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TMI Blog2023 (1) TMI 509X X X X Extracts X X X X X X X X Extracts X X X X ..... ting authority to decide the issue afresh - Appeal allowed by way of remand. - Service Tax Appeal No.11918 of 2018 and Service Tax Appeal No.12872 of 2018 - A/10028-10029/2023 - Dated:- 10-1-2023 - MR. RAMESH NAIR, MEMBER (JUDICIAL) AND MR. RAJU, MEMBER (TECHNICAL) Shri Jigar Shah, Advocate for the Appellant Shri Dinesh Prithiani, Assistant Commissioner (AR) for the Revenue ORDER These appeals have been filed by M/s. Krishak Bharti Co Operative Ltd against confirmation of demand of service tax. 02. Learned counsel pointed out that the appellants are engaged in the manufacture of fertilizers. 2.1 He pointed out that the appellant assigned work order to various companies for construction/erection of civil structures and other allied works. He pointed out that the work order/contract is the time based contract with price reduction clause for delay in completion of work. He particularly highlighted clause 13 of the Work order which reads as follows:- 13.0 Price reduction clause- Timely completion of entire work shall be the essence of contract. In the event of delay in completion of work beyond seven days, as indicated in LOI/Work order, @5% of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices, namely :- (a) ........ (b) ........ (c) ....... (d) ........ (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and (f) ...... In terms of section 66E(e) of the Finance Act, 1994 the following was a taxable transaction as a declared service, the same is reproduced below:- 66E. Declared services The following shall constitute declared services, namely:- ............. (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act, 05. In the aforesaid circular dated 03.08.2022, the CBIC has clarified its stand on plethora of situation which includes the dispute in the instant case as well. The circular reads as follows:- In certain cases/instances, questions have been raised 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as described above. However, over the years doubts have persisted regarding various transactions being classified under the said description. 3.1. Some of the important examples of such cases are Service Tax/GST demands on i. Liquidated damages paid for breach of contract; ii. Compensation given to previous allottees of coal blocks for cancellation of their licenses pursuant to Supreme Court Order; iii. Cheque dishonour fine/penalty charged by a power distribution company from the customers; iv. Penalty paid by a mining company to State Government for unaccounted stock of river bed material; v. Bond amount recovered from an employee leaving the employment before the agreed period; vi. Late payment charges collected by any service provider for late payment of bills; vii. Fixed charges collected by a power generating 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or implied) to fall within the ambit of the said entry. In other words, one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either (a) refrain from an act, or (b) to tolerate an act or a situation or (c) to do an act. Further some consideration must flow in return from the other party to this contract/agreement (the second party) to the first party for such (a) refraining or (b) tolerating or (c) doing, Such contractual arrangement must be an independent arrangement in its own right. Such arrangement or agreement can take the form of an independent stand- alone contract or may form part of another contract. Thus, a person (the first person) can be said to be making a supply by way of refraining from doing something or tolerating some act or situation to another person (the second person) if the first person 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rformance of that contract. 7.1.1 It is common for the parties entering into a contract, to specify in the contract itself, the compensation that would be payable in the event of the breach of the contract. Such compensation specified in a written contract for breach of non-performance of the contract or parties of the contract is referred to as liquidated damages. Black's Law Dictionary defines Liquidated Damages' as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party. 7.1.2 Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the 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 stipulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a supply' within the meaning of the Act, otherwise it is not a supply 7.1.6 If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must be remembered that a consideration cannot be considered de hors an agreement/contract between two persons wherein one person does something 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and an undesirable situation. The provision of forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up employment. The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation. The said circular also clarified the stand of CBIC on the issue of forfeiture of salary or payment of bond made in the event of employee leaving the employment before the minimum agreed period. 07. Prime facie Para 5(e) of Schedule-II of CGST Act, is identically worded as Section 66E(e) of the Finance Act, 1994. The circular expresses the stand of CBIC in case of GST on an interpretation ..... X X X X Extracts X X X X X X X X Extracts X X X X
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