2019 (11) TMI 183 - AT - Service Tax

Demand of service tax on receipt of amount for Cancellation of Development agreement - 'Declared Service under Section 66 E(e) of the Finance Act - whether the cancellation of the Development Agreement in terms of the Settlement Agreement would be liable to service tax under Section 66E (e) of the Finance Act and the other one is regarding non supply of iron ore from M/s Amit Mines, which resulted into payment of compensation would be chargeable to service tax within the said Section 66E(e) of the Finance Act? - HELD THAT - It is not in dispute that the Development Agreement and Settlement Agreement has been concluded before the introduction of Section 66E (e) of the Act which deals with declared service. The declared service has been defined as agreeing to obligation or to refrain from the act or to tolerate and act and situation or to do an act . Learned Adjudicating Authority has concluded that the amount received by way of Settlement Agreement is agreeing to refrain from an act and thus chargeable to service tax. We find that these two activities have been rendered prior to introduction of declared service under the statue, and therefore, the same cannot be made applicable to the event that as concluded before the introduction of the new levy. This issue has also been decided held in case of Vistar Construction Pvt Ltd vs. Union of India 2013 (2) TMI 52 - DELHI HIGH COURT , wherein it is held that taxable event is rendition of service and hence the rate of tax applicable would be one on the date on which services were rendered but not on the date when payment is received. Thus, there is no justification in imposition of service tax liability on the Appellant, has been held in the impugned order. The declared service under 66E(e) was first introduced from 01.07.2012 while the agreements are prior to the said date. The rules cannot go beyond Act since the charge under Finance Act was not available on the date of agreements in question. The Rule 5 of the Point of Taxation Rule has thus no application in this case to create a change in an indirect way - we also find that the all payments have been received towards the compensation for non performance of contract and the same will not be within the definition of Section 66 E (e) of the Act, which is for obligation to refrain from the Act or to tolerate and act of situation by the service provider. The Appellant has not provided any service as the Development Agreement itself has been cancelled. So, there is no question of any liability towards the service tax on the payment. The compensation received by the appellant towards termination of Development Agreement is to be treated as actionable claim which is not liable to service tax in terms of Section 65B(44) of the Finance Act - once it is held that the Development Right is not service but it is benefit arising out of immovable property there is no scope of levy of service tax on the sum received out of the Settlement claim. Impugned order set aside - appeal allowed - decided in favor of appellant.

Issues Involved:
1. Whether the amount of ?45,08,09,200/- paid to the Appellant as per the 'Settlement Agreement' and the compensation of ?1,97,50,000/- received for non-supply of manganese ore are liable for service tax under 'Declared Service' under Section 66E(e) of the Finance Act, 1994.

Detailed Analysis:

1. Taxability of Settlement Amounts under Section 66E(e) of the Finance Act, 1994:
The Appellant, engaged in the manufacture and sale of M.S. Billets and M.S. Rods, entered into a 'Development Agreement' with 31 companies for land development. Due to the failure of the landowners to provide a contiguous piece of land, the Development Agreement was terminated, and the Appellant received a settlement amount of ?45,08,09,200/- from various landowners. The Department sought to tax these amounts under Section 66E(e) of the Finance Act, which pertains to 'Declared Service' including "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act."

The Appellant argued that the amounts received were not for any taxable service but were compensation for breach of contract. The Tribunal found that the Development and Settlement Agreements were concluded before the introduction of Section 66E(e) on July 1, 2012, and thus could not be taxed under the new provision. The Tribunal relied on precedents that established the taxable event is the rendition of service, not the receipt of payment (CCE & CE vs. Schott Glass India Pvt Ltd, Vistar Construction Pvt Ltd vs. Union of India).

2. Nature of Settlement Amounts as Actionable Claims:
The Appellant contended that the settlement amounts constituted 'actionable claims' as defined under Section 3 of the Transfer of Property Act, 1882, and thus were excluded from the definition of 'service' under Section 65B(44) of the Finance Act. The Tribunal agreed, noting that the compensation received was a debt created by the Settlement Agreement, falling within the scope of actionable claims, which are not liable for service tax.

3. Compensation for Non-Supply of Manganese Ore:
The Appellant received ?1,97,50,000/- as compensation from M/s Amit Mines Limited for non-supply of manganese ore. The Department attempted to tax this amount under Section 66E(e). The Tribunal found that this compensation was for breach of a sale contract, not for any service rendered, and thus did not fall under the purview of Section 66E(e). The Tribunal emphasized that the compensation was for non-performance of a contract for the supply of goods, which is not a taxable service.

4. Applicability of Rule 5 of the Point of Taxation Rules, 2011:
The Tribunal rejected the Department's reliance on Rule 5 of the Point of Taxation Rules, 2011, which deals with the point of taxation for new services. The Tribunal noted that the agreements in question were entered into before the introduction of Section 66E(e), and thus Rule 5 could not retrospectively create a tax liability.

5. Registration of Agreements:
The Adjudicating Authority had held that the non-registration of the Development and Settlement Agreements by the Appellant meant they could not be relied upon. The Tribunal disagreed, stating that under the Registration Act, 1908, these agreements were not compulsorily registerable and were validly negotiated settlements.

6. Limitation and Penalty:
The Appellant argued that the demand was barred by limitation as there was no fraud, collusion, or suppression of facts. The Tribunal agreed, noting that the Appellant had conducted its business in a bona fide manner, regularly filed returns, and maintained transparent accounts. Consequently, the Tribunal found no grounds for imposing penalties under Section 78(1) of the Finance Act.

Conclusion:
The Tribunal set aside the demand for service tax on the settlement amounts and compensation received by the Appellant, holding that these amounts were not liable for service tax under Section 66E(e) of the Finance Act. The amounts were deemed actionable claims, and the agreements were concluded before the introduction of the declared service provision. The appeal was allowed with consequential relief to the Appellant.

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