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Informist, Friday, Dec. 19, 2025

 

NEW DELHI – The Supreme Court Friday held that the non-compete fee paid by one company to another was revenue expenditure and therefore, allowed for income tax deduction under the Income Tax Act, 1961. Non-compete fee is paid by one party to another to restrain the latter from competing  in the same line of business. 

 

The apex court said the purpose of non-compete payment is to give a headstart to the business of the payer. It can also be for the purpose of protecting the business of the payer or to enhance the profitability of the business by insulating the payer from competition, said the top court, rejecting the income tax department's argument that this payment was capital expenditure.

 

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

 

"As long as the enduring advantage is not in the capital field, where the advantage merely facilitates in 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 of such expenditure," said a bench of Justice Manoj Misra and Justice Ujjal Bhuyan.

 

A payer gives non-compete fee in anticipation that absence of competition from the other party may secure some benefit to the party paying the compensation, said the court, adding that there was no certainty that such benefit would accrue. Notwithstanding such an arrangement, the payer may still not achieve the desired result, the court said. 

 

The apex court set aside a Delhi High Court order of 2012 that held the expenditure incurred by Sharp Business System by way of non-compete fee paid to Larsen & Toubro Ltd. could not be claimed as a revenue expenditure as it was clearly a capital expenditure. Regarding remaining appeals by Pentasoft Technology Ltd., Piramal Glass Ltd., and others, the court said it would be appropriate if the matters were remanded back to the respective Income Tax Appellate Tribunals, all appeals and cross-appeals filed were revived and heard afresh having regard to the ratio laid down in the judgment. 

 

Sharp Business System was engaged in the business of importing, marketing and selling electronic office products and equipment in India. It was incorporated in 2000 as a joint venture of Sharp Corp., Japan, and Larsen & Toubro. L&T is in the business of developing, manufacturing, marketing, distributing and selling, amongst other things, electronic equipment in India.

 

During the assessment year 2001-02, Sharp Business System paid a sum of INR 30 million to L&T as consideration for the latter not setting up or undertaking or assisting in the setting up of or undertaking any business in India of selling, marketing and trading in electronic office products for seven years. The amount of INR 30 million was claimed as a deductible revenue expenditure in the return of income filed by the assessee for the assessment year 2001-02. 

 

However, the Income Tax department said that by making payment of INR 30 million to L&T, the assessee could ward off competition in business. The object of making such payment to L&T was to derive an advantage by eliminating competition for a period of seven years, said the department. According to the tax department, such an expenditure had brought into existence an advantage of enduring nature and accordingly should be treated as capital expenditure. Therefore, the said amount was added to the income of the assessee. Similar issues arose with respect to other companies and the case eventually reached the top court.  End

 

Reported by Surya Tripathi

Edited by Vandana Hingorani

 

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