2024 (6) TMI 43 - AT - Service Tax

Demand of Service tax - Taxability of Non-compete and Non-solicit agreement - Applicability of Mega Exemption Notification No. 25/2012-Service Tax - Whether sale of equity shares of an ongoing concern can be subjected to service tax even when no consideration is received towards non-compete and non-solicit condition in the agreement for transfer of equity shares - HELD THAT - From the finding of the adjudication authority, it is an admitted fact that the business transfer carried out by the Appellant is related to an ongoing concern and as per the Mega Exemption vide Notification No. 25/2012-Service Tax dated 20.06.2012 Service by way of transfer of a going concern is fully exempted from all of the service tax leviable thereon. From the evidences on record, no finding can be made that substantial portion of the agreement refers to the conditions/obligations to be followed by M/s SILP like non-compete clauses, performance guarantee for two years etc., since they have not received any consideration as held by the Adjudicating authority. Even on merit, terms and conditions in the agreement entered by M/s SILP and Ola are general in nature and considering the indemnity clause, there is no consideration involved in the present agreement to quantify the service element in the above said agreement. As held by Hon ble Apex Court in the matter of M/s Ishikawajma Harima Heavy Industries 2007 (1) TMI 91 - SUPREME COURT , in construing a contract, the terms and conditions thereof are to be read as a whole. A contract must be construed keeping in view the intention of the parties. No doubt, the applicability of the tax laws would depend upon the nature of the contract, but the same should not be construed keeping in view the taxing provisions. Similarly, as observed by the Tribunal in the matter of M/s Universal Medicare 2019 (6) TMI 166 - CESTAT AHMEDABAD , an agreement has to be interpreted as per the language and intention of the parties to such agreement. Once an ongoing concern is transferred along with assets and liabilities by paying huge amount, it is just obvious that if such non-compete clause is not present, the transferor could immediately start the same business. Hence, such clause is normal in transfer of business and the condition of non-compete clause cannot be separated from the contract concluded between the parties to bring the transaction under the ambit of service tax by denying the benefit of Notification No.25/2012-Service tax. Moreover, Ministry of Finance vide Circular No. 178/10/2022 dated 03.08.2022 clarified that under service tax, GST demand, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute consideration and hence such activities do not constitute supply within the meaning of the Act. Demand of service tax set aside. Since the entire tax liability is set aside, interest and penalty imposed on Appellants is also set aside with consequential relief, if any, in accordance with law.

Summary

Issues Involved:
1. Whether the sale of equity shares of an ongoing concern can be subjected to service tax.
2. Consideration for non-compete and non-solicit conditions.
3. Applicability of Notification No. 25/2012-Service Tax.
4. Determination of dominant character of the agreement.
5. Invocation of the extended period of limitation.

Summary:

Issue 1: Whether the sale of equity shares of an ongoing concern can be subjected to service tax.
The core issue in the appeal was whether the sale of equity shares of an ongoing concern could be subjected to service tax when no consideration was received towards non-compete and non-solicit conditions in the agreement for the transfer of equity shares. The Appellants argued that the amount received was solely for the sale of equity shares and no consideration was attributed to the non-compete and non-solicit clauses. The Tribunal found that the business transfer was related to an ongoing concern and was exempted from service tax as per Notification No. 25/2012-Service Tax dated 20.06.2012.

Issue 2: Consideration for non-compete and non-solicit conditions.
The Adjudicating authority had held that the buyout was to eliminate competition and considered 80% of the transaction amount as consideration for the non-compete agreement. However, the Tribunal concluded that there was no specific consideration for the non-compete and non-solicit clauses and thus, no service tax could be levied. The Tribunal referred to various judgments and the Ministry of Finance Circular No. 178/10/2022, which clarified that payments for non-compete clauses in such contexts do not constitute 'consideration' for service tax purposes.

Issue 3: Applicability of Notification No. 25/2012-Service Tax.
The Tribunal emphasized that the transfer of an ongoing concern is fully exempt from service tax under Notification No. 25/2012-Service Tax. The business transfer carried out by the Appellant was related to an ongoing concern, and thus, the entire transaction was exempt from service tax.

Issue 4: Determination of dominant character of the agreement.
The Tribunal noted that the dominant character of the agreement was the sale of shares and transfer of an ongoing concern, not the non-compete clause. The terms and conditions of the agreement were general in nature and did not indicate any specific consideration for the non-compete clause. The Tribunal referred to the judgment in M/s Bharat Sanchar Nigam Ltd., emphasizing the importance of determining the dominant nature of a composite transaction.

Issue 5: Invocation of the extended period of limitation.
The Adjudicating authority had invoked the extended period of limitation, alleging suppression of facts. However, since the Tribunal concluded that the transaction was exempt from service tax, the question of invoking the extended period of limitation did not arise.

Conclusion:
The Tribunal allowed the appeal filed by the Appellant, set aside the impugned Order-in-Original No. 6/2019 dated 20.11.2019, and dismissed the appeals filed by the Revenue. The entire tax liability, interest, and penalties imposed on the Appellant were set aside, with consequential relief in accordance with the law.