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TMI Blog2022 (8) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... t Shri Dinesh Prithiani, Assistant Commissioner (AR) for the Respondent ORDER This appeal has been filed by M/s. Gujarat State Petronet Ltd. against confirmation of demand of service tax, interest and imposition of penalty. 02. Learned counsel for the appellant pointed out that the appellants are rendering various taxable services like Transmission of gas through pipelines, business support service, Man power supply service, etc. Learned counsel pointed out that a show cause notice dated 03.04.2018 was issued to them alleging that the appellants are charging and recovering certain amounts under the head of liquidated damages for delays in supply contracts or service contracts as per various agreements entered into between them and their vendors. The matter was heard at length and various arguments were extended by both the sides. Reliance on certain decisions was also made. 2.1 Learned counsel had relied on the decision of tribunal in the case of M/s. South Eastern Coalfields Ltd.- 2021 (55) GSTL J54 (SC). Most of the decisions relied by the learned counsel had taken the support of the aforesaid decision of tribunal in the case of South Eastern Coalfields Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act. Applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge etc. arising out of breach of contract or otherwise and scope of the entry at para 5 (e) of Schedule II of Central Goods and Services Tax Act, 2017 (hereinafter referred to as, CGST Act ) in this context has been examined in the following paragraphs. 2. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act has been specifically declared to be a supply of service in para 5 (e) of Schedule I of CGST Act if the same constitutes a supply within the meaning of the Act. The said expression has following three limbs: a. Agreeing to the obligation to refrain from an act- Example of activities that would be covered by this part of the expression would include non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company from State Electricity Boards (SEBs) or by SEBs/DISCOMs from individual customer for supply of electricity; viii.Cancellation charges recovered by railways for cancellation of tickets, etc. In some of these cases, tax authorities have initiated investigation and in some advance ruling authorities have upheld taxability. 4. In Service Tax law, Service' was defined as any activity carried out by a person for another for consideration. As discussed in service tax education guide, the concept 'activity for a consideration' involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an activity for consideration'. The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply. 5. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son was under an obligation to do so and then performed accordingly. Agreement to do or refrain from an act should not be presumed to exist 7. There has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty so stipulated. 7.1.3 It is argued that performance is the essence of a contract. Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. Liquidated damages are a measure of loss and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved person. It is further argued that a contract is entered into for execution and not for its breach. The liquidated damages or penalty are not the desired outcome of the contract. By accepting the liquidated damages, the party aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfilment of the promise by the other party. 7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as liquidated damages' is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing for another and that other pays the first in return. If the payment is merely an event in the course of the performance of the agreement and it does not represent the 'object', as such, of the contract then it cannot be considered 'consideration'. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contract for transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of lease or for p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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