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Service tax on goodwill

Subrahmanya N (Others) (36 Points)

09 April 2014

Anyone clarify, Whether Service Tax applicable on Goodwill....?

Thanks

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12 Replies

ADITYA (Chartered Accountant) (124 Points)
Replied 09 April 2014

One needs to analyse the reason behind the payment for goodwill. If sale, then no levy of service tax is attracted. In case of payment as a non compete fees, implications of service tax may arise.

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Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 09 April 2014

in my opinion- Goddwill is an intengible asset. and on purchase or sale of any asset not attract service tax.

Section 65B (44) - "service" means any activity carried out by a person for another for consideration, and includes a declared service, ……………… .

hope this will clarify ur doubt.....

Subrahmanya N (Others) (36 Points)
Replied 09 April 2014

Hi, thanks for your reply.

Further information;

>Payment made towards Acquisition of Business and not specifically for Goodwill

>As per Valuation Report, small portion of the amount shown as Intangible Asset in the Financials

>As per Service Tax Authorities - Goodwill attract Service Tax under Intellectual Property Rights

We given an explanation stating, payment made only on acquisition of business and not specifically for goodwill and also clarified them, that Permanent Purchase of Goodwill will not attract Service Tax. But the department is not convencing.

Hence, we need, further clarity on this.

Thanks

Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 09 April 2014

but the goddwill is the brand name which is created by the business during its business life and if one can sold its business than-

is there the taxation process will differ in business amount and godwill amount???

Subrahmanya N (Others) (36 Points)
Replied 09 April 2014

Bifurcation of the amount are mentioned in the Intangible assets as follows;

a) Customer relationship and non compete rights

b) Intellectual property and other related intangible

c) Goodwill

Department is in the opinion that, ST applicable on Goodwill...!?

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Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 09 April 2014

but is the dept. have sufficient proof to prove that the goddwill is liable to service tax as per service tax act.....

ie. what is the dept.'s basic logic behind the treating the goddwill for service tax....?

Subrahmanya N (Others) (36 Points)
Replied 09 April 2014

58. INTELLECTUAL PROPERTY SERVICES

(A) Date of Introduction: 10.09.2004 [vide Sec.. 90 of the Finance (No.2) Act,2004]

(F) Clarifications issued by the Board:

Intellectual property services (other than copyrights) – (1) Intellectual property

emerges from application of intellect, which may be in the form of an invention, design,

product, process, technology, book, goodwill etc. In India, legislations are made in

respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights,

trademarks and designs. The definition of taxable service includes only such IPRs

(except copyright) that are prescribed under law for the time being in force. As the

phrase ‘law for the time being in force’ implies such laws as are applicable in India, IPRs

covered under Indian law in force at present alone are chargeable to service tax and

IPRs like integrated circuits or undisclosed information (not covered by the Indian law)

would not be covered under taxable services.

(2) A permanent transfer of intellectual property right does not amount to rendering

of service. On such transfer, the person selling these rights no longer remains a ‘holder

of intellectual property right’ so as to come under the purview of taxable service. Thus,

there would not be any service tax on permanent transfer of IPRs.

As per Point No. 1, they are in the opinion that ST is applicable.

But we are clarifying them that, as per Point No. (2) ST is not applicable for Permanent Transfer.

Is it right.....?

Sweta Agarwal (Consultant) (47 Points)
Replied 11 April 2014

Clause c of section 66E on declared services specifically mentions that temporary transfer or permitting the use or enjoyment of any IP right. Hence the intention of the law is to not tax the sale of such IP rights.

Rahul jain (LEARNING & TEACHING) (435 Points)
Replied 11 April 2014

respected sweta- basically u want to say that goodwill may be swubject to service tax....bcoz is the brand name that one can use ofr its business.......

is this ???

Subrahmanya N (Others) (36 Points)
Replied 11 April 2014

Under Sec.. 90 of the Finance (No.2) Act,2004 and as clarified by the Board;

A permanent transfer of intellectual property right does not amount to rendering

of service. On such transfer, the person selling these rights no longer remains a ‘holder

of intellectual property right’ so as to come under the purview of taxable service. Thus,

there would not be any service tax on permanent transfer of IPRs.

With this, whether we can take a stand that, ST is not applicable for both Seller & Buyer of the Service....!?

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TAPAN RAY (ACP Inspector) (33 Points)
Replied 27 May 2014

• COST OF CONTROL / GOODWILL / CAPITAL RESERVE :
The holding company acquires more than 50% of the shares
of the subsidiary company. such shares may be acquired at a
market price. Which may be at a premium or at discount. This
amount is reflected in the balance sheet of holding company of the
assets side as investment in the shares of subsidiary company.
This is the price paid for shares in net assets of subsidiary
company as on date of its acquisition. Net assets of the subsidiary

5
company consist of share capital, accumulated profits and reserve
after adjustment, accumulated losses as on the date of acquisition.
If the amount paid by the holding company for the shares of
subsidiary company is more than its proportionate share in the net
asset of the subsidiary company as on the date of acquisition, the
difference is considered as goodwill.

The service tax is imposed on book value and goodwill.

Intellectual property services (other than copyrights) – (1) Intellectual property
emerges from application of intellect, which may be in the form of an invention, design,
product, process, technology, book, goodwill etc. In India, legislations are made in
respect of certain Intellectual Property Rights (i.e. IPRs) such as patents, copyrights,
trademarks and designs. The definition of taxable service includes only such IPRs
(except copyright) that are prescribed under law for the time being in force. As the
phrase ‘law for the time being in force’ implies such laws as are applicable in India, IPRs
covered under Indian law in force at present alone are chargeable to service tax and
IPRs like integrated circuits or undisclosed information (not covered by the Indian law)
would not be covered under taxable services.

(2) A permanent transfer of intellectual property right does not amount to rendering
of service. On such transfer, the person selling these rights no longer remains a ‘holder
of intellectual property right’ so as to come under the purview of taxable service. Thus,
there would not be any service tax on permanent transfer of IPRs.

(3) In case a transfer or use of an IPR attracts cess under Section 3 of the Research
and Development Cess Act, 1986, the cess amount so paid would be deductible from
the total service tax payable (refer Notification No.17/2004-S.T., dated 10-9-2004).

[ C.B.E &C Circular No.80/10/2004-S.T dated 17.09.2004 ]