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TMI Blog2025 (4) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... ed damages 78,96,826 87,94,633 u/r.S.78 10,000 u/r.S.77 Legal fees (RCM) 6,37,826 (paid) Import Services 2,59,581 (Paid) Total 87,94,633 88,04,633 42715/ 2018 01.07.12 to 30.06.17 88/2018 dt. 21.08.18 14/2018 dt. 28.03.18 & corrigendum dt. 10.4.18 Late Payment Charges (LPC) 1,83,17,515 1,83,17,515 u/r S.78 40250 / 2019 01.10.12 to 30.06.17 113/2018 dt. 05.12.18 34/2018 dt. 30.08.18 On Liquidate d damages 3,53,62,808 3,53,62,808 u/r S.78 3. Brief facts are that M/s Bharat Sanchar Nigam Limited, Chennai Telephones, the appellant in all these appeals, are an Internet & Telecommunication Service Provider and registered under Service Tax under registration No.AABCB5576GST023. Special Audit was conducted in terms of Section 72A read with Section 83 of Finance Act by the Special Auditor appointed by the Commissioner of Service Tax, along with the officers of Internal Audit of Service Tax Commissionerate. After verification of the appellant's books of account, the Department was of the view that the liquidated damages are collected from the Vendors/Contractors to whom contracts for supply/work was awarded by the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for service tax under Section 66 E (e) of Finance Act, 1994. After due process, this SCN was adjudicated vide OIO No.113/2018 dated 03.12.2018 as aforementioned. Aggrieved by the impugned orders in original, the appellant has preferred these appeals, details of which were tabulated above and are thus before this Tribunal. 4. Shri. V Ravindran, Learned Counsel appearing for the appellant submits that the appellant is one of the largest Public Sector Undertaking functioning under the Ministry of Telecommunications. The Ld. Counsel submits that Liquidated damages are amounts received for making good the damages, losses or injuries arising due to the breach of terms and conditions of the contract committed by the contractors/subcontractors of BSNL in the course of performing their obligations under the contract towards supply of goods or rendering of service. The declared services under Section 66E(e) requires agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act, which the appellant is not doing and on the contrary the breach by the contractor gives rise to a cause of action in terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided in favour of the assessee in a number of Tribunal decisions, a few of which has been filed as relied upon. 7. Shri. Anoop Singh and Shri Sanjay Kakkar, Learned Authorised Representatives for the respondents reiterate the rationale advanced by the adjudicating authority in the respective orders in Original. Shri. Anoop Singh also submitted a Circular No.178/10-HGST/2022-GST dated 05th September 2022 issued by Excise and Taxation Commissioner-cum-Commissioner of State Tax, Haryana to contend that liquidated damages paid for breach of contract and late payment charges collected by any service provider for late payment of bills have been cited therein as examples of transactions answering the description "agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" and thus it can be seen that liquidated damages is distinct and separate from late payment charges. It is the submission of the Ld. AR that therefore the demand confirmed in the OIO 88/2018 dated 21.08.18 in so far as LPC is concerned, being different from liquidated damages, the decisions of the Tribunal on the issue of liquidated damages have no application. Ld. AR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt collected for delayed payment of a telephone bill is not to be treated as consideration charged for providing of telecom service and, therefore, does not form part of the value of taxable service under Section 67 read with Service Tax (Determination of Value) Rules, 2006, holds good to the period after 01.07.2012. In the present case the notice itself admits that LPC amounts were charged by BSNLCT from their subscribers on the outstanding billed amount, if not paid within the due date i.e. 21 days from the bill date. In view of the legal position and factual position, I am of the view that late payment charges need not be included in the taxable value of telecommunication service provided." (emphasis in italics boldened) 10. Thereafter, citing the judgement of the Hon'ble Apex Court in UOI v. Intercontinental Consultants and Technocrats Pvt Ltd, the adjudicating authority goes on to hold that " The above case law strengthens my opinion that telephone charges are the consideration for telecommunication service and delayed payment charges being penal charges collected for the default in payment of telephone charges, it need not be included in the assessable value." (emphasis s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ED PAYMENT: 5.1. The payment against monthly bills beyond the stipulated date shall entail an interest charges @ 2% p.m or such other rate/fixed amount as may be decided by BSNL from time to time, over the payment from the date it became due. This however is without prejudice to the right of BSNL to suspend the services partially or fully due to non-payment." Apart from the said condition, Sl.No.6 deals with different scenarios wherein BSNL has the right to suspend and disconnect the services to the customer. 13. From a plain reading of the aforesaid condition No.5, it is clearly discernible that the appellant has in fact reserved its rights to suspend the services partially or fully due to nonpayment, without prejudice to the payment of penal charges. This only means that even if the subscriber makes the payment of penal charges, still the appellant has the right to suspend the services partially or fully. In other words, the right of the appellant to suspend the services, either partially or fully, does not in any way depend on whether or not the penal charges are paid by the customer. Even if the customer pays the penal charges, the appellant is well within its right to sus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to charge an extra amount which they labeled as 'Surcharge / Late Payment Charges which they collected at the applicable predetermined rates from time to time in terms of the contractual enablement in the agreement [CAF] unconditionally agreed upon by the Customers. Thus, if any Customer defaulted in making the said payment by the prescribed due date, late payment charges is levied on him by the telecom company at applicable rates for the breach of the terms and conditions governing the payment of the amounts towards the receipt of the telecommunication services. The Customers were fully aware that in case of default they would be charged an extra amount by way of 'Surcharge/Late Payment Charges' for the said default. Further, it appears that the telecom companies did not resort to Suspension /Termination of the defaulting member's services, if they paid the 'Surcharge/Late Payment Charges' imposed upon them. Therefore, in all such cases, it appears that the telecom companies tolerated the act of willful default of such clients and received compensation by way of 'Surcharge/Late Payment Charges' towards their act of tolerance or forbearance vis-à-vis the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It could be active or passive. Therefore, it appears that the monetary value recovered by the telecom companies for tolerating the said defaults of their customers have automatically acquired the status and nature of 'consideration' to such passive activity of tolerance by the telecom companies 8 (l) (v) An analysis of the above provisions reveal that breach of contract is a legal concept in which there is a binding agreement respected by one or more of the parties to the contract is breached by non-performance or interference with the other party's performance Liquidated damages are damages whose amount the parties designate during the formation of a contract, for the injured party to collect as compensation upon a specific breach of the contract. The clause will be enforceable if it involves a genuine attempt to quantify a loss in advance. The purpose of payment of Liquidated damages is to make good the damages, losses or injuries arising from the "obligation" on the part of any of the parties to tolerate an act or a situation. When the terms of a contract are broken and if a sum is named in the contract as the amount to be paid in case of breach, the party complainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 13.04.2015, only damages payable to the government are exempted from payment of service tax and damages payable to other non-government entities are not exempt from payment of service tax. The said view strengthens the contention that LPC paid to telecom companies are liable to service tax as liquidated damages' being paid as consideration for the said non-performance /delayed performance which appear to fall under clause (e) of Section 66E (e) of Finance Act, 1994 as a declared service as, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" which is leviable to service tax. 8 (l) (viii) Further, either in 'Negative List' of services listed in Section 66D of Chapter V of the Finance Act, 1994, or in Mega exemption issued vide Notification No.25/2012-Service Tax dated 20th June, 2012 effective from 01/07/2012 as amended, there is no express provision for exemption of the 'Surcharge/Late Payment Charges' from the payment of Service Tax service. 8 (l) (ix) Thus it is a confirmed fact that BSNL and their Clients consented to follow the voluntary and mandatory terms and conditions contained in the Individ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) - - 59 14(e) - - 60 14(f) - - 61 15 - - 62 15(a) the LPC amount collected should not form part of the value of taxable the LPC amount collected should not should not be classified as declared service as defined in Section 66 E (e) read with Section 65B (44) of the Finance Act, 1994 for payment of Service Tax as discussed in para 8 above, for the period from 01.07.2012 to 30.6.2017. 15. Thus, the proposal in the notice asking the appellant to show cause, itself was, why the LPC amount collected should not be classified as declared service as defined in Section 66E(e) read with Section 65 B (44) of the Finance Act, 1944 for payment of Service Tax as discussed in para 8 above, for the period 01.07.2012 to 30.06.2017; the said para 8 clearly stating that the LPC paid to telecom companies are liable to service tax as 'liquidated damages'. This proposal in the show cause notice itself to categorise the LPC as liquidated damages, puts paid to the Ld Authorised Representative's contention that LPC is to be seen different from liquidated charges, relying on the circular of the Commissioner of State Tax, issued under the GST regime. While the Ld. AR can adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specify the: (a) consideration for agreeing to the obligation to refrain from an act; or (b) consideration for agreeing to tolerate an act or a situation; or (c) consideration to do an act. 17. 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) and would be taxable under Section 68 at the rate specified in Section 66B. Likewise, there can be services conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. xx xx xx 32. In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between 'conditions to a contract' and 'considerations for a contract'." 19. The issue in the present case is covered by the aforesaid decision rendered by the Tribunal and, therefore, it has to be held that service tax could not have been demanded from the appellant. 20. In this connection it would also be pertinent to refer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n act, because there cannot be any contract : (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, such payments will not constitute 'consideration' and hence such activities will not constitute "supply" within the meaning of the Act." 21. Thus, for all the reasons stated above, it is not possible to sustain the order dated 27-4-2018 passed by the Commissioner. It is accordingly, set aside and the appeal is allowed." (Emphasis supplied) 18. For the sake of brevity, we refraining from burdening this order by reproducing from the wealth of jurisprudence available in this regard. The decisions in Neyveli Lignite Corporation Ltd v CCE & ST, Chennai, 2021 (53) GSTL 401 (TriChennai), Steel Authority of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doing something and the other 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. v. 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 20-9-2022 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 (C.A. No. 2372/2021), M/s. Paradip Port Trust (Dy. No. 24419/2022, dated 8-8-2022), and M/s. Neyveli Lignite Corporation Ltd. (CA No. 0051-0053/2022) [2022 (59) G.S.T.L. J55 (S.C.)] on this gr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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