2023 (1) TMI 934 - AT - Service Tax

Levy of service tax - business of extraction and selling of coal from open cast mines - declared service or not - amount received by the appellant towards penalty, earnest money deposit forfeiture and liquidated damages - whether this would amount to consideration for tolerating an act on the part of the buyers of coal/contractors, for which service tax would be levied under section 66 E(e) of the Finance Act? - period of dispute in the present appeal is from July 2012 to March 2016. HELD THAT - 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. 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 would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding applicability of goods and service tax on liquidated damages, compensation and penalty arising out of breach of contract in the context of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act - This Circular emphasizes that there has to be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist and such an act or a situation cannot be imagined or presumed to exist merely because there is a flow of money from one party to another. Appeal allowed.

Summary

Issues Involved:
1. Whether the appellant is providing a "declared service" under section 66E(e) of the Finance Act.
2. The applicability of service tax on compensation/penalty collected from buyers of coal, contractors, and suppliers.
3. The invocation of the extended period of limitation under section 73(1) of the Finance Act.
4. The imposition of interest and penalty.

Issue-wise Detailed Analysis:

1. Declared Service Under Section 66E(e):
The core issue was whether the appellant's actions constituted a "declared service" as per section 66E(e) of the Finance Act, which became taxable from July 1, 2012. Section 65B(44) defines "service" 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 situation, or do an act constitutes a declared service. The tribunal held that there must be a clear agreement specifying the consideration for such activities. The appellant's agreements did not specify any obligation to tolerate an act or situation for consideration, thus not meeting the criteria for a declared service.

2. Applicability of Service Tax on Compensation/Penalty:
The appellant collected amounts under three heads: compensation/penalty from coal buyers for short-lifted/un-lifted coal, compensation/penalty from contractors for breach of terms, and liquidated damages from suppliers for breach of contract. The Principal Commissioner argued that these amounts were for "tolerating an act" and thus taxable. However, the tribunal referred to the South Eastern Coalfields Ltd. case, which clarified that such penalties are safeguards for commercial interests and not considerations for tolerating an act. The tribunal concluded that the penalties and liquidated damages were not for any service provided by the appellant but were deterrents for non-compliance, thus not attracting service tax.

3. Extended Period of Limitation:
The show cause notice invoked the extended period under section 73(1) for the period from July 2012 to March 2016, alleging evasion of service tax. The tribunal did not find sufficient grounds for invoking the extended period, as the appellant's actions did not constitute a declared service under section 66E(e).

4. Imposition of Interest and Penalty:
Given that the tribunal found no service tax liability, the imposition of interest and penalty was also deemed unsustainable. The appellant's actions were not for tolerating any act or situation for consideration, and thus, no service tax was due.

Conclusion:
The tribunal set aside the order dated 27.04.2018 passed by the Commissioner, concluding that the appellant was not liable to pay service tax on the amounts collected as penalties or liquidated damages. The appeal was allowed, and the order was pronounced in the open court.