010] 327 ITR 323 (SC) (para 12.10)
• Empire Jute Co. Ltd. v. CIT [1980] 3 Taxman 69 (SC)/[1980] 124 ITR 1 (SC) (para 12.3)
• CIT v. Madras Auto Service (P.) Ltd. [1998] 99 Taxman 575 (SC)/[1998] 233 ITR 468 (SC) (para 12.5)
• CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) (para 12.6)
• Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) (para 12.6)
• Guffic Chem (P.) Ltd. v. CIT [2011] 10 taxmann.com 105 (SC)/[2011] 198 Taxman 78 (SC)/[2011] 332 ITR 602 (SC) (para 14.1)
• CIT v. Bharti Hexacom Ltd. [2023] 155 taxmann.com 322 (SC)/[2023] 458 ITR 593 (SC) (para 14.1)
• Pitney Bowes India (P) Ltd. v. CIT 2011 SCC OnLine Del 5114 2011 SCC OnLine Del 5114 (para 14.1)
• Pitney Bowes India (P.) Ltd. v. CIT [2012] 17 taxmann.com 116/254 CTR 38/204 Taxman 333 (Delhi) (para 14.1)
• Liquidators of Pursa Limited v. CIT [1954] 25 ITR 265 (SC) (para 14.10)
• Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC)/[1999] 239 ITR 775 (SC) (para 14.10)
• CIT v. McDowell & Co. Ltd. [2009] 180 Taxman 514 (SC)/[2009] 314 ITR 167 (SC) (para 14.5)
• Siddeshwari Cotton Mills (P) Ltd. v. Union of India 1989 taxmann.com 634 (SC) (para 14.5)
• Sree Durga Distributors v. State of Karnataka (2007) 4 SCC 476 (para 14.6)
• Mohd. Shabir v. State of Maharashtra (1979) 1 SCC 568 (para 14.6)
• CIT v. Hindustan Coca Cola Beverages (P.) Ltd. [2011] 9 taxmann.com 104 (Delhi)/[2011] 198 Taxman 104 (Delhi)/[2011] 331 ITR 192 (Delhi) (para 14.7)
• Atherton Vs. British Insulated and Helsby Cables Ltd (1925) 10 TC 155 (para 18)
• S.A. Builders Ltd. v. CIT (Appeals) [2007] 158 Taxman 74 (SC)/[2007] 288 ITR 1 (SC) (para 35.3).