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TMI Blog2023 (6) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... ntains a list of declared services - One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. 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) of the Finance Act and would be taxable under section 68 of the Finance Act 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). It would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding the applicability of goods and service tax on liquidated damages, compensation and penalty arising out of breach of contract in the context of agreeing to the obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sharma, learned Consultant for the appellant assisted by Ms. Pooja Agarwal and Dr. Radhe Tallo learned authorized representative appearing for the Department it would be necessary to briefly state the relevant facts. 3. The appellant had placed a purchase order upon M/s Larox Corporation, now known as M/s Outotec Oyi of Finland [foreign supplier] for supply of the filter with spare parts. Clause VI of the purchase order relates to performance guarantee. It provides that the foreign supplier will guarantee the production of 100 ton per hour filter cake with a moisture of less than 8.5%. Clause XII of the purchase order deals with disputes and arbitration and provides that arbitration can be resorted to if a dispute cannot be settled amicably under or in relation to the purchase in accordance with the latest rules of conciliation and arbitration of the International Chambers of Commerce. 4. A dispute arose between the parties regarding the filter that was supplied by the foreign supplier since it had many defects and the level of production could also not be achieved. Accordingly, the appellant sent a legal notice dated 26.11.2011 through an advocate and paragraph 29 of the not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 March 2016 the Tribunal formally closed the proceedings (Article 27 of the Rules). The Tribunal has reviewed the terms of the Parties joint request and accepts to issue the Award by Consent. At its session of 24 March 2016 the Court fixed the costs of arbitration of USD 338 000 (i.e. fees and expenses of the arbitration and the ICC administrative expenses). 6. The Settlement referred in Clause 3 of the award is as follows :- Sarda and Outotec have agreed that for the breach of the contract, Outotec will pay, in accordance with the provisions below, 8.5 million Euros [Eight million and five hundred thousand Euros] ( the Settlement Sum ) {which, for the avoidance of doubt, is inclusive of any applicable taxes} to Sarda in full and final settlement of (i) all claims made by Sarda against Outotec in the Arbitration and (ii) any claims Sarda has or may have against Outotec or any other company belonging to Outotec Group whose parent company is Outotec Oyi, including future claims not yet known to it, in respect of the supply, erection and commissioning by Outotec to Sarda of the Hoesch FFP 1516 Filter press machine. 3. Sarda, on receipt of BG by authenticated SWIFT, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Service Tax Rules, 1994. (b) The demand of Rs. 1,17,18,413/- (Rupees One Crore Seventeen Lakhs Eighteen Thousand Four Hundred Thirteen only) is dropped after allowing Noticee the benefit of cum-tax value. (c) I order for recovery of interest form the Noticee at the appropriate rate on the above Service Tax under Section 75 of the Finance Act, 1994. (d) I impose a penalty of Rs. 8,08,16,636/- (Rupees Eight Crores Eight lakhs sixteen thousand six hundred and thirty six only) on the Noticee under the provisions of Section 78 of the Finance Act, 1994. (e) I further impose a penalty of Rs. 37,199/- (Rupees Thirty Seven Thousand One Hundred Ninety Nine only) under Section 78 of the Finance Act, 1994 on the Noticee in respect of the payment of Service Tax on receipt of penalties against cancellation of orders . 10. The issue that arises for consideration in this appeal is as to whether the damages received by the appellant from the foreign supplier for breach of contractual obligations can be subjected to levy of service tax under section 66E (e) of the Finance Act. 11. Learned Consultant appearing for the appellant submitted that the issue is covered by the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force . 16. Declared Services have been defined in section 66E and sub-section (3) of section 66E, which is involved in this appeal, is as follows : 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; 17. The demand proposed in the show cause notice has been confirmed by the Commissioner for the reason that by settling the dispute in arbitration proceedings by a consent settlement would amount to not letting the arbitration proceedings continue and so the said activity would be covered under the definition of declared service under section 66E (e) of the Finance Act. 18. 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 toler ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uard 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 compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o mentions that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute consideration and such activities will not constitute supply . The relevant portion of the Circular is reproduced below: Agreement to do or refrain from an act should not be presumed to exist 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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