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TMI Blog2024 (11) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... no longer res-integra in the light of the decision cited by the appellant in the case of South Eastren Coalfields Ltd. [ 2020 (12) TMI 912 - CESTAT NEW DELHI ] it is clear that penalty towards non fulfillment of the condition of the contract will not fall under Section 66 E (e) of Finance Act, 1994, therefore the service tax under the said declared service cannot be recovered. Accordingly, service tax demand on this ground is set aside. Service tax on consideration recovered from the employees who have not complied with the condition of giving sufficient notice before leaving the job - This issue is also not res-integra as the same has been decided in the case of GE T D INDIA LIMITED [ 2020 (1) TMI 1096 - MADRAS HIGH COURT ] the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of the employee upon imposition of a cost upon him for the sudden exit. The definition in clause (e) of Section 66E as extracted above is not attracted to the scenario before me as, in considered view, the employer has not 'tolerated' any act of the employee but has permitted a sudden exit upon being compensated by the employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority along with demand of interest and imposition of penalty. Being aggrieved by the order in original appellant filed appeal before the Commissioner (Appeals) who concurring with the views taken by adjudicating authority upheld the Order-In-Original and rejected the appeal. Therefore, the present appeal filed by the appellant. 2. Mrs. Neeta Ladha, Learned Chartered Accountant, appearing on behalf of the appellant submits that as regard the issue of service tax leviability on penalty for not completing the contract within the stipulated time period, the same does not fall under the declared service under Section 66 E (e) as the same is not consideration towards any service whereas, it is the penalty for not completing the work within the stipulated time period. She placed reliance on the Board's Circular No.178/10/2022-GST and this Tribunal s decision in the case of South Eastren Coalfields Ltd Vs Commissioner of Central Excise Service Tax Final No.51651/2020 dated 22.12.2020 CESTAT, New Delhi. As regard the issue that whether the service tax is chargeable on the amount recovered from the employee under the head Notice to Pay that is for employees failing to comply with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant in the case of South Eastren Coalfields Ltd wherein, the principal bench of the Tribunal, New Delhi has disposed of a bunch of appeals by passing following order:- 10. The issue that is involved is whether the appellant is providing a declared service contemplated under Section 66E(e) of the Finance Act, which service became taxable w.e.f. July 1, 2012. The period of dispute in the present appeal is from July, 2012 to March, 2016. 11. Section 65B(44) of the Finance Act defines service to mean any activity carried out by a person for another for consideration, and includes a declared service, but does not include what is mentioned in (a), (b) and (c) . The relevant portion of the definition of service is reproduced below : Section 65B(44) service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - (a) an activity which constitutes merely, - (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of taxable service for charging service tax. It is reproduced below :- 67.(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, - (i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him; (ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. xx xx xx Explanation. - For the purposes of this section, - (a) consideration includes xx xx -xx (b) xx xx xx (c) xx xx xx (Emphasis supplied) 17. Section 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in Section 66B in such manner and within such period as may be prescribed. 18. It is, thus, clear that where service tax is chargeable on any ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words for such service provided the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply of goods provided by the service recipient to the service provider is neither an amount charged by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined. (Emphasis supplied) 21. The aforesaid view was reiterated by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats [2018 (10) G.S.T.L. 401 (S.C.)] and it was observed that since service tax is with reference to the value of service, as a nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not become part of the value which is taxable. It should also be remembered that there is marked distinction between conditions to a contract and considerations for the contract . A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 25. It is in the light of what has been stated above that the provisions of Section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. 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. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the contract and a penalty is imposed only if there is non-compliance. 29. The situation would have been different if the party purchasing coal had an option to purchase coal from A or from B and if in such a situation A and B enter into an agreement that A would not supply coal to the appellant provided B paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under Section 66E(e). 30. The activities, therefore, that are contemplated under Section 66E(e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. 31. In this connection, it will be useful to refer to a decision of the Supreme Court in Food Corporation of India v. Surana Commercial Co. and Others [(2003) 8 SCC 636]. The Supreme Court pointed out that if a party promises to abstain from doing something, it can be regarded as a consideration, but such abstinence has to be specifically mentioned in the agreement. The relevant portion of the judgment is reproduced below : Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11(A)(1)(a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies . 34. The question referred for preliminary hearing, in essence, in the aforesaid decision was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The sum paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed : 26.Since the obligation to make a reservation arises from the contract for accommodation itself a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration was whether forfeiture of the amount received by a hotel from a customer on cancellation of the booking would be leviable to service tax under Section 66E(e). The Tribunal held that the retention of the amount on cancellation would not attract service tax under Section 66E(e) and the relevant portion of the decision is reproduced below : 3. So far as the first issue is concerned, the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retain the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permissible abated value. It is the case of the Revenue that upon cancellation by the customers, the gross amount received by the appellant qualifies the receipt under Section 66E(e). 4. Ld. Commissioner (Appeals) in confirming the demand under this head has observed that retention of such cancellation charges is not against the provisions of intende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... compensate them from the financial damage/injury. As such, ex gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee. xxx xxx xxx In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex gratia job charges. The same are not covered by any of the Acts as described under Section 66E(e) of the Finance Act, 1994. The said Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said clause, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. which are clearly absent in the present case. In the instant case, if the delivery of project gets delayed, or any other terms of the contract gests breached, which were expected to cause some damage or loss to the appellant, the contract itself provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod. The plaintiff, therefore, sought a decree for possession of land and building and a decree of Rs. 6500/- as compensation for use and occupation of the building. It was alleged that the agreement stood cancelled because the defendant committed a default in performing the agreement and the sum of Rs. 25,000/- paid by the defendant stood forfeited. 40. It is in this context and in the context of Section 74 of the Contract Act, that the Supreme Court observed : 20. Section 74 declares the law as toliability upon breach of contract where compensation is by agreement of parties pre- determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract for predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. 41. The Supreme Court also noticed that Section 74 of the Contract Act mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod prior to quitting from employment, ranging from two to three months. An option is provided to the employees to the effect that if they are not in a position to stay and serve out the notice period, then in lieu of the same, the employee will be required to pay the equivalent pay of salary for the period for which notice was not served. 2. Thus, in a case where an employee wishes to quit, it is incumbent upon the employee to put the employer to notice in advance of a stipulated period to enable recruitment of a new employee and smooth transition of the work carried on by the employee, who proposes to quit. It also facilitates a situation where the employee may desire immediate quitting by enabling him to do so, however, also ensuring that some compensation is provided to the employer by virtue of the sudden and unexpected termination of duty. 3. The petitioner in this case had received certain amounts in lieu of notice period from outgoing employees. The Assessing Officer was of the view that this amount would attract service tax since the petitioner is deemed to have facilitated the termination of employment and thus a category of service entiled and described as 'facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, alterations, replacements or remodelling of any existing civil structure; (c) temporary transfer or permitting the use of enjoyment of any intellectual property right; (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software; (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; 7. According to the Revenue, payment in lieu of notice constitutes payment to an employee by the employer for the notice period or vice versa where the employer/employee desires an immediate exit from the organization. 8. This arrangement, the Revenue argues, would attract the provisions of Section 66E(e), whereby agreement by an entity to the obligation to refrain from an Act or to tolerate an Act or a situation, or to do not act, would constitute taxable service. According to the respondent, the petitioner has tolerated the act of immediate quitting from service, by the employees and such agreement/toleration results in the rendition of a taxable service. 9. Heard Mr.Joseph Prabakar, learned counsel for the petitioner and Mr.A.P.Srinivas, learned Senior Standing Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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