2024 (2) TMI 964 - AT - Service Tax

Business transfer with non-compete clause qualifies for service tax exemption under Notification 25/2012

Mr. Naveen Chava, Mr. Srikar Reddy Vempati, Sicon Design Technologies Pvt. Ltd. Versus Commissioner of Central Tax, Bengaluru

CESTAT Bangalore held that a business transfer agreement with non-compete clause qualified for exemption under Notification No. 25/2012-Service Tax for ... Declared Service u/s 66 E(e) of FA or not - Business Transfer Agreement (BTA) entered by the Appellant having a non-compete clause - HELD THAT:- The business transfer carried out by the Appellant is related to an ongoing concern and as per the mega exemption vide Notification No. 25/2012-Service tax dated 20/06/2012 “Service by way of transfer of a going concern is fully exempted from all of the service tax leviable thereon. From the evidence on record, no finding can be made that substantial portion of the agreement refers to the conditions/obligations to be followed M/s Sicon like non-compete clauses, performance guarantee for two years etc., for which they have received consideration of Rs. 106,79,67,816/- as held by the Adjudicating authority. As observed by the Tribunal in the matter of M/s Universal Medicare [2019 (6) TMI 166 - CESTAT AHMEDABAD], an agreement has to be interpreted as per the language and intention of the parties to such agreement. Once an ongoing concern is transferred along with assets and liabilities by paying huge amount, it is just obvious that if such noncompete clause is not present, the appellant could immediately start the same business. Hence such clause is normal in transfer of business and the condition of noncompete clause cannot be separated from the contract ended between the parties to bring the transaction under the ambit of service tax by denying the benefit of notification No. 25/2012-Service tax. Moreover, Ministry of Finance vide Circular No. 178/10/2022 dated 03.08.2022 clarified that under service tax, GST demand, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute ‘consideration’ and hence such activities do not constitute “supply” within the meaning of the Act. Since the entire service tax liability is set aside, interest and penalty imposed on Appellants are also set aside - Appeal allowed. Issues Involved:1. Classification of Business Transfer Agreement (BTA) with a non-compete clause as Declared Service under Section 66 E(e) of the Finance Act, 1994.2. Applicability of service tax on the transfer of an ongoing concern.3. Determination of consideration for non-compete clauses in the context of service tax.Summary:Issue 1: Classification of BTA as Declared ServiceThe issue in these appeals is whether the Business Transfer Agreement (BTA) entered by the Appellant having a non-compete clause can be classified as Declared Service under Section 66 E(e) of the Finance Act, 1994 for demanding service tax. The Adjudication authority confirmed the demand of service tax and imposed penalties, alleging that agreeing to obligations/refrain from certain activities should be treated as a Declared service.Issue 2: Applicability of Service Tax on Transfer of Ongoing ConcernThe Appellants argued that the transfer of an ongoing concern, as per the mega exemption Notification No. 25/2012-Service Tax dated 20/06/2012, is exempt from taxable service. The Adjudication authority admitted that the business transfer was related to an ongoing concern, which is fully exempt from service tax. The Tribunal noted that no substantial portion of the agreement referred to conditions/obligations like non-compete clauses for which consideration was received.Issue 3: Determination of Consideration for Non-Compete ClausesThe Appellants contended that the terms of the agreement, including the non-compete clause, were general and did not involve a quantifiable service element. The Tribunal referred to the judgment in Ishikawajma Harima Heavy Industries, emphasizing that contracts must be construed as a whole, keeping in view the parties' intentions. The Ministry of Finance's Circular No. 178/10/2022 clarified that payments for non-compete clauses do not constitute 'consideration' for taxable services unless made for an independent activity of tolerating an act.Conclusion:The Appeals were allowed, and the impugned order was set aside. The Tribunal concluded that the non-compete clause is a standard part of business transfer agreements and does not constitute a separate service liable for service tax. Consequently, the interest and penalties imposed on the Appellants were also set aside, with consequential relief as per law.