2022 (2) TMI 955 - AT - Service Tax

Levy of service tax - implementation of the Information Technology related projects - amount received from the Departments of the State Government and which has been paid to the vendors - mount collected by the appellant from vendors on account of breach of agreement - pure agent services or not - HELD THAT - As a nodal agency appointed by the various State Government Departments, the primary responsibility of the appellant was to supervise and monitor the overall execution of projects; computation of estimate of cost; issuance of notice inviting tenders; and appointment of vendors. The vendors so appointed by the appellant then entered into the contracts with the appellant on behalf of the State Government. The vendors performed their obligations stipulated in the contracts for execution of the projects and upon completion of the projects, a working report with utilization certificates and invoices were furnished by the appellant to the concerned Departments, which thereafter released the sanctioned amount to be paid to the vendors through the appellant. All the conditions of rule 5(2) of the Valuation Rules are satisfied, the appellant acted as a pure agent as a result of which the amount collected by the appellant from the State Government for payment to the vendors cannot be subjected to service tax - the amount received by the appellant from the State Government for payment to vendors is not a consideration for any service said to be rendered by the appellant to the State Government and, therefore, no service tax could be levied. This is for the reason that the amount which the appellant has received is not a consideration for provision of any service. The appellant was appointed merely as a Nodal Agency to supervise and monitor the overall execution of the projects. Infact, the amount paid by the State Government Department to the appellant are reimbursements which cannot be subjected to levy of service tax and in any view of the matter the appellant was acting as a pure agent as all the conditions stipulated in rule 5(2) of the Valuation Rules are satisfied. Levy of service tax - amount collected by the appellant from vendors on account of breach of agreement - HELD THAT - This amount, which is called liquidated damages, has been held to be susceptible to service tax under section 66E(e) of the Finance Act by the Commissioner as an amount received for tolerating an act. According to the appellant, the liquidated damages recovered on account of breach or non-performance of a contract is not a consideration in lieu of any service. It is infact, in the nature of a deterrent so that such a breach is not repeated - 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) of the Finance Act 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) of the Finance Act - service tax could not have been levied on the amount recovered as liquidated damages. Appeal disposed off.

Issues Involved:
1. Whether the amount received from the State Government for payment to vendors is susceptible to service tax.
2. Whether the amount collected as liquidated damages from vendors is susceptible to service tax.
3. Whether the penalty against the appellant should be waived under section 80 of the Finance Act.

Detailed Analysis:

1. Amount Received from State Government for Payment to Vendors:
The appellant, a wholly owned undertaking of the Government of Rajasthan, was appointed as a nodal agency for implementing various IT-related projects. The primary dispute was whether the amounts received from State Government Departments, which were paid to vendors, were subject to service tax.

The appellant argued that these amounts were reimbursements and not consideration for services provided. They contended that they acted as a pure agent, and service tax was already paid on the service charges they retained. The Tribunal agreed with the appellant, citing section 67 of the Finance Act, which states that service tax is chargeable on the gross amount charged for such service. The Tribunal referenced the Supreme Court's decision in *Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd.*, which held that reimbursable expenses cannot be included in the taxable value. The Tribunal concluded that the amounts paid to vendors were reimbursements and not consideration for services, thus not subject to service tax.

2. Amount Collected as Liquidated Damages:
The second issue was whether liquidated damages collected from vendors for breach of contract were subject to service tax under section 66E(e) of the Finance Act, which includes "agreeing to the obligation to tolerate an act" as a declared service.

The appellant argued that liquidated damages are not consideration for any service but a deterrent for breach of contract. The Tribunal referred to the definition of "service" under section 65B(44) and the declared services under section 66E(e), emphasizing that there must be a flow of consideration for agreeing to tolerate an act. The Tribunal cited the decision in *M/s. South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax*, which held that penalties for breach of contract are not consideration for any service. The Tribunal concluded that liquidated damages are not subject to service tax.

3. Waiver of Penalty under Section 80:
The Commissioner appealed against the order dropping the penalty against the appellant, arguing that section 80 of the Finance Act was omitted after the show cause notice and order were issued. However, since the Tribunal set aside the entire demand, it found it unnecessary to examine the penalty waiver issue.

Conclusion:
The Tribunal set aside the orders dated 16.01.2017 and 18.05.2018, confirming the demands of service tax on the amounts received from the State Government for payment to vendors and on liquidated damages. The appeal by the Commissioner regarding the penalty was dismissed. The appellant's appeals were allowed, and the demands were not sustained.

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