2022 (2) TMI 1010 - AT - Service Tax

Levy of service tax - declared services - Berth Reservation Scheme, to accord priority berthing of specified users in the Port - penalty by way of encashment of Bank Guarantee for the equivalent wharfage in respect of the shortfall quantity of the MGT - HELD THAT - Tribunal in the case of M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI has examined in detail the provisions of Declared Service under Section 66E(e) of the Finance Act, 1994, which was introduced in the Negative List based regime effective from 01.07.2012 - In the said case, the issue for consideration before the Tribunal was whether the assessee company was liable to pay service tax on the liquidated damages and penalty / forfeiture of earnest money deposit for recovery of amount due to non fulfilment of contractual agreement by one of the parties to the agreement. The Tribunal came to a conclusion that by collecting the penal amount as aforesaid, it is not the intention of the assessee to tolerate the non performance of the obligation which was cast upon him as per the commercial contract entered by the assessee with the other party. The decision of the Tribunal is squarely applicable in the instant case also wherein the amount collected by the appellant by encashment of Bank Guarantee for the shortfall of the quantity as against the Minimum Guarantee Tonnage (MGT) as per the scheme cannot be said towards tolerating any act or a situation on the part of the appellant and thus, there is no rendition of Declared Service under Section 66E(e) by the appellant. The impugned demand cannot be sustained and is thus set aside. Penalty imposed on the appellant is also set aside - Appeal allowed - decided in favor of appellant.

Summary

Issues:
- Confirmation of demand of service tax under Section 66E(e) of the Finance Act, 1994
- Interpretation of the Berth Reservation Scheme and its relation to declared service
- Analysis of relevant case laws regarding penalty for non-fulfillment of contractual obligations
- Application of Section 66E(e) to the case at hand
- Consideration of the intention behind penalty clauses in commercial contracts

Analysis:
The judgment pertains to an appeal against an Order-in-Original confirming the demand of service tax under Section 66E(e) of the Finance Act, 1994. The appellant, an autonomous body providing port services, implemented a Berth Reservation Scheme involving penalties for non-fulfillment of Minimum Guarantee Tonnage (MGT). The Ld. Commissioner held that forfeiting amounts from MGT providers fell under Section 66E(e) as tolerating an act or situation. The Tribunal reviewed relevant case laws, including South Eastern Coalfields Ltd, emphasizing the necessity of consideration flowing from one party to another for declared services. The Tribunal concluded that penal amounts were not for tolerating non-performance but to ensure contractual compliance, thus not constituting declared services under Section 66E(e).

The Tribunal highlighted the distinction between contractual conditions and considerations, emphasizing that penal clauses aim to safeguard commercial interests rather than impose penalties. Referring to Section 65B(44) and Section 67, the Tribunal analyzed the intention behind penal clauses in agreements, asserting that penalties aim to deter non-compliance, not to tolerate default. The Tribunal applied the principles established in previous cases to the current scenario, determining that the appellant's actions did not constitute declared services under Section 66E(e.

In conclusion, the Tribunal set aside the impugned demand and penalty, allowing the appeal with consequential relief. The judgment reaffirmed that penal amounts in commercial contracts serve to ensure compliance rather than tolerate non-performance, aligning with the interpretation of Section 66E(e) and the principles established in relevant case laws.