Taxability of Agreeing to Obligation to Refrain / Tolerate an Act or Situation or to do an Act.

[Dr. Sanjiv Agarwal]

According to section 66E(e) of the Finance Act , 1994, as inserted   by Finance Act, 2012,  agreeing to the obligation to refrain from an act, or to tolerate on act or a situation, or to do an act shall be a declared service and  liable to service tax.

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.

• Agreeing to the obligation to refrain from an act.

• Agreeing to the obligation to tolerate an act or a situation.

• Agreeing to the obligation to do an act.

This is a new entry which was not taxable in erstwhile provisions prior to Finance Act, 2012.

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 cases where a transaction may involve rendering of a service or even non-rendering of a service but consideration is involved - an entry where a non-action or non-service event also becomes taxable because consideration is involved.

Examples –

(a) non compete fees for agreeing not to compete.

(b) compensation on termination of business agreements.

(c) advance 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 services.

(e) Cancellation charges being charged by airlines, hotels etc.

(f) Consideration for non-appearance in a court of law or withdrawal of suit.

(g) Demurrage charges or detention charges.

The above are only examples and one can visualize and imagine any more actions or inactions which Department  may seek to impose service tax on.

 

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