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Validity Of Non Compete Agreement
Majmudar & Co., International Lawyers, India 3
Mumbai Office – Tel: +91 22 6630-7272; Fax: 6630-7252; E-mail: mailbox@majmudarindia.com
Bangalore Office – Tel: +91 80 4147-0000; Fax: 4147-0010; E-mail: mailbox@majmudarindia.com
Integrated Network Offices – New Delhi, Chennai and Hyderabad
Coca Cola Company, AIR 1995 SC 2372) However, in an old case, where the
defendant and the plaintiff used to carry on the business of ferrying boats and
arrived at a business settlement whereby the defendant promised to pay a certain
amount to the plaintiff in order that the plaintiff abstain from carrying on his boat
business for a period of three (3) years, the court held that the agreement was void
as the restraining covenant was a vital part of the agreement and did not fall under
the “goodwill exception” to section 27 of the IC Act. (Parasulla Mallick v.
Chandra Kanta Dass, AIR 1918 Cal 546)
In conclusion, covenants that prohibit employees from engaging in a business
similar to or competitive with that of the employer beyond the term of
employment are invalid. The same applies to non-compete agreements between
companies, except franchise agreements, notwithstanding that, the popular view is
that non-compete arrangements between companies are valid.
On many occasions, business exigencies require impositions of certain restraints.
The attitude towards public policy has always been subject to change in tandem
with the change and development in trade and economic thought. Therefore, the
general principle applicable to agreements in restraint of trade needs to be suitably
modified. In this regard, the Law Commission of India has recommended in its
13
th
report that section 27 of the IC Act should be amended so as to allow
restrictions and contracts in restraint of trade, if they are in the interest of the
parties as well as of the public. However, no action has been taken so far.
Under recent amendments to India’s Income-tax Act, 1961, any sum received or
receivable in cash or kind under an agreement for not carrying out any activity in
relation to any business or for not sharing any know how, patent, copyright,
trademark, licence, franchise, or any other business or commercial right of similar
nature, or information or technique likely to assist in the manufacture or
processing of goods of provision for services, will now be chargeable to tax as
profits or grains from business or profession. Therefore, the revenue authorities
seek to tax payments received by companies for entering into non-compete
covenants as business profits. The issue that arises is whether taxability of such
payments validates the underlying transactions. In our opinion, until judicial
precedents to the contrary are pronounced, there will always be a question mark as
regards validity of non-compete covenants.
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