Transfer of business agreements with non-compete clauses cannot be categorized as Declared Service for the purpose of levying Service Tax.

The CESTAT, Bangalore, in the matter of Naveen Chava v. Commissioner of Central Tax [Service Tax Appeal No. 20013 of 2021 dated January 30, 2024], determined that there is no evidence indicating that a significant part of the agreement pertains to the obligations to be fulfilled by the Appellants. Additionally, if any payment is made for an independent activity of tolerating an act under a separate arrangement, such payments do not qualify as ‘consideration.’ Consequently, Business Transfer Agreements (BTAs) entered by the Appellants, which include a non-compete clause, cannot be categorized as Declared Service under Section 66E (e) of the Finance Act, 1994, warranting the imposition of Service Tax.

Facts:

The CESTAT, Bangalore, in the matter of Service Tax Appeal No. 20013 of 2021, ruled as follows:

Naveen Chava and Others (“the Appellants”) were involved in designing integrated sheets/circuits for the telecom industries. On July 27, 2020, they entered into a Business Transfer Agreement (BTA) with M/s. Altran Technologies India Pvt. Ltd. (“M/s. Altran”), encompassing the sale, transfer, grant, assignment, and delivery of all their rights, title, and interests related to the business as a going concern, on a slump sale basis as defined in Section 2(42C) of the Income Tax Act, 1961 (“the IT Act”).

The Directorate General of Goods and Service Tax Intelligence (“the DGGI”) conducted an investigation and contended that the agreement to refrain from certain activities for 2 years should be treated as a Declared Service. Subsequently, a Show Cause Notice dated December 19, 2019 (“the Impugned SCN”) was issued to the Appellants, alleging that the services provided by them to M/s. Altran fall under the category of Service as per Section 66E (e) of the Finance Act. The Adjudication Authority (“the Respondent”) then issued an Order dated August 28, 2020 (“the Impugned Order”), confirming the demand for Service Tax and imposing a penalty on the Appellants.

Therefore, the Appellants filed the present appeal, expressing their dissatisfaction with the Impugned Order.

Issue:

Can the Business Transfer Agreement (BTA) entered into by the Appellant, featuring a non-compete clause, be categorized as Declared Service, thus warranting the imposition of Service Tax?

Held:

1. Noted that, based on the facts presented, the business transfers executed by the Appellants pertained to an ongoing concern and, according to the Exemption Notification No. 25/2012-Service Tax dated June 20, 2012, services involving the transfer of a going concern are entirely exempt from Service Tax. In this case, there is no evidence indicating a significant portion of the agreement outlining the conditions or obligations to be adhered to by the Appellants, such as non-compete clauses, a two-year performance guarantee, etc., for which they purportedly received consideration amounting to INR 1,06,79,67,816, as determined by the Respondent.

2. Stated that non-compete clauses are customary in business transfers, and their conditions cannot be isolated from the overall contract between the parties to bring the transaction within the purview of Service Tax while denying the benefit of the Exemption Notification.

3. Cited the case of Ishikawajma Harima Heavy Industries v. Director of Income Tax, Mumbai [2007 (3) SCC 481)], emphasizing that when interpreting a contract, its terms and conditions should be considered as a whole. The intention of the parties should guide the construction of the contract, and while tax laws’ applicability depends on the contract’s nature, it should not be construed solely in light of tax provisions.

4. Referenced the case of M/s. Universal Medicare Pvt. Ltd. v. C.C.E. & S.T., [Service Tax Appeal No. 11161 of 2017-DB dated June 02, 2019], where the Tribunal held that an agreement should be interpreted according to the language and intention of the parties involved. If an ongoing concern is transferred along with assets and liabilities through substantial payment, the absence of a non-compete clause would allow the Appellants to immediately commence the same business.

5. Highlighted that the CBIC, through Circular No. 178/10/2022 dated August 03, 2022, clarified that under Service Tax, unless payment has been made for an independent activity of tolerating an act under a distinct arrangement, such payments do not constitute ‘consideration.’ Consequently, these activities do not qualify as “supply.”

6. Consequently, the appeal was granted, and the Impugned Orders were overturned.