SPECIFIED OBLIGATIONS UNDER DECLARED SERVICES

[Dr. Sanjiv Agarwal]

Declared Services

Following nine activities have been specified in Section 66E as declared services –

1. renting of immovable property;
2. 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;
3. temporary transfer or permitting the use or enjoyment of any intellectual property right;
4. development, design, programming, customization, adaptation, up-gradation, enhancement, implementation of information technology software;
5. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
6. transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods;
7. activities in relation to delivery of goods on hire purchase or any system of payment by installments;
8. service portion in execution of a works contract;
9. 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.

Obligation related services

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:

1. Agreeing to an obligation to refrain from an act.
2. Agreeing to an obligation to tolerate an act or a situation.
3. 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 three parts:

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 particular profession.

 2)   Obligation to tolerate an act or a situation

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.

b)  Pre-payment 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.

Examples

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:

1. non-compete fees for agreeing not to compete.
2. Compensation on termination of business agreements.
3. advance forfeited for cancellation of agreement to provide a   service.
4. Forfeiture of security deposit for damages done by service receiver in course of receiving of services.
5. Cancellation charges being charged by airlines, hotels etc.
6.  Consideration for non-appearance in a court of law or withdrawal of suit.
7. Demurrage charges or detention charges at ports, airports, warehouses, railways etc.