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2020 (12) TMI 912 - AT - Service TaxDeclared Service or not - appellant had collected an amount towards compensation/penalty from the buyers of coal on the short lifted/un-lifted quantity of coal; collected amount towards compensation/penalty from the contractors engaged for breach of terms and conditions; and collected amount in the name of damages from the suppliers of material for breach of the terms and conditions of the contract - period from July 2012 to March, 2016 - Whether the appellant is providing a declared service contemplated under section 66E(e) of the Finance Act, which service became taxable w.e.f July 1, 2012? HELD THAT - Liability has been fastened upon the appellant under section 65B read with section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party - Section 65B (44) defines service to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under section 66E (e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66 B provides that service tax shall be levied at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while section 66E contains a list of declared services. Section 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed - It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of subsection (1) of section 67. What needs to be noted is that each of these refer to where the provision of service is for a consideration , whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a consideration for the provision of such service. Explanation to sub-section (1) of section 67 clearly provides that only an amount that is payable for the taxable service will be considered as consideration . This apart, what is important to note is that the term consideration is couched in an inclusive definition. The Supreme Court in COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. 2018 (2) TMI 1325 - SUPREME COURT , while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. It would also be pertinent to refer to TRU Circular dated 20 June, 2012 issued by the Central Board of Excise and Customs as an Education Guide when the Negative List based taxation regime was introduced from July 2012 to clarify various aspects of the levy of service tax. The Board dealt with consideration in paragraph 2.2 of this Circular and pointed out that since the definition was inclusive, it will not be out of place to refer to the definition of consideration as given in section 2(d) of the Indian Contract Act, 1872. A service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a declared service under section 66E(e) read with section 65B (44) and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e) - It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. The activities, therefore, that are contemplated under section 66E (e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity - In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between conditions to a contract and considerations for a contract . It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act - Appeal allowed - decided in favor of appellant.
Issues Involved:
1. Whether the appellant is providing a "declared service" under section 66E(e) of the Finance Act, 1994. 2. Whether the amount collected as penalty, earnest money deposit forfeiture, and liquidated damages is taxable as "consideration" for tolerating an act. 3. Applicability of the extended period of limitation. 4. Imposition of interest and penalty. Issue-wise Detailed Analysis: 1. Declared Service under Section 66E(e) of the Finance Act: The core issue was whether the appellant's collection of penalties, earnest money deposit forfeitures, and liquidated damages constituted a "declared service" under section 66E(e) of the Finance Act, 1994. The Tribunal examined the definition of "service" under section 65B(44) and "declared services" under section 66E(e). It was noted that for a service to be taxable, there must be a flow of consideration from one person to another for an activity carried out by a person for another. The Tribunal concluded that the penal clauses in contracts were intended to safeguard commercial interests and not to agree to tolerate an act or situation for consideration. The intention of the parties was for the supply of coal, goods, or services, not for the breach of contract terms. 2. Taxability of Collected Amounts as Consideration: The Tribunal referred to various legal precedents, including the Supreme Court's decisions in Bhayana Builders and Intercontinental Consultants, which emphasized that consideration must flow from the service recipient to the service provider and should be directly linked to the taxable service provided. The Tribunal found that the amounts collected as penalties, forfeitures, and liquidated damages were not for any service rendered but were compensatory in nature for breaches of contract. The Tribunal also cited the European Court of Justice's decision in Societe Thermale d’Eugenic-les-Bains, which distinguished between compensation for cancellation and consideration for services rendered. The Tribunal concluded that the amounts collected by the appellant did not constitute consideration for any declared service under section 66E(e). 3. Extended Period of Limitation: The appellant argued that the extended period of limitation could not be invoked. The Tribunal did not specifically address this issue in detail, as the primary focus was on whether the collected amounts were taxable. However, given the conclusion that the amounts were not taxable, the invocation of the extended period of limitation became moot. 4. Imposition of Interest and Penalty: The Tribunal found that since the amounts collected were not taxable as consideration for any declared service, the imposition of interest and penalties was not justified. The Tribunal set aside the demand for service tax, interest, and penalties. Conclusion: The Tribunal concluded that the amounts collected by the appellant as penalties, earnest money deposit forfeitures, and liquidated damages did not constitute consideration for any declared service under section 66E(e) of the Finance Act, 1994. The impugned order dated December 18, 2018, was set aside, and the appeal was allowed.
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