Refraining from an act/ tolerating an act / situation - Service Tax Practice Manual / Ready Reckoner - Service Tax

Chapter 5 Refraining from an act/ tolerating an act / situation Effective date: 1.7.2012 Scope of Declared Service - Section 66E (e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Analysis: This is a new category of activity which has been covered into service tax by this entry. It covers followings activities: Agree to refrain from an act, Agree to tolerate an act, Agree to tolerate a situation and Agree to do an act. All these activities if agreed upon for a consideration, it will cover in this entry and will be liable to service tax. Example of such activities: - Non-compete agreement in which one party agrees not to complete with another company for a certain number of years in a particular territory for some agreed consideration. - Non initiation of legal proceedings in which one party agrees not to initiate legal proceedings on a dispute in consideration for money or money s worth. Clarification by the Board (Taxation Guide - Guidance Note -6 - Exemptions dated 20.06.2012) 6.7 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act 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. 6.7.1 Would non-compete agreements be considered a provision of service? Yes. By virtue of a non-compete agreement one party agrees, for consideration, not to compete with the other in any specified products, services, geographical location or in any other manner. Such action on the part of one person is also an activity for consideration and will be covered by the declared services.