2024 (1) TMI 1326 - AT - Service Tax

Levy of service tax - declared service or not - compensation received by the appellant on the failure to procure the power at contractual quantity - HELD THAT - The decision of the Tribunal in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI dealt with the issue, which had arisen in similar situation whether the amount collected towards compensation/penalty from the buyers of coal on the short lifted/un-lifted quantity of coal, collected amount towards compensation/penalty from the contractors engaged for breach of terms and conditions and collected amount in the name of damages from the suppliers of material for breach of the terms and conditions of the contract can be treated as declared service under section 66E(e) of the Act. Relying on the decision of the Larger Bench in M/S BHAYANA BUILDERS (P) LTD. OTHERS VERSUS CST, DELHI OTHERS. 2013 (9) TMI 294 - CESTAT NEW DELHI-LB , which was affirmed by the Apex Court in COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. 2018 (2) TMI 1325 - SUPREME COURT dismissing the department s appeal, the principle enunciated was any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The underline object of the contract is to provide the services of electricity on requisite consideration and the compensation under clause 3.3.4 is distinct as the purpose thereof is to ensure that the minimum quantity of power is procured and there is no default. Therefore, the amount received as compensation has no nexus to the taxable service and cannot be treated as value of the services that are provided. In this regard, the provisions of Section 67 of the Act needs to be considered which provides that service tax is chargeable on any taxable service with reference to its value and the various clauses provides for determination of such value in following words, where the provision of service is for a consideration . The Explanation specifically provides by way of inclusive definition that only an amount that is payable for the taxable service would be the consideration . The Adjudicating Authority was not right in levying the service tax on the amount received by the appellant as compensation for short lifting of electricity was not on account of any obligation to tolerate an act. The impugned order deserves to be set aside - Appeal allowed.

Summary

Issues:
Whether compensation received for failure to procure power at contractual quantity is a "declared service" under Section 66E(e) of the Finance Act, 1994.

Analysis:
The appellant challenged the Order-in-Original, contending that the compensation received for the failure to procure power at the contractual quantity does not fall under the category of a "declared service" as per Section 66E(e) of the Finance Act, 1994. The appellant, engaged in manufacturing and power generation, entered into agreements where compensation was to be paid in case of failure to procure the contractual quantity of power. The Department issued a show cause notice alleging service tax liability on the compensation received. The Commissioner confirmed the demand, leading to the present appeal.

The appellant argued that a similar issue had been decided in a previous Tribunal case and relied on a circular clarifying the activities covered under Section 66E(e). The Tribunal referred to the decision in South Eastern Coalfields Ltd. case, emphasizing the distinction between conditions to a contract and considerations for a contract. It highlighted that activities falling under Section 66E(e) require a specific agreement and flow of consideration. The Tribunal concluded that the compensation received by the appellant was a condition of the contract, not consideration for the contract, and hence not taxable.

The Tribunal further discussed the Circular issued by the Board, emphasizing the need for specific reference in the agreement and flow of consideration for activities under Section 66E(e). It noted that the Circular was binding on the department and that the demand was unsustainable based on the guidelines provided. Consequently, the Tribunal held that the Adjudicating Authority was wrong in levying service tax on the compensation received by the appellant and set aside the impugned order, allowing the appeal.

In conclusion, the Tribunal ruled in favor of the appellant, stating that the compensation received for the failure to procure power at the contractual quantity did not constitute a declared service under Section 66E(e) of the Finance Act, 1994. The Tribunal based its decision on the distinction between conditions and considerations in a contract, as well as the guidelines provided in a Circular issued by the Board.