Non-compete consideration and CENVAT credit limits: specific statutory entitlement prevailed over presumptive service tax demands.

Consideration for a non-compete agreement was held not taxable under Business Auxiliary Service because liability in a taxing statute cannot rest on presumption and the notice failed to identify the exact statutory sub-clause or direct promotion activity. Full utilisation of common CENVAT credit was also upheld for services covered by Rule 6(5) of the CENVAT Credit Rules, 2004, since the general restriction under Rule 6(3) does not override the specific credit entitlement unless the services are used exclusively for exempted supplies. The tax, interest and penalty demands were set aside.

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Issues: (i) Whether consideration received for a non-compete agreement was taxable under Business Auxiliary Service. (ii) Whether full CENVAT credit on common input services could be utilised where the services fell within Rule 6(5) of the CENVAT Credit Rules, 2004.

Issue (i): Whether consideration received for a non-compete agreement was taxable under Business Auxiliary Service.

Analysis: The demand was founded on an assumption that agreeing not to compete indirectly promoted the client's business. In a taxing statute, liability cannot rest on presumption, and the promotion of the client's business must be direct. The agreement did not contain any clause showing such promotion. The notice also failed to specify the precise sub-clause of the definition under which the activity was sought to be classified, and a notice must state the exact nature of the alleged contravention.

Conclusion: The demand under Business Auxiliary Service was unsustainable and was set aside.

Issue (ii): Whether full CENVAT credit on common input services could be utilised where the services fell within Rule 6(5) of the CENVAT Credit Rules, 2004.

Analysis: The restriction in Rule 6(3) on utilisation of common credit does not apply to the specified services covered by Rule 6(5). Rule 6(5) permits credit of the whole service tax paid unless the services are used exclusively for exempted goods or exempted services. The appellant was providing taxable output services and the notice did not allege exclusive use for exempted services. The credit utilised related to services covered by Rule 6(5), so the demand based on an alleged 20% cap was contrary to the statutory scheme.

Conclusion: The appellant was entitled to full utilisation of the credit, and the demand on this count was unsustainable.

Final Conclusion: The impugned order was set aside and the appeal was allowed, with the consequential demands of tax, interest, and penalty disappearing.

Ratio Decidendi: Taxability must be clearly pleaded and established by the revenue, and where the statute grants a specific credit exception, that exception prevails over a general restriction unless the statutory conditions for denial are shown to exist.

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