2024 (6) TMI 766 - AT - Service Tax

Taxability of forfeited earnest money under Section 66E (e) of the Finance Act, 1994 - declared service or not - Forfeiting earnest money amount to tolerating an act or not - HELD THAT - Once the activity of appellant that is of forfeituring the amount of earnest money is not a declared service, question of retaining said money as consideration for rendering the such service becomes absolutely redundant. Otherwise also it is always the value of service, which is actually rendered that has to be ascertained for the purpose of calculating the service tax payable thereupon. Support drawn from the decision of Hon ble apex Court in the case of COMMISSIONER OF SERVICE TAX ETC. VERSUS M/S. BHAYANA BUILDERS (P) LTD. ETC. 2018 (2) TMI 1325 - SUPREME COURT where it was held that ' The value of the goods/materials cannot be added for the purpose of aforesaid notification dated September 10, 2004, as amended by notification dated March 01, 2005'. Thus, it is absolutely clear that the amount, in question, was not towards rendering the taxable service. In addition, it is also on record that the amount was not actually retained by the appellant. Subsequent to the receipt of show cause notice, the same was transferred to the sub-contractor as is apparent from the General Voucher dated 25.01.2021 - Once the activity of the appellant cannot be called as the taxable service as that of rendering the declared service and that the appellant has returned the amount alleged to be a consideration for the said activity the question of any tax liability of the appellant as has been appreciated in the impugned order under challenge has no sustainability. The order under challenge is hereby set aside - Appeal allowed.

Summary

Issues:
1. Taxability of forfeited earnest money under Service Tax Commissionerate for Works Contract Service.
2. Interpretation of Section 66E (e) of the Finance Act.
3. Consideration of forfeiture of earnest money as a declared service.
4. Application of General Rules for Guidelines of contractor of Rajasthan State Road Development Construction Limited (RSRDC).

Analysis:

Issue 1: The appeal challenges the decision regarding the taxability of forfeited earnest money under the Service Tax Commissionerate for Works Contract Service. The appellant forfeited earnest money from contractors, leading to a show cause notice proposing recovery of an amount along with interest and penalty. The appellant contends that the forfeited amount was erroneously booked as miscellaneous income and was subsequently transferred to the sub-contractor, passing on the benefit to the client.

Issue 2: The interpretation of Section 66E (e) of the Finance Act is crucial in determining the taxability of the forfeited earnest money. The Commissioner (Appeals) considered whether the forfeited amount constitutes a declared service under this section, which obligates refraining from an act or tolerating a situation. The appellant argued that the forfeiture does not amount to agreeing to refrain from or tolerate an act, citing relevant case laws to support this position.

Issue 3: The consideration of forfeiture of earnest money as a declared service is a key point of contention. The Tribunal referenced previous decisions, including M/s South Eastern Coalfields Ltd. and M/s Steel Authority of India Ltd., to establish that forfeiting earnest money does not equate to rendering a declared service. The Tribunal emphasized that the purpose of forfeiting earnest money is to ensure compliance with contractual terms, not to receive consideration for tolerating default acts.

Issue 4: The application of General Rules for Guidelines of contractor of Rajasthan State Road Development Construction Limited (RSRDC) plays a role in the case. The appellant, a PSU engaged in construction services, followed these rules and corrected the ledger entry regarding the forfeited amount. Despite the correction, the department argued that the tax liability remains unchanged, relying on the observations of the Commissioner (Appeals) in the order under challenge.

In conclusion, the Tribunal held that the forfeited amount was not towards rendering a taxable service, as it was not retained by the appellant and was subsequently transferred to the sub-contractor. The order under challenge was set aside, and the appeal was allowed based on the findings that the forfeiture of earnest money did not constitute a declared service under the Finance Act.