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TMI Blog2021 (2) TMI 821X X X X Extracts X X X X X X X X Extracts X X X X ..... lectricity or for tampering of meters. 3. The appellant is a wholly owned undertaking of the Government of Madhya Pradesh and is engaged in the distribution of electricity in the eastern area of the State. The "transmission or distribution of electricity by an electricity transmission or distribution utility" is included in the negative list of services in section 66D(k) of the Finance Act, 1994 [the Finance Act]. The power charges are, therefore, exempted from levy of service tax. 4. During the course of audit pertaining to the period 2012-13 to 2015-16, it was noticed that the appellant was collecting an amount towards liquidated damages from the contractors and suppliers when they failed to ensure compliance of the terms of the contract within the time stipulated and the appellant was also recovering amount from consumers for theft and un-authorized use of electricity. According to the Department, this amount was not included in section 66D(k) of the negative list and so a show cause notice dated October 5, 2017 was issued to the appellant mentioning therein that the penalty amount and the amount collected towards theft of electricity by the appellant was towards considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a consideration of-course. As per Explanation (a) to Section 67 of the Act "consideration" includes any amount that is payable for the taxable services provided or to be provided. By virtue of agreements/contracts, the Noticee levy consideration in the name of compensation/penalty from the suppliers/contractors to tolerate their act of failure situation as per the contractual term & conditions. Such action on the part of the Noticee is an activity and constitutes a "declared service‟ under Section 66E of the Finance Act, 1994. It may not be out of place to mention that a statute is designed to be workable and the interpretation thereof by the adjudicator should be to secure that object, unless crucial omission or clear direction makes that end unattainable. One provision of an Act cannot be so construed as to defeat another provision of the Act. The several provisions in the Act must be read together and as parts of one larger one." (emphasis supplied) 8. In regard to the amount collected for theft of electricity, the findings of the Principal Commissioner are as follows : " ********** 23. Theft charges are collected from the consumer of electricity for unauthorized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Das [AIR 1963 SC 1405] held that reasonable compensation for a breach of contract has to be proportionate to the actual injury suffered, which means injury tolerated since the word "suffering" is synonymous to "tolerating". (iv) A case of compensation or damages for breach of a contract always involves one party tolerating/suffering an injury. Hence, the claim of the appellant in the present case that their contract is not for tolerating anything is fundamentally wrong; (v) In this connection, reliance has also been placed upon the decision of the Delhi High Court in XL Energy Limited Vs. Mahanagar Telephone Nigam Limited [MANU/DE/1892/2018]. 11. The submissions advanced by the learned counsel for the appellant and the learned Authorized Representative of the Department have been considered. 12. As noted above, the appellant is engaged in the business of distribution of electricity. In the course of business, certain contracts were executed by the appellant in which a clause provided for levy of penalty for non-observance/breach of the terms of the contract. The appellant also collected theft charges as penalty for unauthorized use of electricity as contemplated under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, namely:- ***** (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" 18. Liability has been fastened upon the appellant under section 65B read with section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party. 19. 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the service provider and should accrue to the benefit of the latter. The concept of "consideration‟, as was also expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between "conditions‟ to a contract and "consideration for the contract". It has been prescribed under the said GST Rules that certain "conditions‟ contained in the contract cannot be seen in the light of "consideration‟ for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 24. This precise issue was considered by a Division Bench of this Tribunal in M/s South Eastern Coalfields Ltd wherein certain clauses providing penalty for non-observance/breach of the terms of the contract entered during the course of business came up for consideration. The case of Department was that the amount collected by the appellant towards compensation/penalty was taxable as a " declared service" under section 66E(e) of the Finance Act. After considering the decision of a Larger Bench of the Tribunal in Bhayana Builders and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do an act. 26. 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) and would be taxable under section 68 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). 27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the supply of a reservation service. The Tribunal also referred to its earlier decisions in M/s K.N. Food Industries Pvt. Ltd. vs. Commissioner of CGST and Central Excise Kanpur [2019-TIOL-3651-CESTAT-ALL] and M/s Lemon Tree Hotel vs. Commissioner, Goods and Service Tax [2020-TIOL-1114-CESTAT-DEL] 27. Ultimately, the Tribunal has held as follows: "43. 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." 28. The issue that arose for consideration in Lemon Tree Hotel Hotel 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 hote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal held that the ex-gratia charges were for making good the damages due to the breach of the terms of the contract and did 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 towards payment for any services. The relevant portion 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 compe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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