2024 (7) TMI 269 - AT - Service Tax

Levy of service tax - ex-gratia amount received - Section 66E of the Finance Act, 1994 - HELD THAT - The issue is no more res integra and is squarely covered by the decision of the Tribunal in the case of 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 ' As such the present ex-gratia charges made by the 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.' The facts of the present case are squarely covered by the aforesaid decision of the Tribunal - the impugned order cannot be sustained - Appeal allowed.

Summary

Issues:
Challenge to Order-in-Appeal regarding service tax on ex-gratia amount received.

Analysis:
The Appellant, engaged in biscuit manufacturing, entered into an agreement with another company to use spare manufacturing facility. Service tax was demanded on the ex-gratia amount received due to underutilization of capacity. The Appellant contended that the ex-gratia was not for refraining or tolerating any act, hence not covered under Section 66E of the Finance Act, 1994. They argued that it was part of job work charges and not a consideration for any service. Additionally, they highlighted that the ex-gratia was compensatory in nature for underutilization. The Appellant also cited a CBIC circular supporting their stance. The Tribunal referred to a previous case where it was held that ex-gratia charges for underutilization compensation do not constitute a service liable for service tax. The Tribunal agreed with this precedent, emphasizing that the ex-gratia was not a payment for any service but a compensation for unintended events, not arising from an obligation to tolerate an act. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief.

This judgment involved the interpretation of the applicability of service tax on ex-gratia amount received for underutilization of manufacturing capacity. The Tribunal considered the nature of the ex-gratia payment, determining it to be compensatory in case of underutilization, not constituting a service liable for service tax. The decision was based on a previous ruling that clarified ex-gratia charges for underutilization compensation do not fall under the definition of service for tax purposes. The Tribunal found the facts of the present case aligned with the precedent, leading to the setting aside of the impugned order and allowing the appeal with consequential relief.