2023 (6) TMI 589 - AT - Service Tax

Levy of Service tax - declared service or not - amount received towards damages in arbitration proceedings in connection with the purchase order dated 23.10.2007 issued for Pressure Filter Model HOSESCH FFP along with spares - section 66E (e) of the Finance Act, 1994 - period of dispute in the present appeal is post July 1, 2012 - HELD THAT - 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 - One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a declared service , under section 66E(e) read with section 65B (44) of the Finance Act and would be taxable under section 68 of the Finance Act at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e). It would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding the 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 . The demand could not have been confirmed as the appellant had not provided the declared service contemplated under section 66 (E) (e) of the Finance Act. It is, therefore, not possible to sustain the order dated 07.08.2017 passed by the Commissioner - Appeal allowed.

Summary

Issues Involved:
1. Whether the damages received by the appellant from the foreign supplier for breach of contractual obligations can be subjected to levy of service tax under section 66E(e) of the Finance Act, 1994.

Summary of the Judgment:

Issue 1: Taxability of Damages as Declared Service under Section 66E(e) of the Finance Act, 1994

M/s Sarda Energy & Minerals Ltd. [the appellant] received an amount of EURO 8.5 Million towards damages in arbitration proceedings concerning a purchase order. The department considered this amount taxable under section 66E(e) of the Finance Act, 1994, and issued a show cause notice on 25.10.2016. The Commissioner, by order dated 07.08.2017, confirmed the demand and imposed a penalty upon the appellant. This order was impugned in the appeal.

The appellant contended that the damages received cannot be subjected to service tax, citing the Tribunal's decisions in South Eastern Coalfields Ltd. versus Commissioner of Central Excise & Service Tax, Raipur and M/s Krishnapatnam Port Company Limited versus Commissioner of Central Excise & Service Tax, Guntur. The Tribunal had held that such damages do not attract service tax as they are not for any service provided but are compensatory in nature. The appellant also referred to a Circular dated 03 August, 2022, issued by the Ministry of Finance, which clarified that payments in the nature of liquidated damages, compensation, and penalties arising out of breach of contract do not attract service tax.

The Tribunal examined whether the appellant provided a "declared service" under section 66E(e) of the Finance Act, which includes agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to do an act. The Tribunal noted that for an activity to be taxable as a declared service, there must be a flow of consideration specifically for such an activity.

In South Eastern Coalfields, the Tribunal had observed that penal clauses in contracts are safeguards for commercial interests and not intended as consideration for any service. The recovery of liquidated damages or penalties cannot be considered as payment for any service provided. This decision was followed in subsequent cases, including Northern Coalfields Ltd. versus Commissioner, CGST, CE and Customs, Jabalpur and Krishnapatnam Port.

The Tribunal concluded that the issue in the present case is covered by these decisions, and service tax could not have been demanded from the appellant. The Circular dated 03.08.2022 also emphasized that there must be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist. Payments such as liquidated damages for breach of contract do not constitute consideration for tolerating an act or situation.

Therefore, the demand confirmed by the Commissioner was not sustainable. The order dated 07.08.2017 was set aside, and the appeal was allowed.