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TMI Blog2023 (3) TMI 641X X X X Extracts X X X X X X X X Extracts X X X X ..... not examine the issue in the light of the aforesaid circular. The issue in dispute can be decided in the light of the aforesaid circular. The matter is remanded to the original adjudicating authority to decide the issue afresh. - Service Tax Appeal No.10543 of 2019 - Final Order No. A/10441/2023 - Dated:- 14-3-2023 - MR. RAMESH NAIR, MEMBER (JUDICIAL) AND MR. RAJU, MEMBER (TECHNICAL) Shri T.R. Venkateswaran Ms. Nikita Jain, Chartered Accountants for the Appellant Shri Tara Prakash, Deputy Commissioner (AR) for the Respondent ORDER This appeal has been filed by M/s. Linde Engineering India Private Limited against confirmation of demand of service tax on amount claimed by the appellant to the liquidated damages. 02. Learned counsel for the appellant pointed out that demand has been confirmed in respect of amount received by them which they claim to be liquidated damages. The demand has been made under Section 66E(e) of the Finance Act, 1994. Learned counsel pointed out that the appellants are receiving certain amounts from their vendors when vendors delay or cause some other default in the contracts, such amount is sought to be taxed under the head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment 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 consideration paid by the other party. Another example of such activities would be a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighbouring housing project, which wants to pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 an act or a situation, or to do an act in para 5 (e) of Schedule II of CGST Act is strikingly similar to the definition of contract in the Contract Act, 1872. The Contract Act defines 'Contract as a set of promises, forming consideration for each other. 'Promise' has been defined as wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere 'events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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