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Judgment
Dr. Rachna Gupta, J
The present appeal has been filed to assail the Order-in-Appeal No.88/2018 dated 28.09.2018. The facts in brief which have culminated into the said order are that the appellants are registered as provider/recipient of taxable service, namely, manpower supply service, works contract service etc. During the audit of the appellants record for the financial year 2012-13, 2013-14 & 2014-15 the Jurisdictional Range Officer observed that the appellant has received an amount of Rs.13,16,17,000/- as a claimed income from agreement cancellation. The breakup of the said amount received is as follows:-
Financial Year – 2012-13 – Rs.4,26,00,000/-
Financial Year – 2013-14 – Rs.7,00,17,000/-
Financial Year – 2014-15 – Rs.1,90,00,000/-.
Department formed an opinion that the amount received is the consideration due to cancellation of an agreement hence towards a declared service as per section 66 (E) (e) of Finance Act 1994 and thus is taxable in terms of Section 65 (B) (22) of the said Act. Based on this observation that a Show Cause Notice No.226/2015 dated 05.07.2016 was served upon the appellant proposing the demand of service tax amounting to Rs.16267861 on the aforesaid amount of Rs.13,16,17,000/- received by the appellant. Proportionate interest and the appropriate penalties were also proposed against the appellant. Said proposal was confirmed vide Order-in-Original No.49/2018 dated 28.03.2018. The appeal against the said order has been has been rejected vide the order under challenge. Being aggrieved, the appellant is before this Tribunal.
We have heard Mr. Krishna Mohan Menon & Ms. Parul Sachdeva, ld. Counsels for the appellant and Mr. S.K. Ray, Authorized Representative for the Respondent.
Ld. Counsel for the appellant has mentioned that the appellant is engaged in the business of manufacturing operations of iron and steel goods and is also registered with the Service Tax Department. The appellant had entered into various agreements to purchase pieces of land from various parties for the mutually decided amount of consideration. As per the covenants of those agreements, the appellant buyer was to be compensated by the seller in case the sale failed to materialize at the end of the seller. Due to unforeseen circumstances all the sale contracts were cancelled by the sellers before the due date of the payments forcing the appellant to recover damages for the breach of contract from the sellers, as per the contract itself. To avoid the litigation, the quantum of damages got mutually agreed upon and the respective sale cancellation agreements were entered into. It is in leu of those agreements that the amount in question has been received by the appellant and is declared in the accounts under the head “claim income from agreement cancellation”. It is submitted that the damages for contractual breach cannot be called as “consideration” for rendering taxable “declared service”. The ld. Counsel has relied upon the following decisions:-
i. South Eastern Coalfields Ltd Vs Commissioner of Central Excise & Service Tax [Final Order No.51651/2020, dated 22.12.2020 in ST/50567/2019]
ii. M/s Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Limited Vs Commissioner of CGST & Central Excise [2022 TAXSCAN (CESTAT) 249]
iii. M/s Bharat Dynamics Ltd Vs Commissioner of Central Tax, Hyderabad [F.No/A/30130/2022 dt 14.09.22 in ST/30964/2018]
iv. Northern Coalfields Ltd Vs Commissioner of CGST, CE & Cus., Jabalpur [2023 (71) G.S.T.L 63 (Tri-Del)]
v. M/s M.N Dastur & Company Private Limited Vs Commissioner of Service Tax- I, Kolkata [2023-TAXSCAN (CESTAT) 686]
With these submissions and impressing upon that there was no reason to invoke the extended period of limitation the SCN is alleged to have been barred by time and the order under challenge is prayed to be set aside. Appeal is prayed to be allowed.
While rebutting these submissions, ld. Authorised Representative has mentioned that the appellant has received the compensation for cancelling Land Sale Agreement, which itself determines that the act constitutes a taxable service under section 66(E)(e) of the Finance Act, 1994. It is submitted that the act of cancellation involves agreeing to an act or tolerating an act or a situation which is called as declared service and the same is taxable. With respect to the act of suppression of facts, the findings in para 13 of the Order-in-Original are being reiterated. It is submitted that there is no infirmity in the order in appeal as has been challenged before this Tribunal. Appeal is prayed to be dismissed.
Having heard both the parties at length and perusing the record, we observe that the appellant had entered into 8 ‘Agreements to Sell’ in the year 2007 for purchase of land at a considerable amount. Vide another agreement called ‘Cancellation of Sale Agreement’ the seller agreed to pay a compensation for cancellation of agreement to the buyer i.e. the appellant herein. The details of agreement are as follows:-
Year
Agreement made with
Agreement date
Date of corresponding 'Cancellation of sale Agreement'
Compensation Amt. agreed upon by the Parties in Cancellation agreement
A
B
C
D
E
2012-13
M/s Shikhar Amusement Pvt.Ltd.
06.02.2007
12.06.2012
2,16,00,000
M/s. R.N.Navnirman
09.01.2007
12.06.2012
1,85,00,000
M/s Shikhar Amusement Pvt.Ltd.
06.02.2007
12.06.2012
25,00,000
Sub Total
4,26,00,000
2013-14
M/s Shikhar Amusement Pvt.Ltd.
30.03.2007
7.12.2013
94,61,000
M/s Shikhar Amusement Pvt.Ltd.
28.05.2010
15.10.2013
11,26,000
M/s Shikhar Amusement Pvt.Ltd.
25.03.2007
17.04.2013
5,06,03,000
M/s Prahalad Kumar Agrawal
24.03.2007
09.04.2013
88,27,000
Sub Total
7,00,17,000
2014-15
M/s Singhal Marketing Pvt.Ltd.
18.09.2007
19.9.2014
1,90,00,000
Grand Total
13,16,17,000
However, the buyer failed to perform his part vis-à-vis those sale agreements. Hence in terms of the agreements of the year 2007 the buyer was agreed to be compensated in case the seller fails to act upon the agreement. Resultantly, the sale cancellation agreements, as in question, were executed by the appellant. Pursuant whereto the appellant received an amount of Rs.13,16,17,000/- during the period 2012-13 to 2014-15, the cancellation agreements being executed during that period. On this amount, the service tax of Rs.1,62,67,861/- has been demanded from the appellant alleging that the execution of sale cancellation agreement is an act of rendering the declared service defined under section 66(E) (e) of Finance Act, 1994.
In the light of the above admitted facts the issue to be adjudicated herein is: “Whether the appellant is providing the declared service contemplated under section 66 (E) (e) of Finance Act which became taxable w.e.f. 1st July, 2002”.
For the purpose foremost we look into the definition of service.
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) a transaction in money or actionable claim;
(b) a provision of service 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.
”Declared services” have been defined in Section 66E and sub-section (e) of Section 66E, which is involved in this appeal, is as follows :
Declared services “66E.
The following shall constitute declared services, namely :-
xx xx xx
agreeing to the obligation to refrain from an act, or to tolerate (e) an act or a situation, or to do an act;
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 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.
Reverting to the facts of the case, we observe that the show cause notice and the impugned order indicate that the appellant was charging and collecting an amount under the following three heads :
(i) Compensation/penalty from the buyers of coal on the short-lifted/un-lifted quantity of coal and non-compliance of the terms and conditions of the Coal Supply Agreement, including forfeiture of earnest money deposit/security deposit;
(ii) Compensation/penalty from the contractors engaged by the appellant for providing various types of services for breach of the terms and conditions of the contract; and
(iii) Liquidated damages from the suppliers of materials for breach of the terms and conditions of the contract.
We observe that these amounts have been collected in terms of another simultaneous agreement between the parties i.e.. “Cancellation of Sale Agreement”
We further observe that when a contract has been broken, the party who suffers by such breach is entitled to receive, form the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by contract: When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.
Section 73 & 74 of Chapter VI of Indian Contract Act provides for compensation of loss or damage caused by breach of contract. Section 75 of Contract Act talks about compensation for party rightfully rescinding the contract.
Apparently there were executed the agreements to purchase land which are absolutely out of the scope of service tax. Cancellation of these agreements has been made as per mutual consent of buyer/appellant and the sellers of eight ‘Agreements to Sell’ subject to compensation to be paid to buyer of such amount as specifically agreed between the parties. These facts when read in the light of above discussion are sufficient for us to hold that the amount of compensation received by the appellant is not an amount for any act of obligation or toleration on part of appellant. Hence is wrongly held to be the amount of consideration for rendering declared service defined under section 66 E (e) of Finance Act, 1994.
Liability has been fastened upon the appellant under Section 65B read with Section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the aforesaid amounts the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of the contract by the other party.
Similar issue has been considered and settled in favour of the assessee, in the order in the case of M/s. South Eastern Coalfields Ltd. Vs. Commissioner, CGST, Raipur reported as 2021 (55) GSTL 549 (Tri. - Del.). We find that the Learned Delhi Bench has analysed the scope and ambit of Sections 65B (44), 66E (e) and 67 (1) of the Act and they have also applied various decisions of the Hon’ble Apex Court [Commissioner of Service Tax v. M/s. Bhayana Builders reported in 2018 (10) G.S.T.L. 118 (S.C.), Union of India v. M/s. Intercontinental Consultants and Technocrats Pvt. Ltd. reported in 2018 (10) G.S.T.L 401 (S.C.) and Fateh Chand v. Balkishan Das reported in AIR 1963 SC 1405] and thereafter, has concluded that the view of the Principal Commissioner therein that the penalty amount, forfeiture of earnest money deposit and liquidated damages received by the appellant therein towards “consideration” for “tolerating an act” as being amenable to Service Tax under Section 66E (e) of the Finance Act, is wrong.
In South Eastern Coalfields vs. Commissioner of Central Excise & Service Tax, Raipur reported in 2021 (55) GSTL 549 (Tri.- Del.), the Tribunal examined at length the provisions of Section 66E(e) of the Finance Act and made the following observations :
“27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various 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.
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 is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.
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).
The 30. 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
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’.”
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.
In this connection it would also be pertinent to refer to the Circular dated 3-8-2022 issued by the Department of Revenue regarding 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 obligation to refrain from an act or to tolerate an act or a situation, or to do an act’. This Circular emphasizes that there has to be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist and such an act or a situation cannot be imagined or presumed to exist merely because there is a flow of money from one party to another. It also 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’.
We further observe that this Tribunal, Chennai Bench has dealt with the identical facts of getting the damages on account of cancellation of the contracts in the case of M/s. Bharat Heavy Electricals Ltd. vs. Commissioner of GST and Central Excise in Service Tax Appeal No.41500 of 2019 decided on 26.04.2023. We find no reason to differ from these findings. More so, for the reason that since the value of taxable services for charging service tax is the gross amount charged for providing “such” taxable services has to be found Hence any other amount which calculated not for providing such taxable service cannot be the part of that value. We have already held that the act of entering into sale cancellation agreement is not an act of rendering taxable declared service. Any amount received as damages, in lieu thereof, cannot be called as the taxable value. We draw our support from the decision of Hon’ble Apex Court in the case titled as Union of India vs. Intercontinental Consultants and Technocrats Pvt. Ltd. reported as 2018 (10) GSTL 401 (S.C.).
In the light of these observations since the appellant has not rendered any activity which can be called as taxable declared Service, no question arises of any alleged evasion of service tax. We hold that extended period as has been invoked while issuing the impugned Show Cause Notice is also wrong. We don’t find any positive evidence to support the alleged suppressions of facts on part of the appellant. The Show Cause Notice is held to be barred by time. Accordingly, the order under challenge is hereby set aside and the appeal is hereby allowed.
[Pronounced in the open Court on 08/11/2024]