By TIOL News Service

NEW DELHI, AUG 14, 2017: THE appellant entered into a non-compete agreement with another company M/s Jai Suspension Systems Ltd. (JSSL) committing that they would not set up any factory or sell parabolic springs and tapered leaf to Tata Motors Ltd., Uttarakhand. For this act, they received consideration of Rs. 5 crores. Incidentally, it is also on record that JSSL is a wholly owned subsidiary of the appellant.

It is the stand of the department that the appellant by entering into such an agreement supported the business of JSSL by agreeing not to sell the goods to Tata Motors Ltd. and such 'support services' are covered and taxable under the category of 'Support services of business or commerce' under the FA, 1994.

The CCE, Indore confirmed the service tax demand of Rs.51,50,000/- along with interest and equivalent penalty.

Aggrieved, the appellant is before the CESTAT.

After considering the submissions made by both sides, the Bench extracted the definition of 'Support services of business or commerce' appearing in section 65(104c) and that of 'taxable service' in section 65(105)(zzzq) of the FA, 1994 and observed thus –

++ 'Non-compete agreement' which actually provided business and commercial support to other party viz. JSSL in relation to JSSL's business and commerce, would be covered under the definition of 'support service of business or commerce' of Section 65(104c) and the corresponding taxable service of 65(105)(zzzq) of the Finance Act. Had there been no support, the appellant would not have got non-compete agreement fee of Rs. 5 crores.

++ This non-compete agreement fee of Rs.5 crores is the consideration for the support service provided to the business and commercial activities of JSSL, who is otherwise a competitor of the appellant as both parties to the agreement deal in the common business of designing, developing, manufacturing, marketing, selling, commercializing, distribution and promotion of automotive suspension systems.

Concluding that the activity of 'entering into non-compete agreement with JSSL' is nothing but a service covered by 'support service of business and commerce' and, therefore, the consideration received for the said services is taxable, the impugned order was sustained and the appeal was dismissed as without merit.

(See 2017-TIOL-2923-CESTAT-DEL)