2024 (12) TMI 85 - AT - Service Tax

Levy of Service tax - Declared service - Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. - recovery of penalty charges from the contactors / suppliers for delay in providing the goods/ service - HELD THAT - The issue is no longer res-integra as the same is covered by the decision of this Tribunal in GUJARAT STATE ELECTRICITY CORPORATION LIMITED VERSUS COMMISSIONER OF C.E. S.T. -SURAT-I 2024 (11) TMI 473 - CESTAT AHMEDABAD where it was held that ' It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under Section 66E(e) of the Finance Act.' From the above decision, it can be seen that the issue involved in the present case is exactly same as in above cited case law, therefore, the ratio of the above decision is directly applicable in the present case. Following the above decision of the Tribunal, the impugned order is not sustainable, hence the same is set aside. Appeal allowed.

Issues Involved:

1. Whether the penalty recovered from contractors for delay in completing work is liable to service tax under Section 66E(e) of the Finance Act, 1994.
2. Whether the notice pay recovered from employees for not providing sufficient notice before leaving employment is liable to service tax under Section 66E(e) of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Penalty Recovered from Contractors:

The primary issue is whether penalties imposed on contractors for not completing work within the stipulated time frame fall under the definition of "declared service" as per Section 66E(e) of the Finance Act, 1994, which involves "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." The Tribunal concluded that such penalties do not constitute consideration for any service provided. The penalties are not part of any agreement to tolerate an act or situation but are instead a safeguard for the appellant's commercial interests. The Tribunal referenced the decision in the case of South Eastern Coalfields Ltd., where it was established that penalties and liquidated damages do not qualify as consideration for any service and thus are not taxable under Section 66E(e). The Tribunal emphasized that the intention of the parties in the contract is not to breach the terms but to ensure compliance, and penalties are merely a deterrent against non-compliance. Therefore, the service tax demand on penalties is not sustainable and is set aside.

2. Notice Pay Recovered from Employees:

The second issue concerns whether notice pay collected from employees who do not serve the required notice period before leaving employment is subject to service tax. The Tribunal referred to the decision of the Hon'ble Madras High Court in the case of GE T & D India Limited, which clarified that such payments do not constitute a service. The notice pay is not a consideration for any service but a compensation for the employer for the sudden exit of the employee. The High Court noted that the employer does not "tolerate" the act of the employee leaving without notice; rather, it permits the exit upon receiving compensation. The Tribunal agreed with this interpretation, stating that the notice pay does not fall under the declared service category of Section 66E(e) and thus is not subject to service tax. Consequently, the service tax demand on notice pay is also not sustainable and is set aside.

Conclusion:

Both issues are resolved in favor of the appellant. The penalties imposed on contractors and the notice pay collected from employees do not constitute taxable services under Section 66E(e) of the Finance Act, 1994. The Tribunal set aside the impugned order and allowed the appeal, thereby ruling that the service tax demands on these grounds are not sustainable.

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