activities have been specified in Section 66E as declared services –
a). renting of
b). construction of
a complex, building, civil structure or a part thereof, including a complex or
building intended for sale to a buyer, wholly or partly, except where the
entire consideration is received after issuance of certificate of completion by
a competent authority;
transfer or permitting the use or enjoyment of any intellectual property right;
design, programming, customization, adaptation, up-gradation, enhancement,
implementation of information technology software;
e). agreeing to the
obligation to refrain from an act, or to tolerate an act or a situation, or to
do an act;
f). transfer of
goods by way of hiring, leasing, licensing or any such manner without transfer
of right to use such goods;
g). activities in
relation to delivery of goods on hire purchase or any system of payment by
h). service portion
in execution of a works contract;
i). service portion
in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any
manner as part of the activity.
As per section
66E(e), ‘agreeing to an obligation to refrain from an act or to tolerate an act
or a situation, or to do an act,’ has been declared as a service. Refrain means
to keep oneself away from one act or feeling from a particular thing that somebody
does. In terms of this entry, the following activities, if carried out by a
person for another for consideration, would be treated as provision of service:
a). Agreeing to an
obligation to refrain from an act.
b). Agreeing to an
obligation to tolerate an act or a situation.
c). Agreeing to an
obligation to do an act.
This is a new entry
which was not taxable in erstwhile provisions prior to Finance Act, 2012.
Simply but, in case
a company or any other person enters into a non- compete agreement with another
person for a consideration, then it would be considered to be a declared
service and attract Service Tax. This entry covers cases, where a transaction
may involve rendering of a service or even non-rendering of a service but
consideration is involved. It also covers an entry where a non-action or
non-service event also becomes taxable because consideration is involved. Note
that the activities mentioned in the above clause have very wide ambit and may
be interpreted to include the transactions as far as the creativity in the mind
allows. However, one thing to be kept in view while determining whether it is a
declared service or not is that, the consideration should have a direct link
with the activity.
Scope of obligations
After referring to
the aforementioned definitions the said clause can be broken in to following
1) Obligation to refrain from an act
It means any act,
which binds a person, for not doing a particular act in the given circumstance.
For example – Non
Compete fees for not doing a particular business or not to practice a
2) Obligation to tolerate an act or a
It means to accept
the occurrences or existence of an act or a particular thing, which is imposed
by a condition or circumstances, in a contract, agreement or any other document
which is legally enforceable by law. The following are some of the examples:
a) Penalty on early
termination of rental or lease agreement.
charges on early payment of loan installment.
c) Demurrage charges
paid to the port authorities for not clearing the goods within a specified
period of time.
d) Compensation on
termination of business agreements.
e) advance forfeited
for cancellation of agreement to provide a service.
3) Obligation to do an act
It means to perform
or to do something, necessarily, prescribed in an agreement, contract, or any
other document which is required under any law for the time being in force.
The following are
the examples, where agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act may be considered as a declared
service and made liable to Service Tax:
a). non-compete fees
for agreeing not to compete.
b). Compensation on
termination of business agreements.
forfeited for cancellation of agreement to provide a service.
d). Forfeiture of
security deposit for damages done by service receiver in course of receiving of
charges being charged by airlines, hotels etc.
for non-appearance in a court of law or withdrawal of suit.
Demurrage charges or detention charges at ports, airports, warehouses, railways