Madras HC rules on depreciation of non-compete fee paid

 

This tax alert summarizes a recent ruling of the Madras High Court in the case of Pentasoft Technologies Ltd. (Taxpayer) on the issue of availability of depreciation on non-compete fee. Considering the facts of the case, the HC held that non-compete fee paid to the transferor under a composite agreement, inter alia, involved transfer of trade names, trademarks, service marks, patents, copyrights, confidential information, computer programs and all other intangible property rights of software, together with associated goodwill (specified intellectual property rights (IPRs)) of the identified business division and, hence, is eligible for depreciation under the ITL. Furthermore, the HC held that the non-compete clause in the composite agreement should be read as a supporting clause strengthening the transfer of specified IPRs of the business transferred under the agreement.

Admissibility of depreciation on payment towards non-compete fee is a contentious issue. In this case, the Taxpayer paid non-compete fee to the transferor under the composite agreement for restraining him from entering into similar business for ten years. The HC granted depreciation on non-compete fee by treating it as strengthening or supporting the primary transfer of various IPRs rather than giving rise to an independent commercial right by itself.