2022 (9) TMI 625 - AT - Service Tax

Levy of Service Tax - Collection of penalties or liquidated damages - levy of penalty and liquidated damages collected by the appellant towards late supply of service or goods on the ground that the said amount is collected for agreeing to tolerate the act of late supply of goods by the suppliers - declared service or not - HELD THAT - 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 June 2017 for the reason that by collecting the said amount the appellant agreed to the obligation to refrain from an act or to tolerate the nonperformance of the terms of the contract by the other party - Section 65B (44) defines service to mean any activity carried out by a person for another person for consideration and includes a declared service. Under section 66E (e) a declared service shall constitute agreeing to the obligation to refrain from an act or to tolerate an act or situation or to do an act. Section 66 B provides that service tax shall be levied at the rate of 12 per cent on the value of all services other than those services specified in the negative list provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services while section 66E contains a list of declared services. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that consideration includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from the other party cannot be said to be towards any service per se since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. Two Division Benches of the Tribunal in M.P. POORVA KSHETRA VIDYUT VITRAN CO. LTD. VERSUS PRINCIPAL COMMISSIONER CGST AND CENTRAL EXCISE BHOPAL 2021 (2) TMI 821 - CESTAT NEW DELHI and M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI have held that the amount recovered towards penalties/liquidated damages cannot be included as consideration towards any service or declared service. Levy of service tax - Wheeling charges and Cross Subsidy Charges - levy of service tax on the ground that they are consideration towards provision of declared service as defined under section 66E(e) of the Finance Act - HELD THAT - Wheeling is nothing but transmission of electricity undertaken by the appellant Discom using its infrastructure as the power producer is not permitted to transmit electricity. Transmission is not leviable to service tax. Even assuming that the wheeling charges are collected as charges for permitting the power producer to transmit its electricity using the infrastructure of the appellant since it is an activity related to transmission of electricity and also that the main activity of transmission is done by the appellant wheeling charges would not be leviable to service tax in view of the decision of the Gujarat High Court in Torrent Power. Collection of cross subsidy charges is provided under the Electricity Act and the Regulations to meet the requirements of current level of cross subsidy within the area of supply of the distribution licencee. It is also in relation to transmission and distribution of electricity and cannot be treated as a declared service since it is not for agreeing to tolerate an act of any other person - It is not generated out of any service provided by the appellant and therefore service tax cannot be levied. Levy of service tax - Supervisory charges and Testing charges and Transformer and Meter Testing Charges - HELD THAT - The appellant collects supervision charges in relation to service connection or any other works as a part of the amount paid by it to the contractors to ensure that the network being provided is as per the standards fixed under the Electricity Act and Regulations framed thereunder. Under rule 45 of Indian Electricity Rules 1956 no electrical insulation work shall be carried out for the purpose of distribution of electricity except by the licensed contractor under the direct supervision of a Department person to ensure that the quality of line/ instrument and safety checks for protection/ safety of consumers - In M.P. POORVA KSHETRA VIDYUT VITRAN CO. LTD. VERSUS PRINCIPAL COMMISSIONER CGST AND CENTRAL EXCISE BHOPAL 2021 (2) TMI 821 - CESTAT NEW DELHI it has been held that the amount collected towards these charges cannot be subjected to levy of service tax. The same would be the position for the other charge under this head. Extended period of limitation - suppression of facts or not - HELD THAT - Even when an assessee has suppressed facts the extended period of limitation can be evoked only when suppression is shown to be willful and with an intent to evade payment of service tax. In the present case the Department could not establish conclusively that the appellant had suppressed material facts with an intention to evade payment of service tax. Only a general statement has been made by the Commissioner that the appellant had willfully mis-stated that the consideration received by the appellant for providing the services was not leviable to service tax. Thus it is not possible to sustain the demand made for the extended period of limitation - The demand under this head for the normal period of imitation is sustained. The Department shall calculate the amount of service tax for the normal period of limitation as the demand made for the extended period of limitation cannot be sustained. The impugned order passed by the Commissioner is accordingly set aside except in so far is it seeks to confirm the demand of service tax for the amount collected towards rent from the contractors for the normal period of limitation - Appeal allowed in part.

Summary

Issues Involved:

1. Taxability of penalties/liquidated damages.
2. Taxability of wheeling charges.
3. Taxability of cross subsidy charges.
4. Taxability of supervision/incidental charges.
5. Taxability of transformer and meter testing charges.
6. Taxability of rental amounts collected from contractors.
7. Invocation of the extended period of limitation.

Issue-wise Detailed Analysis:

1. Taxability of Penalties/Liquidated Damages:

The appellant contested the demand of service tax on penalties and liquidated damages collected for late supply of goods/services, arguing that this does not constitute a 'declared service' under section 66E(e) of the Finance Act. The Tribunal agreed, noting that the collection of penalties is not for tolerating an act but to deter non-compliance. The Tribunal referenced previous decisions in M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. and South Eastern Coalfields, concluding that such amounts cannot be considered as 'consideration' for any service or declared service.

2. Taxability of Wheeling Charges:

The Tribunal found that wheeling charges, which are for the transmission of electricity, are not subject to service tax. This conclusion was based on the Gujarat High Court's decision in Torrent Power, which held that transmission of electricity is exempt from service tax, and wheeling charges, being related to transmission, should also be exempt.

3. Taxability of Cross Subsidy Charges:

The Tribunal ruled that cross subsidy charges, collected to cover subsidies granted to consumers, are not subject to service tax. These charges are related to the transmission and distribution of electricity and are mandated by the Electricity Act and relevant regulations. They do not fall under the category of 'declared service' as they are not for tolerating an act.

4. Taxability of Supervision/Incidental Charges:

Supervision charges collected for ensuring compliance with standards during electrical installation work were deemed not subject to service tax. The Tribunal referred to the decision in M.P. Poorva Kshetra Vidyut Vitran Co. Ltd., which held that such charges are part of the essential activities related to the distribution of electricity and thus exempt.

5. Taxability of Transformer and Meter Testing Charges:

The Tribunal held that transformer and meter testing charges are also not subject to service tax. These charges are part of the essential activities related to the transmission and distribution of electricity, as clarified in the Gujarat High Court's decision in Torrent Power.

6. Taxability of Rental Amounts Collected from Contractors:

The Tribunal acknowledged the appellant's liability for service tax on rental amounts collected from contractors but limited this liability to the normal period of limitation. The extended period of limitation was not applicable due to the lack of evidence of willful suppression of facts.

7. Invocation of the Extended Period of Limitation:

The Tribunal found that the extended period of limitation could not be invoked as the Department failed to prove that the appellant had willfully suppressed facts with the intent to evade service tax. The Tribunal referenced the Supreme Court's decisions in Pushpam Pharmaceutical Co. and Continental Foundation Joint Venture Holding, emphasizing that suppression must be deliberate and with intent to evade tax. Consequently, the demand for the extended period was set aside, and the Department was directed to calculate the service tax for the normal period of limitation only.

Conclusion:

The Tribunal set aside the impugned order dated 16.04.2019, except for the confirmation of the demand for service tax on rental amounts collected from contractors for the normal period of limitation. The appeal was allowed to the extent indicated, with the Department instructed to calculate the service tax for the normal period of limitation. The order was pronounced on 14.09.2022.