2023 (9) TMI 650 - AT - Service Tax

Legality of demand for service tax under section 66E(e) of Finance Act 1994 - monies received for allegedly tolerating breach of contract through encashment of performance Guarantee / Bank Guarantee - failure to comply with the agreed obligation by various contractors / sub-contractors - HELD THAT - Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. The contract entered into by the appellant with the contractors/ sub-contractors is not aimed at any activity to receive compensation by a breach of contract, similarly it cannot be said that it was the intention of the contractors to breach or violate the contract and incur a loss. Hence there is no agreement/ contract between the parties involving a consideration to be received for a service provided by the appellant which will attract service tax. We find that the issue is no longer res intigra and has been clarified by the CBIC itself as per the Circulars cited by the appellant. In the case of the CMRL, Revenue has not pointed out any such contractual arrangement which is an independent arrangement in its own right to receives damages by tolerating breach of contract. The amounts retained towards liquidated damages and also invoked as bank guarantee are not a consideration for tolerating breach of contract. Any amount, which is not a consideration for provision of service, cannot be subjected to service tax - It cannot be agreed that CMRL had received a consideration for tolerating the delay in execution of the projects contracted by them. A demand for service tax on the monies received through encashment of performance Guarantee / Bank Guarantee and that collected/ retained as liquidated damages for non-performance and failure to comply with the agreed obligation by various contractors / sub-contractors, hence fails. This being so the demands for duty along with interest made and the penalties imposed by the impugned order are required to be set aside. Appeal allowed.

Summary

Issues Involved:
1. Legality of demand for service tax on monies received through encashment of performance guarantees.
2. Legality of demand for service tax on monies collected/retained as liquidated damages for non-performance by contractors/sub-contractors.

Summary:

Issue 1: Demand for Service Tax on Encashment of Performance Guarantees

The Adjudicating Authority dropped the proceedings relating to the Performance Guarantee, holding that the amount is compensation for the contractors' default and not subject to service tax. The argument of the assessee claiming it to be an "actionable claim" was found sustainable. The Revenue's appeal against this dropping was dismissed by the Tribunal, which found no contractual arrangement for receiving damages by tolerating breach of contract. The amounts received are not a consideration for tolerating breach of contract and thus not subject to service tax.

Issue 2: Demand for Service Tax on Liquidated Damages

The Adjudicating Authority held that collecting liquidated damages is an act of agreeing to an obligation to tolerate non-performance, making it a declared service under section 66E(e) of the Finance Act, 1994. The demand of Rs. 20,81,25,159/- was confirmed along with interest and an equal penalty under section 78 of the FA. However, the Tribunal found that there is no agreement for receiving consideration for a service provided by the appellant, and thus, no service tax is applicable. The Tribunal relied on CBIC Circulars and case laws, which clarified that damages for breach of contract are not taxable as they do not constitute a service.

Conclusion:

The Tribunal set aside the demands for duty along with interest and penalties imposed by the impugned order. The appeal filed by the appellant (CMRL) was allowed, and the appeal filed by Revenue was dismissed. The appellant is eligible for consequential relief as per law.