2024 (12) TMI 11 - AT - Service Tax

Demand of Service Tax on Amount retained through forfeiture of earnest money/security deposits of contractors - Declared Service - consideration for tolerating the act of poor performance by service providers /contractors - Applicability of section 66E(e) of the Finance Act, 1994 - HELD THAT -From the perusal of these decisions it becomes abundantly clear that the issue of considering a forfeited amount as an amount of consideration towards declared services stands already settled in favour of the assessee. The same is already held to not to be the consideration towards rendering declared service defined u/s 66E(e) of the Finance Act, 1944. In fact the cancellation of contract itself is held to not to be a service. We find no reason to differ from these findings. We further observe that department also vide Circular No.214/1/2023-ST dated 28th February, 2023 has clarified about leviability of service tax on the declared services, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act under clause (e) of section 66E of Finance Act, 1994 and has clarified that the activities contemplated under section 66 E (e) i.e. when one party agrees to refrain from an act or to tolerate an act or a situation, or to do an act, are the activities where the agreements specifically refers to such an activity and there is a flow of consideration for this activity. The decision of this Tribunal in the case of Dy. General Manager (Finance), Bharat Heavy Electricals Limited 2022 (9) TMI 1005 - CESTAT NEW DELHI wherein the earlier decision of the Tribunal in the case of M/s. South Eastern Coalfields 2020 (12) TMI 912 - CESTAT NEW DELHI was dealt with, has been referred in this Circular. The Board has decided to not to file any appeal against the decision in M/s. South Eastern Coalfields 2023 (8) TMI 606 - SC ORDER . The said decision has also been upheld by Hon ble Supreme Court 2023 (8) TMI 606 - SC ORDER passed in the case of Commissioner of Central Excise and Service Tax vs. South Eastern Coal Fields Limited in Civil Appeal No. 2372/2021. We hold that the amount retained has wrongly been held to be the amount towards rendering declared service. The order under challenge is therefore set aside and consequent thereto, the appeal is hereby allowed.

Issues:
1. Alleged failure to pay service tax on amounts retained from contractors.
2. Applicability of section 66E(e) of the Finance Act, 1994.
3. Barred by time - Show Cause Notice dated 24.04.2018.
4. Interpretation of "consideration for tolerating poor performance."

Analysis:

1. Alleged failure to pay service tax on amounts retained from contractors:
The appellant was alleged to have failed to pay service tax on amounts retained from contractors in the form of earnest money, fines/penalties, and liquidated damages for delayed completion of works. The department issued a Show Cause Notice proposing recovery of service tax along with interest and penalties. The appellant contended that the amounts retained were penal charges to compensate for losses and deter violations, not consideration for services. The Tribunal noted the appellant's argument and considered relevant case laws to decide in favor of the appellant, setting aside the demand for service tax.

2. Applicability of section 66E(e) of the Finance Act, 1994:
The department argued that the appellant's retention of amounts from contractors fell under the purview of section 66E(e) of the Finance Act, 1994, which pertains to agreeing to refrain from an act or tolerate a situation as a declared service. However, the Tribunal referenced precedents and held that forfeited amounts for breach of contract terms or non-compliance do not constitute consideration for declared services. The Tribunal found that the issue had already been settled in favor of the appellant by previous decisions and circulars, ultimately allowing the appeal.

3. Barred by time - Show Cause Notice dated 24.04.2018:
The appellant argued that the Show Cause Notice dated 24.04.2018, raising the demand for the period from 2014 to 2015, was time-barred as there was no element of fraud or suppression, and the demand was based on the appellant's own data. The Tribunal agreed with the appellant, stating that the Notice was indeed barred by time and should be set aside on this ground as well.

4. Interpretation of "consideration for tolerating poor performance":
The crux of the dispute revolved around whether the amounts retained by the appellant constituted consideration for tolerating poor performance by contractors. The appellant argued that there was no quid pro quo for the amounts retained, making them penal charges rather than consideration for services. The Tribunal analyzed relevant case laws and circulars, concluding that the retained amounts were not consideration for declared services under section 66E(e) of the Finance Act, 1994. This interpretation led to the Tribunal setting aside the order and allowing the appeal.

In conclusion, the Tribunal ruled in favor of the appellant, holding that the amounts retained from contractors were not subject to service tax as they did not constitute consideration for declared services. The Tribunal also found the Show Cause Notice to be time-barred and set it aside on this ground as well. The decision was based on a thorough analysis of legal provisions, precedents, and circulars related to the interpretation of penal charges and consideration for services under the Finance Act, 1994.

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