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TMI Blog2020 (12) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed - It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of subsection (1) of section 67. What needs to be noted is that each of these refer to where the provision of service is for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. The activities, therefore, that are contemplated under section 66E (e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity - In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between conditions to a contract and considerations for a contract . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced below:- 5. M/s SECL is charging collecting amount in the name of compensation/penalty from the buyers of coal on the short-lifted/un-lifted quantity of coal non-compliance of terms conditions of coal supply agreements including forfeiture of EMD/SD. M/s SECL is also collecting amount in the name of compensation/penalty from the contractors engaged by them for providing various types of services viz. transportation, OBR removal, etc. for breach of terms conditions of the respective contracts. It is also noticed that SECL were also recovering/claiming amount in the name of liquidated damages from the material suppliers for breach of terms conditions of the contracts. Accordingly, in terms of provisions of Section 65B of the Finance Act, 1994 read with Section 66E(e) ibid, such amount charged by SECL from the buyers of coal/service providers etc. under the respective agreements appears pertain to the declared services under clause (e) of Section 66E attracting levy of service tax. M/s SECL and its coal producing areas have recovered ₹ 265,99,46,400/- towards EMD forfeitures, penalty liquidated damages respectively from the buyers of coal, contractors and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r interest or penalty was imposable. 6. The Principal Commissioner, however, did not accept the contentions advanced on behalf of the appellant and confirmed the demand of service tax holding that the amount received by the appellant towards penalty, earnest money deposit forfeiture and liquidated damages would tantamount to a consideration for tolerating an act on the part of the buyers of coal/contractors, for which service tax would be levied under section 66 E(e) of the Finance Act. The relevant portion of the order is reproduced below: 10. I find that the main allegation based on which the demands of Service Tax have been made, in all the cases is non-payment of Service Tax on the amount of EMD forfeitures, penalty liquidated damages recovered by M/s. SECL from the buyers of coal, contractors and material suppliers. I find that the proposition of the Revenue is simple, that the impugned activity falls under the category of Declared service and shall be taxable, while on other hand, M/s. SECL has contested the levy of Service Tax on the above on different grounds. ******* ******* ******* 13. Before initiating the examination of the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Penalty, EMD forfeiture amount and Liquidated damages would tantamount to a consideration payable for tolerating an act on the part of Buyers of Coal/Contractors of M/s. SECL. Therefore, Service Tax is leviable to be paid by M/s. SECL under section 66E(e) of the Finance Act, 1994. (emphasis supplied) 7. Shri Rajeev Agarwal, learned authorized representative for the appellant made the following submissions: (i) The Principal Commissioner committed an error in holding that by collecting the amount, the appellant has agreed to the obligation to refrain from an act or that the appellant tolerated the non-performance of the terms of the contract by the other party. In support of this contention, learned authorized representative placed reliance upon the following decisions: (a) M/s K.N. Food Industries Pvt. Ltd. vs. Commissioner of CGST and Central Excise Kanpur [2019-TIOL-3651-CESTAT-ALL]. (b) M/s Lemon Tree Hotel vs. Commissioner, Goods and Service Tax [2020-TIOL-1114-CESTAT-DEL]. (c) Commissioner of Service Tax, Chennai vs. M/s Repco Home Finance Ltd. [ST Appeal No. 511 of 2011 (LB) decided on June 6, 2020.] (d) GE T D India Limited vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved is whether the appellant is providing a declared service contemplated under section 66E(e) of the Finance Act, which service became taxable w.e.f July 1, 2012. The period of dispute in the present appeal is from July 2012 to March 2016. 11. Section 65B(44) of the Finance Act defines service to mean any activity carried out by a person for another for consideration, and includes a declared service, but does not include what is mentioned in a,b and c . The relevant portion of the definition of service is reproduced below: Section 65B(44) service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below:- 67. (1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall,- (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. ******** Explanation. -For the purposes of this section,- (a) consideration includes ******** ******** ******** (b) xxxxxxxxxxx (c) xxxxxxxxxxx (emphasis supplied) 17. Section 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed. 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words for such service provided the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply goods provided by the service recipient to the service provider is neither an amount charged by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined. (emphasis supplied) 21. The aforesaid view was reiterated by the Supreme Court in Union of India vs. Intercontinental Consultants and Technocrats [ 2018 (10) GSTL 401 (SC) ] and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a consideration for the taxable service provided under the Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. It should also be remembered that there is marked distinction between conditions to a contract and considerations for the contract . A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 25. It is in the light of what has been stated above that the provisions of section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation 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. 29. The situation would have been different if the party purchasing coal had an option to purchase coal from A or from B and if in such a situation A and B enter into an agreement that A would not supply coal to the appellant provided B paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under section 66E (e). 30. The activities, therefore, that are contemplated under section 66E (e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. 31. In this connection, it will be useful to refer to a decision of the Supreme Court in Food Corporation of India vs. Surana Commercial Co. and others [ (2003) 8 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration within the territory of the country by a taxable person acting as such is subjected to VAT. Article 6(1) of the Sixth Directive provides that supply of services shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inter alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11(A) (1) (a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies . 34. The question referred for preliminary hearing, in essence, in the aforesaid decision was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11). (emphasis supplied) 35. Reference can also be made to a decision of the Tribunal in Lemon Tree Hotel. The issue that arose for consideration was whether forfeiture of the amount received by a hotel from a customer on cancellation of the booking would be leviable to service tax under section 66E(e). The Tribunal held that the retention of the amount on cancellation would not attract service tax under section 66E (e) and the relevant portion of the decisions is reproduced below: 3. So far as the first issue is concerned, the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retains the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decision is reproduced below: 4. ******* ******* ******* We find that appellant is admittedly manufacturing confectionaries for and on behalf of the M/s Parle and is clearing the same upon payment of Central Excise duty on the basis of MRP declared by M/s Parle. It is only in situation when the appellants capacity, as a manufacturer, is not being fully utilized by M/s Parle, their claim of ex-gratia charges arises so as to compensate them from the financial damage/injury. As such, ex-gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee. ******* ******* ******* In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex-gratia job charges. The same are not covered by any of the Acts as described under Section 66E (e) of the Finance Act, 1994. The said Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale price. iv) The defendant had to get the sale deed registered by July 1, 1949. If, for any reason, the defendant failed to get the sale deed registered by the stipulated date, then the sum of ₹ 25,000/- (₹ 1000 received as earnest money deposit and the subsequent ₹ 24,000/- out of the sale price) would be forfeited and the agreement cancelled. 39. The plaintiff received the agreed sum on March 25, 1949 and possession was delivered, but the sale of the property was not completed before the expiry of the stipulated period. The plaintiff, therefore, sought a decree for possession of land and building and a decree of ₹ 6500/- as compensation for use and occupation of the building. It was alleged that the agreement stood cancelled because the defendant committed a default in performing the agreement and the sum of ₹ 25,000/- paid by the defendant stood forfeited. 40. It is in this context and in the context of section 74 of the Contract Act, that the Supreme Court observed: 20. Section 74 declares the law as to liability upon breach of contract where compensation is by agreement of parties pre-determined, or where there is a stipu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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