2022 (11) TMI 947 - AT - Service Tax

Levy of service tax - declared service or not - to refrain from an act or tolerate an act - forfeiture of amount of advance deposit for not lifting the ordered goods in terms of purchase order - Section 66E (e) of Finance Act, 1994 - extended period of limitation - HELD THAT - The amount of consideration received for providing taxable service i.e. those services which are not mentioned in negative list of Section 66 D is being made liable, under Section 66 of Finance Act, 1994 to service tax at the rate specified therein. Section 67 of Finance Act, 1994 which deals with the valuation of taxable service. According to this Section 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 sub-section (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 patly consisting of money, or where it is not ascertainable. In the present case, the appellant is the manufacturer of specific machines. He was approached by a buyer for manufacturing a customized machine for him. Vide the purchase order the buyer agreed to make an advance payment accepting the terms and conditions of the purchase order including the condition of said advance to be forfeited in case of failure on part of the buyer to receive the manufactured goods. For this advanced deposit to become a consideration received by the appellant against a declared service being provided by him, it is necessary that there has to be some concurrence/assumption of an obligation to refrain from an act or to tolerate the same on the part of the appellant. But in the present case it was an agreement between the parties that in case any term of the purchase order gets breached which may cause some damage or loss to the appellant, the advance deposit made by the buyer to the appellant shall be forfeited by the appellant owing to the said breach. Larger Bench of this decision in M/s. South Eastern Coalfields Ltd. 2020 (12) TMI 912 - CESTAT NEW DELHI has dealt with the impugned issue with the clarity. It has been held that any amount received from the buyer in advance when forfeited for non-compliance of the contract, the same shall not be the consideration for tolerating an act and as such shall not be leviable to service tax under Section 66 E (e) of Finance Act, 1994 as declared services. Particularly, when contract nowhere provided obligation on assesse to refrain from an act or tolerate an act. Otherwise also when it was an agreed term and condition that in case of failure or non-compliance of any condition of contract the amount deposited shall be liable to be forfeited, the forfeiture thereof is actually an act in furtherance of the aforesaid terms and conditions, cannot be called as the tolerance on account of non-compliance of any condition of contract by the other party. The present case, apparently and admittedly is a case of supply of goods. The element of service being provided was never a fact of the present case. Retaining the amount of advance deposit by the appellant is nothing but acting in furtherance of the contract by him with his buyer - The Machine Availability clause in the present case, to my opinion when read with the entire agreement, there is an apparent intent that the terms of agreement shall not be violated and that the service provider shall not compromise with the quality of service else the commercial interest of the appellant shall remain safeguarded in the form of compensation to be paid by M/s. SGSL. Hence, it cannot, by any stretch of imagination, be stated that the recovery of sum by invoking the said clause is the reason behind the execution of agreement for an accrued consideration. The concept of declared services,in the impugned facts and circumstances, has wrongly been invoked by the department. The appellant therefore cannot be fasten with any liability to pay the tax. Service recipient cannot be fastened with any liability to pay tax. Extended period of limitation - HELD THAT - The present case was purely a case of supply of goods - In the present case the entire show cause notice is silent about any such act on part of the appellant which may amount to suppression of a fact. The element of intent on the part of the appellant to evade the tax liability is miserably missing. Based on the facts herein, the above discussion has already held that, in fact, here is no service tax liability on the appellant. Resultantly, the extended period of limitation has wrongly been invoked by the appellant. Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the forfeiture of advance payment constitutes a declared service under Section 66E(e) of the Finance Act, 1994.
2. Applicability of service tax on the forfeited amount.
3. Invocation of extended period of limitation for service tax demand.

Detailed Analysis:

Issue 1: Whether the forfeiture of advance payment constitutes a declared service under Section 66E(e) of the Finance Act, 1994.
The primary controversy to be adjudicated is whether the forfeiture of the advance payment by the appellant constitutes a declared service under Section 66E(e) of the Finance Act, 1994, which became taxable from 01.07.2012. According to Section 65 B (44) of the Finance Act, 1994, a service is defined as any activity carried out by a person for another for consideration, including declared services. Section 66E(e) specifies that agreeing to the obligation to refrain from an act, tolerate an act or a situation, or to do an act constitutes a declared service.

The judgment highlights that for an act to qualify as a service, there must be a service activity carried out for consideration. The Supreme Court in Food Corporation of India V. Surana Commercial Co. and others [(2003) 8 SCC 636] clarified that abstinence or toleration must be explicitly mentioned in the agreement to be considered as a service. In the present case, the forfeiture of the advance payment was due to the buyer's failure to comply with the purchase order terms, and not an agreement to tolerate an act or situation.

Issue 2: Applicability of service tax on the forfeited amount.
The Tribunal observed that the forfeited advance payment was not a consideration for a declared service but rather an amount of liquidated damages for breach of contract. The intention was not to tolerate the breach but to safeguard the appellant's commercial interest. The Tribunal referenced the Larger Bench decision in M/s. South Eastern Coalfields Ltd., which held that forfeited amounts for non-compliance of a contract are not consideration for tolerating an act and thus not subject to service tax under Section 66E(e).

The Tribunal concluded that the appellant did not provide any service by forfeiting the advance payment; instead, it acted in accordance with the terms of the purchase order. The forfeiture was a consequence of the buyer's failure to take delivery of the goods, and not a service rendered by the appellant. Therefore, the concept of declared services was wrongly invoked by the department, and the appellant was not liable to pay service tax on the forfeited amount.

Issue 3: Invocation of extended period of limitation for service tax demand.
The demand period was from 2012-2013, and the show cause notice was issued in 2016. The Commissioner (Appeals) justified the extended period of limitation on the grounds of alleged suppression of taxable value by the appellant. However, the Tribunal noted that mere failure to declare does not amount to suppression. The Supreme Court in M/s. Pahwa Chemicals (P) Ltd. Vs. CCE 2005 (189) E.L.T. 257 (SC) held that suppression requires a positive act of mis-declaration or willful suppression.

The Tribunal found no evidence of willful suppression or intent to evade tax by the appellant. Since there was no service tax liability, there was no obligation to declare the forfeited amount for self-assessment. Consequently, the extended period of limitation was wrongly invoked.

Conclusion:
The Tribunal set aside the order of the Commissioner (Appeals) and allowed the appeal, holding that the forfeiture of the advance payment did not constitute a declared service under Section 66E(e) of the Finance Act, 1994. The appellant was not liable to pay service tax on the forfeited amount, and the extended period of limitation was not applicable.