2024 (11) TMI 475 - AT - Service Tax

Demand of service tax - amount received as the consideration due to cancellation of an agreement - declared service as per section 66 (E) (e) of Finance Act 1994 or not? - Obligation to refrain from an act, or to tolerate (e) an act or a situation, or to do an act - invoking the extended period of limitation - Whether the appellant is providing the declared service contemplated under section 66 (E) (e) of Finance Act which became taxable w.e.f. 1st July, 2002 ? HELD THAT - When a contract has been broken, the party who suffers by such breach is entitled to receive, form the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract. Section 73 74 of Chapter VI of Indian Contract Act provides for compensation of loss or damage caused by breach of contract. Section 75 of Contract Act talks about compensation for party rightfully rescinding the contract. Apparently there were executed the agreements to purchase land which are absolutely out of the scope of service tax. Cancellation of these agreements has been made as per mutual consent of buyer/appellant and the sellers of eight Agreements to Sell subject to compensation to be paid to buyer of such amount as specifically agreed between the parties. These facts when read in the light of above discussion are sufficient for us to hold that the amount of compensation received by the appellant is not an amount for any act of obligation or toleration on part of appellant. Hence is wrongly held to be the amount of consideration for rendering declared service defined under section 66 E (e) of Finance Act, 1994. Liability has been fastened upon the appellant under Section 65B read with Section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the aforesaid amounts the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party. Similar issue has been considered and settled in favour of the assessee, in the order in the case of M/s. South Eastern Coalfields Ltd. 2020 (12) TMI 912 - CESTAT NEW DELHI held that service tax could not have been demanded from the appellant. In this connection it would also be pertinent to refer to the Circular dated 3-8-2022 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. It also mentions that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute consideration and such activities will not constitute supply . Act of entering into sale cancellation agreement is not an act of rendering taxable declared service. Any amount received as damages, in lieu thereof, cannot be called as the taxable value. We draw our support from the decision of Hon ble Apex Court in the case titled as Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd. 2018 (3) TMI 357 - SUPREME COURT Since the appellant has not rendered any activity which can be called as taxable declared Service, no question arises of any alleged evasion of service tax. We hold that extended period as has been invoked while issuing the impugned Show Cause Notice is also wrong. We don t find any positive evidence to support the alleged suppressions of facts on part of the appellant. The Show Cause Notice is held to be barred by time. Accordingly, the order under challenge is hereby set aside and the appeal is hereby allowed.

Summary

Issues Involved:

1. Whether the compensation received by the appellant for cancellation of land sale agreements constitutes a taxable service under Section 66(E)(e) of the Finance Act, 1994.
2. Whether the extended period of limitation was correctly invoked in issuing the Show Cause Notice.
3. Whether the appellant suppressed facts to evade service tax liability.

Detailed Analysis:

Issue 1: Taxability of Compensation as Declared Service

The central issue was whether the compensation received by the appellant for the cancellation of land sale agreements falls under the definition of "declared service" as per Section 66(E)(e) of the Finance Act, 1994. The appellant argued that the compensation received was for damages due to breach of contract and not as consideration for any service rendered. The Tribunal examined the definition of "service" under Section 65B(44) and the scope of "declared services" under Section 66E. It was observed that for an activity to be considered a declared service, there must be a specific obligation to refrain from an act, tolerate an act, or do an act, with a flow of consideration for this activity. The Tribunal found that the compensation received was not for any obligation or toleration but was a result of a breach of contract, which does not constitute a service. The Tribunal relied on precedents such as South Eastern Coalfields Ltd. and Bharat Dynamics Ltd., which held that penalties or damages for breach of contract do not amount to consideration for a declared service. Therefore, the Tribunal concluded that the compensation received did not constitute a taxable service under Section 66(E)(e).

Issue 2: Invocation of Extended Period of Limitation

The Tribunal examined whether the extended period of limitation was rightly invoked in issuing the Show Cause Notice. The appellant contended that the notice was time-barred and that there was no suppression of facts. The Tribunal noted that extended periods can be invoked only when there is a deliberate act of suppression or misrepresentation. In this case, the Tribunal found no positive evidence of suppression or intent to evade tax. The Tribunal highlighted that the compensation was disclosed in the appellant's accounts under "claim income from agreement cancellation," indicating transparency in financial reporting. Consequently, the Tribunal held that the invocation of the extended period was unjustified, and the Show Cause Notice was barred by time.

Issue 3: Alleged Suppression of Facts

The respondent claimed that the appellant suppressed facts to evade tax liability. However, the Tribunal found no substantial evidence supporting this allegation. The Tribunal reiterated that the compensation received was disclosed in the appellant's financial statements and that there was no intention to hide or misrepresent facts. The Tribunal emphasized that mere receipt of compensation for breach of contract does not imply suppression of facts. Therefore, the Tribunal concluded that there was no suppression of facts by the appellant.

Conclusion:

The Tribunal set aside the order under challenge, holding that the compensation received by the appellant did not constitute a taxable declared service under Section 66(E)(e) of the Finance Act, 1994. It also ruled that the Show Cause Notice was time-barred due to the unjustified invocation of the extended period of limitation. The appeal was allowed, and the demand for service tax, along with associated penalties and interest, was quashed.