2024 (9) TMI 619 - AT - Service Tax

Levy of service tax - ex-gratia job charges amount received by the appellant from M/s Parle - HELD THAT - The issue in hand is no longer res-integra as the same has been decided in matters other contract manufacturers of biscuit of M/s Parle - reliance placed in M/S K.N. FOOD INDUSTRIES PVT. LTD. VERSUS THE COMMISSIONER OF CGST CENTRAL EXCISE, KANPUR 2020 (1) TMI 6 - CESTAT ALLAHABAD where it was held that ' In the instant case, if the delivery of project gets delayed, or any other terms of the contract gests breached, which were expected to cause some damage or loss to the appellant, the contract itself provides for compensation to make good the possible damages owning to delay, or breach, as the case may be, by way of payment of liquidated damages by the contractor to the appellant. As such, the contracts provide for an eventuality which was uncertain and also corresponding consequence or remedy if that eventuality occurs. As such the present ex-gratia charges made by M/s. Parle to the appellant were towards making good the damages, losses or injuries arising from unintended events and does not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be the payments for any services.' From the above decision, it can be seen that the facts in the above decision and in the present case are absolutely identical and issue involved is also common therefore the ratio of the above decision is directly applicable in the present case. In the present appeal also the impugned order is not sustainable and the same is set aside - Appeal is allowed.

Issues Involved:
1. Whether the ex-gratia amount received by the appellant from M/s Parle is liable to service tax under Section 66E(e) of the Finance Act, 1994.
2. Whether the ex-gratia amount constitutes consideration for a service or is merely compensation for underutilized manufacturing capacity.
3. Application of previous judgments and legal precedents to the present case.
4. Interpretation of Section 66E(e) of the Finance Act, 1994 in the context of ex-gratia payments.
5. Whether the extended period of limitation and penal provisions are applicable.

Detailed Analysis:

1. Liability of Ex-Gratia Amount to Service Tax:
The core issue is whether the ex-gratia amount paid by M/s Parle to the appellant for underutilized manufacturing capacity is subject to service tax under Section 66E(e) of the Finance Act, 1994. The department argued that this amount is leviable to service tax as it constitutes a service of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act."

2. Nature of Ex-Gratia Amount:
The appellant contended that the ex-gratia amount is not a consideration for any service but a compensation for the financial damage due to low utilization of manufacturing capacity. The ex-gratia amount is calculated based on various factors such as the length and width of the oven and the product output ratio. The appellant argued that this compensation is not fixed and is mutually decided based on the terms of the agreement with M/s Parle.

3. Application of Previous Judgments:
The appellant relied on several judgments where similar issues were decided in favor of the assessee. Notably, in the case of K.N. Food Industries Pvt. Ltd. versus CCE, it was held that the ex-gratia amount received by the appellant for underutilized manufacturing capacity does not amount to providing any service liable to service tax. The Tribunal in this case found that the ex-gratia amount was compensation for financial damage and not a service under Section 66E(e).

4. Interpretation of Section 66E(e):
The Tribunal examined Section 66E(e) of the Finance Act, 1994, which defines declared services, including "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." The Tribunal concluded that the ex-gratia payments do not fall under this definition as there was no agreement to refrain from an act or tolerate a situation. The payments were compensatory in nature, arising from unintended events such as underutilization of manufacturing capacity.

5. Extended Period of Limitation and Penal Provisions:
The appellant argued that there was no deliberate withholding of information to evade service tax, and hence, the extended period of limitation and penal provisions should not apply. The Tribunal, having allowed the appeal on merits, did not find it necessary to address the plea of limitation.

Conclusion:
The Tribunal, following the decisions in K.N. Food Industries Pvt. Ltd. and M/s Prahladrai Confectioneries Pvt. Ltd., concluded that the ex-gratia amount received by the appellant from M/s Parle is not liable to service tax under Section 66E(e) of the Finance Act, 1994. The ex-gratia payments were deemed to be compensation for financial damage due to underutilized manufacturing capacity and not consideration for any service. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief as per law. The Tribunal did not uphold the extended period of limitation and penal provisions.

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