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TMI Blog2023 (4) TMI 1075X X X X Extracts X X X X X X X X Extracts X X X X ..... l held that liquidated damages recovered on account of breach or non-performance of contract are not consideration in view of any service but are in the nature of deterrent imposed so that such a breach or non-performance is not repeated. The Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs also provides that service tax cannot be levied on the amount collected for the said purpose - thus demand on contractual agreement do not sustain. Alleged short-payment of tax to the extent of dead rent/surface rent paid by the appellant to the State Government - reverse charge mechanism - HELD THAT:- For the purpose of levying service tax, the taxable event is construed as the time when the service is provided or agreed to be provided. Thus, in order to determine whether levy of tax is applicable on a particular activity, it is necessary to determine the point of time when such activity is provided or agreed to be provided. In the present case, the agreement between the appellant and State Government for grant of mining rights was executed on 02.01.2016 and on this date, the transactions involving assignment of right to use natural resource was not taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, not possible to sustain the impugned order dated 27.03.2019 passed by the Principal Commissioner - Appeal allowed. - SERVICE TAX APPEAL NO. 52226 OF 2019 - FINAL ORDER NO. 50522/2023 - Dated:- 24-4-2023 - MR. DILIP GUPTA, PRESIDENT AND MS. HEMAMBIKA R. PRIYA, MEMBER (TECHNICAL) Shri B.L. Narasimhan and Shri Kunal Aggarwal, Advocates for the Appellant Dr. Radhe Tallo, Authorized Representative for the Department ORDER M/s. Madhya Pradesh State Mining Development Corporation [the appellant] has filed this appeal to assail the order dated 27.03.2019 passed by the Principal Commissioner, CGST and Central Excise, Bhopal [the Principal Commissioner] confirming the demand of service tax with interest and penalty after invoking the extended the period of limitation contemplated under the proviso to section 73(1) of the Finance Act [ the Finance Act]. 2. The appellant was granted rights to mine sand, rock, phosphate, flag stone, and coal by the Madhya Pradesh State Government [the State Government]. In lieu of these rights, the appellant was required to pay royalty to the State Government. The mining operations were carried out by the appellant either d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the obligation to tolerate an act or situation or to do an act as a declared service. The appellant is recovering the amount of contractual adjustment as penalty on account of penal clause imposed on the contractor. Further, the appellant is recovering consideration in the name of compensation/penalty from the contractors to tolerate contractor s act of failure/ situation as per the contractual terms conditions. Such actions on part of the appellant constitutes a declared service under section 66E (e) of the Finance Act, making the amounts susceptible to service tax. 21,33,83,731/- 2. Non-payment of service tax on royalty paid to State Government under Reserve Charge Mechanism By an agreement dated 2.1.2016, the State Government granted the appellant mining rights of sand, rock, phosphate, flag stone, and coal. For such rights, the appellant is required to pay royalty to the State Government. As per Part 5 of the agreement, the payment of royalty/dead rent/surface rent is subject to Rule 30 of M.P. Minor Minerals Rules, 1996. The appellant has been payi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t towards its administrative expenses. As per the Order dated 08.04.1996 and the Order dated 30.12.1996, the appellant has to do several works and towards compensation for same, the appellant is entitled to retain 30% of amount collected for area development. This amount is against services provided by the appellant and hence appears liable to pay service tax. 36,70,018/- 5. Shri B.L. Narshiman assisted by Shri Kunal Aggarwal, learned counsel for the appellant made the following submissions: (i) It is a settled position of law that liquidated damages recovered on account of breach or non-performance of contract are not consideration in lieu of any service but are in the nature of a deterrent imposed so that such a breach or non-performance is not repeated. In support of this contention learned counsel placed reliance on the decision of the Tribunal in South Eastern Coalfileds vs. Commissioner of Central Excise and Service Tax [ 2020 (12) TMI 912 CESTAT New Delhi ], and to other decisions which have followed this decision; (ii) The Circular 28.02.2023 issued by Central Board of Indirect Tax Customs regarding levi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious 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 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. 28. It also needs to be noted that section 65B(44) defines -service to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that -consideration includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agrees to pay consideration to the first party for doing or abstaining from such an act. Such contractual arrangement must be an independent arrangement in its own right. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration. 5. The issue also came up in the CESTAT in Appeal No. ST/50080 of 2019 in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the Hon'ble Tribunal relied on the judgment of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur (2021 (55) G.S.T.L 549(Tri-Del)). Board has decided not to file appeal against the CESTAT order ST/A/50879/2022-CU[DB] dated 20.09.2022 in this case and also against Order A/85713/2022 dated 12.8.2022 in case of M/s Western Coalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022 dated 08-08-2022), and M/s Neyveli Lignite Corporation Ltd (CA No. 0051-0053/2022) on this ground. 6. In view of above, it is clarified that the activities contemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not taxable. 17. In this connection section 66D of the Finance Act, as it existed prior to 01.04.2016, can be referred to and it is as follows: 66D The negative list shall comprise of the following services, namely:- (a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere- (i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government; (ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) transport of goods or passengers; or (iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business entities 18. Thus, prior to 01.04.2016, barring a few exceptions, all services provided by the Government were covered under the negative list and accordingly, not subjected to service tax. 19. With effect from 01.04.2016, however, section 66D(a)(iv) of the Finance Act was amended and 'all services provided by the government to a business entity were excluded from the negative list of services. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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