Case Law Details
Rajcomp Info Service Limited Vs Commissioner (CESTAT Delhi)
In this case Liquidated damages, has been held to be susceptible to service tax under section 66E(e) of the Finance Act by the Commissioner as an amount received for tolerating an act. According to the appellant, the liquidated damages recovered on account of breach or non-performance of a contract is not a consideration in lieu of any service. It is infact, in the nature of a deterrent so that such a breach is not repeated.
To examine this issue it would be useful to refer to the definition of “service” as defined under section 65B(44) of the Finance Act. “Service” has been defined to mean any activity carried out by a person for another for consideration, and includes a declared service. “Declared services” have been defined in section 66E of the Finance Act and sub-section(e) of section 66E of the Finance Act, 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;”
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:
i. consideration for agreeing to the obligation to refrain from an act; or
ii. consideration for agreeing to tolerate an act or a situation; or
iii. consideration 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 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) of the Finance Act.
In this view of the matter, service tax could not have been levied on the amount recovered as liquidated damages.
FULL TEXT OF THE CESTAT DELHI ORDER
Service Tax Appeal No. 50631 of 2018 has been filed by M/s Rajcomp Info Service Limited1 to assail the order dated 16.01.2017 passed by the Commissioner, Central Excise and Service Tax Commissionerate, Jaipur 2 by which the demand of service tax amounting to Rs. 6,22,73,658/- has been confirmed under section 73(2) of the Finance Act,19943 with interest and penalty. This order adjudicates the show cause notice dated 22.11.2015 that had been issued to the appellant for the period 01.04.2011 to 30.09.2014.
2. Service Tax Appeal No.52613 of 2018 has been filed by the appellant to assail the order dated 18.05.2018 passed by the Commissioner confirming the demand of Rs. 117,49,52,281/- under section 73(2) of the Finance Act with interest and penalty. This order adjudicates the show cause notice dated 18.05.2018 issued to the appellant for the period 01.10.2014 to 31.03.2016.
3. Service Tax Appeal No. 51698 of 2017 has been filed by the Commissioner against that part of the order dated 16.01.2017 by
which the penalty against the appellant has been dropped for the reason that benefit of waiver of penalty was available to the appellant under section 80 of the Finance Act.
4. The appellant, which is a wholly owned undertaking of the Government of Rajasthan 4 , acts as a nodal agency in the implementation of various Information Technology related projects of the Department of Information Technology and Communication5 in the State Government.
5. The process involved in execution of the projects has been explained by the appellant in the following manner:
6. The various public benefit schemes, for whose implementation the appellant had been appointed as a nodal agency, are predominantly oriented towards technological advancement of Departments. In the general scheme of events, as can be seen from the aforesaid chart, the concerned Department of the State Government, along with the Department of IT&C, prepare a report for a project. This report is given sanctity by the Apex Committee of the State Government, subsequent to which a project estimate is assigned. Considering the expertise of the appellant in execution of such projects, a formal request is extended to the appellant by the Department of IT&C for implementing the verified project. Thereafter, the appellant floats tenders on behalf of the concerned Department of the State Government and awards the work to one or more vendors for supply of goods and/or services. The vendor is thereafter reimbursed out of the funds sanctioned by the Department of the State Government. Wherever the appellant recovers a separate service charge from the Departments of the State Government, service tax is paid thereon, which fact has not been disputed by the Revenue.
7. The present dispute is limited to the question as to whether the amount received from the Departments of the State Government and which has been paid to the vendors, would be susceptible to service
8. Pursuant to an audit, two show cause notices dated 16.01.2017 and 18.05.2018 were issued to the appellant wherein it was alleged that in addition to the service charges recovered by the appellant, it was also liable to discharge service tax on the entire project amount received from the concerned Departments of the State Government.
9. The appellant contested the proposals for demand on the basis that it was acting as a nodal agency for the Department of IT&C, and several projects of the State Government were being executed through the appellant. It was stated by the appellant that the amount received from the State Government was paid to the vendors; the amounts were in the nature of reimbursements; and the appellant was acting as a pure agent of the State Government.
10. The submissions of the appellant were rejected and the demands were partially confirmed by the two orders dated 16.01.2017 and 05.2018 holding that the appellant had for these projects provided services to the State Government and hence the entire amount would be susceptible to service tax. In addition, the orders also confirm the levy of service tax on the amount collected/forfeited as liquidated damages by the appellant from the vendors on account of breach of contract.
11. It is these two orders dated 16.01.2017 and 18.05.2018 that have been assailed by the appellant in the first two appeals. In the order dated 16.01.2017, the penalty proposed against the appellant was dropped on the ground that benefit of waiver of penalty was available to the appellant under section 80 of the Finance Act. This part of the order has been assailed by the Revenue in the third appeal.
12. Shri B.L. Narasimhan, learned counsel appearing for the appellant made the following submissions:
i. The amount received from the State Government for payment to vendors is not towards any consideration and, therefore, not taxable. In terms of section 67(1) of the Finance Act, the value of any taxable service is the gross amount charged by the service provider from the service recipient ‘for such service’. The phrase ‘for such service’ is required to be understood to mean that the consideration should necessarily have a direct nexus with the service. Thus, only such amount can be subjected to service tax which represents a consideration for provision of service. Any other amount, which is not a consideration for provision of service, cannot be subjected to service tax. In support of this contention reliance has been placed on the judgment of the Delhi High Court in Intercontinental Consultants & Technocrats Pvt. Ltd. Union of India6, which has been affirmed by the Supreme Court in Union of India and another vs. Intercontinental Consultants and Technocrats Private Limited7 . Reliance has also been placed on the judgment of the Supreme Court in Commissioner of Service Tax vs. Bhayana Builders Private Limited8;
ii. The amount paid to the vendors is in the nature of Rule 5(1) of the Service Tax (Determination of Value) Rules, 20069, which provides for taxability of expenses, has itself been held to be ultra vires section 67 of the Finance Act by the Supreme Court;
iii. The amount paid by the Departments of the State Government to the appellant are reimbursements, which cannot be subjected to the levy of service tax. The only consideration retained by the appellant was the ‘service charge’ on which service tax has been discharged. Hence, no further tax liability accrues on the appellant;
iv. The appellant acted as a pure agent and so no service tax can be levied on the consideration paid by the service recipient (the State Government) to the vendors. In this connection reliance has been placed on the decision of the Tribunal in CE, CGST, Delhi-III National Informatics Centre Service Inc.10;
v. In sub-rule (2) of the rule 5 of the Valuation Rules, expenditure or cost incurred by the service provider as a pure agent of the service recipient has to be excluded from the value of taxable service, only if the conditions mentioned in the said rule are satisfied;
vi. No ‘services’ can be said to have been rendered when the appellant is acting as an implementing agency of the State Government;
vii. 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. Instead, these are in the nature of a deterrent imposed so that such a breach or non-performance is not repeated. Thus, no service tax is leviable on liquidated damages. In this connection, reliance has been placed on the decision of the Tribunal in M/s. South Eastern Coalfields Ltd. vs. Commissioner of Central Excise and Service Tax11;
viii. No service tax can be levied in the absence of consideration;
ix. Amount returned by the appellant to the State Government is required to be reduced from the taxable value;
x. Demand should be dropped on account of being revenue neutral;
xi. Cum-tax computation should be extended;
xii. The extended period of limitation could not have been invoked in the facts and circumstance of the case; and
xiii. No penalty could have been imposed.
13. Dr. Neha Garg, learned authorized representative appearing for the department, however, supported the impugned order and made the following submissions.
i. The appellant did not act as a pure agent since it did not fulfill all the conditions of rule 5(2) of the Valuation Rules;
ii. The appellant is liable to pay service tax on the amount received as reimbursements for payment to vendors;
iii. The services rendered to the State Government are taxable;
iv. Service tax is leviable on liquidated damages;
v. No documentary evidence has been provided by the appellant that may suggest that any amount has been returned to the State Government;
vi. Revenue neutrality cannot be a ground for dropping the demand;
vii. The invocation of the extended period of limitation is justified in the facts and circumstances of the case; and
viii. Penalty cannot be waived as both the show cause notice and the order were issued after section 80 of the Finance Act was omitted.
14. The submissions advanced by the learned counsel for the appellant and the learned authorized representative appearing for the Department have been considered.
15. The issue that arises for consideration in these appeals is regarding the demand on the amount received by the appellant from the State Government Departments for implementation of the Information Technology related projects. The appellant, as noticed above, had been appointed as a nodal agency for implementation of the different public benefit schemes that were predominantly oriented towards technological advancement of the Departments. Reference can be made to one such scheme of the Department of Labour. In connection with the Labour Department Management System Project, the appellant was appointed as a nodal agency by the Labour Department for a project involving computerization of the Department. The Apex Committee held its meeting on 12.06.2012 and indicated that the total project cost would be Rs. 4.96 Crores. The appellant received service charge of Rs. 38.59 Lakhs, on which it paid service tax. The appellant floated a notice inviting tenders in which, amongst others, it was specifically stated that the tender was on behalf of the State Government. Pursuant to the acceptance of the tender, an agreement was entered into between the appellant and M/s. Compucom Software Limited. Payment was made to the said firm after issuing payment sanction orders which clearly stated that the payment would be from the budget heads set out by the Department of Labour. Invoices were raised by M/s. Compucom Software Limited on the appellant and after the project was completed, the appellant submitted utilization certificate to the State Government.
16. It has to be determined whether the amount received by the appellant from the State Government for payment to vendors would be a consideration for any service provided by the appellant to the State Government and, therefore, taxable. It needs to be remembered that on the service charges received by the appellant from the State Government Departments, service tax was paid by the appellant and this fact is not in dispute in the appeals. The dispute is about the amount received from the State Government Departments, which amount was paid by the appellant to the vendors. The Revenue has demanded the service tax on this amount.
17. The submission of the learned counsel for the appellant is that no service tax can be levied on the amount received for onward payment to the vendors and in this connection, reliance has been placed on section 67 of the Finance Act which deals with valuation of taxable services. The relevant portion of this section is reproduced below:
“67. Valuation of taxable services for charging service tax (1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its 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;”
(emphasis supplied)
18. It would be seen from the aforesaid section that the value of any taxable service is the gross amount which has been charged by the service provider from the service recipient for such service. What, therefore, flows is that the consideration should necessarily have a direct nexus with the service. In other words, only that amount can be subjected to service tax which represents consideration for provision of Any other amount, which is not a consideration for provision of service cannot, therefore, be subjected to service tax.
19. In this connection, it would be relevant to refer to the decision of the Delhi High Court in Intercontinental Consultants. The appellant therein was providing consulting engineering services. It received payment not only for the services provided by it but was also reimbursed for the expenses incurred by it on air travel, hotel stay, It paid service tax on the amount received by it for services rendered to its clients but did not pay any service tax in respect of expenses incurred by it which were reimbursed by the clients. A show cause notice was issued to it to explain why service tax should not be charged on the gross value including reimbursable and out of pocket expenses. The provisions of rule 5(1) of the Valuation Rules were resorted to for this purpose by the Department. A Writ Petition was filed before the High Court challenging the vires of rule 5 as being unconstitutional as well as ultra vires the provisions of sections 66 and 67 of the Finance Act. The Delhi High Court accepted the said contention and declared rule 5 to be ultra vires the provisions of sections 66 and 67 of the Finance Act. The High Court noted that both the amended and unamended section 67 of the Finance Act authorized the determination of value of taxable services for the purpose of charging service tax under section 66 of the Finance Act as the gross amount charged by the service provider for such services provided or to be provided by him in a case where consideration for such service is money. The High Court placed emphasis on the words “for such service” and took the view that the charge of service tax under section 66 of the Finance Act has to be on the value of taxable service i.e. the value of service rendered by the assessee and the quantification of the value of service can, therefore, never exceed the gross amount charged by the service provider for the service provided by him. On that analogy, the High Court opined that the scope of rule 5 of the Valuation Rules goes beyond the scope of section 67 which was impermissible as rules could be framed only for carrying out the provisions of the Finance Act. In taking this view, the High Court observed that the expenditure or cost incurred by the service provider for providing the taxable service can never be considered as the gross amount charged by the service provider “for such service” provided by him. Paragraph 18 of the judgment of the High Court is reproduced below:
“18. Section 66 levies service tax at a particular rate on the value of taxable services. Section 67(1) makes the provisions of the section subject to the provisions of Chapter V, which includes Section 66. This is a clear mandate that the value of taxable services for charging service tax has to be in consonance with Section 66 which levies a tax only on the taxable service and nothing else. There is thus inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of 67. Clause (i) of subsection (1) of Section 67 provides that the value of the taxable service shall be the gross amount charged by the service provider “for such service”. Reading Section 66 and Section 67(1)(i) together and harmoniously, it seems clear to us that in the valuation of the taxable service, nothing more and nothing less than the consideration paid as quid pro quo for the service can be brought to charge.”
20. The Supreme Court, in the appeal filed by the Union of India, noticed the various reimbursable claims which were included in the gross value. The Supreme Court noted that rule 5 of the Valuation Rules does bring within its sweep, the expenses which are incurred while rendering the service and are reimbursed and, therefore, what was required to be decided was whether section 67 of the Finance Act permits subordinate legislation to be enacted as done by rule 5 of the Valuation Rules. It needs to be noted that prior to 19 April, 2006, in the absence of a Rule, the valuation was required to be done as per the provisions of section 67 of the Finance Act. The Supreme Court noticed that the charging section 66 of the Finance Act provides that there shall be levied service tax @ 12% of the value of taxable services referred to in the sub-clauses of section 65 and collected in such manner as may be prescribed. Thus, the service tax is on the “value of taxable services” and, therefore, it is the value of the services which are actually rendered which has to be ascertained for the purpose of calculating the service tax. It is for this reason that the Supreme Court observed that the expression “such” occurring in section 67 of the Fiance Act assumes importance. It is in this context that the Supreme Court observed in paragraph 26 that the authority has to find what is the gross amount charged for providing “such” taxable services and so any other amount which is calculated not for providing such taxable service cannot be a part of that valuation as the amount is not calculated for providing “such taxable service”. This, according to the Supreme Court, is the plain meaning attached to section 67 of the Finance Act, either prior to its amendment on 01 May, 2006 or after this amendment and if this be so, then rule 5 of the Valuation of Rules went much beyond the mandate of section 67 of the Finance Act. Paragraph 26 of the judgment of the Supreme Court is reproduced below:
“26. In this hue, the expression “such” occurring in Section 67 of the Act assumes importance. In other words, valuation of taxable services for charging service tax, the authorities are to find what is the gross amount charged for providing “such” taxable services. As a fortiori, any other amount which is calculated not for providing such taxable service cannot be a part of that valuation as that amount is not calculated for providing such “taxable service”. That according to us is the plain meaning which is to be attached to Section 67 (unamended i.e. prior to 1-5-2006) or after its amendment, with effect from 1-5-2006. Once this interpretation is to be given to Section 67, it hardly needs to be emphasised that Rule 5 of the Rules went much beyond the mandate of Section 67. We, therefore, find that the High Court was right in interpreting Sections 66 and 67 to say that in the valuation of taxable service, the value of taxable service shall be the gross amount charged by the service provider “for such service” and the valuation of tax service cannot be anything more or less than the consideration paid as quid pro qua for rendering such a service.”
21. Reliance can also be placed on the decision of the Supreme Court in Bhayana Builders wherein it was held that the consideration should be for taxable services provided or to be provided and there should be a nexus between the consideration and the services provided. The relevant observations are as follows:
“12. On a reading of the above definition, it is clear that both prior and after amendment, the value on which service tax is payable has to satisfy the following ingredients :
a. Service tax is payable on the gross amount charged:- the words “gross amount” only refers to the entire contract value between the service provider and the service recipient. The word “gross” is only meant to indicate that it is the total amount charged without deduction of any expenses. Merely by use of the word “gross” the Department does not get any jurisdiction to go beyond the contract value to arrive at the value of taxable services. Further, by the use of the word “charged”, it is clear that the same refers to the amount billed by the service provider to the service receiver. Therefore, in terms of Section 67, unless an amount is charged by the service provider to the service recipient, it does not enter into the equation for determining the value on which service tax is payable.
b. The amount charged should be for “for such service provided” : Section 67 clearly indicates that the gross amount charged by the service provider has to 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 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)
22. The factual position described above would clearly indicate that as a nodal agency appointed by the various State Government Departments, the primary responsibility of the appellant was to supervise and monitor the overall execution of projects; computation of estimate of cost; issuance of notice inviting tenders; and appointment of vendors. The vendors so appointed by the appellant then entered into the contracts with the appellant on behalf of the State Government. The vendors performed their obligations stipulated in the contracts for execution of the projects and upon completion of the projects, a working report with utilization certificates and invoices were furnished by the appellant to the concerned Departments, which thereafter released the sanctioned amount to be paid to the vendors through the appellant.
23. It would, therefore, be seen that two independent activities were performed for which consideration was received. When the appellant supervised the project, the appellant received consideration towards the service charges for supervising the project. The vendors, on the other hand, received the project cost for the activity of execution of the project. The services rendered by the appellant were limited to the supervision and monitoring of the execution of the projects, in lieu of which it recovered service charges and service tax has been paid by the appellant on the consideration received for the service. In respect to the amount paid to the vendors towards the project cost, the appellant has not provided any service and, therefore, no service tax can be levied for the reason that in terms of section 67 of the Finance Act, the amount paid to the vendors has not been received by the appellant ‘for such service’.
24. The contention of the Department is that the amount paid by the appellant to its vendors is in the nature of expenses incurred by the appellant in the course of providing service to the State Government and such expenses would be includable in the taxable value of the services in terms of rule 5 of the Valuation Rules.
25. In the first instance, as noticed above, rule 5(1) of the Valuation Rules has been struck down by the Supreme Court as being ultra vires section 67 of the Finance Act.
26. Secondly, the appellant had appointed vendors on behalf of the State Government for procurement of goods and/or services. The amount payable to the vendors are borne by the State Government, though, through the appellant for which the appellant submits utilization certificates to the State Government with the corresponding invoices raised by the vendors. This would be apparent from the documents annexed with the appeal.
27. In connection with the Labour Department Management System Project referred to above, the memorandum of understanding for appointment of the appellant as nodal agency for implementation of the Labour Department Management System is reproduced below:
“Memorandum of Understanding
Between
Department of Labour (DoL)
Government of Rajasthan (GoR)
And
Rajcomp Info Services Limited (RISL)
For Appointment of RISL
As
Nodal Agency
For
The Pilot Implementation of
Labour Department Management System (LDMS) Project
*******
Whereas
As a part of eGovernance initiatives, the DoL, GoR has decided to implement the “Pilot implementation of Labour Department Management System (LDMS)”, hereinafter referred to as the “project”.
And whereas
As part of this MoU, the DoL, GoR hereby agrees to appoint RISL as “Nodal Agency” to the DoL, GoR to undertake the project execution work for the Pilot LDMS project as defined below in Para 5 of this MoU.
And whereas
RISL is exempted from payment of EMD/SD under Rule 57(2)(a)(i) of GF&AR Part-II.
Now it is hereby agreed to by and between the parties hereto as under:-
1. Project Background/Overview
a) *****
b) LDMS has been identified as one of the State Mission Mode Project under State eGovernance Action Plan owing to its functional critically and high-level of direct citizen The proposed LDMS has been designed taking into consideration the strengths and limitation of DoL. The project focuses on computerization and automation of processes and services offered by DoL to citizens.
c) *****
d) *****
*******
3. Scope of Work/Services
a) To coordinate with all the stakeholders of the project viz. DoL, DoIT&C, NIC and Implementing Agency
b) Review and approve the overall LDMS solution design, implementation approach and other technical reports as submitted by the implementing agency.
c) To provide necessary technical support during requirement gathering, sharing of sample reports and other requisite IT infrastructure with DoL and implementing agency.
d) To conduct periodic reviews and monitor the overall implementation progress of the LDMS project by the implementing agency.
e) Provide feedback to the implementing agency on changes to be in the solution to improve usability of the application software.
f) Report problems/bugs in solution to the implementing agency for immediate action/rectification.
g) Provide the Data Centre/requisite infrastructure at RSDC for hosting the developed website and LDMS application software in consultation with DoIT&C, GoR.
h) Prioritize the change requests, if any, as per project objectives. Evaluate and approve the effort estimates (for change requests) provided by the implementing agency for development and development of LDMS application software.
i) To ensure timely project milestones sign-offs
j) To review the installation, commissioning and maintenance of the software.
k) Facilitate Testing and Audit of the LDMS system.
l) To approve and oversee the proposed training plan and methodology.
m) Setup and administration of a proper escalation mechanism.
n) Review and approve the payments to the implementing agency as per agreed Service Level Agreement (SLA)
*******
5. Scope of Work/Services
The scope of work and services which will be provided by RISL would be as under: –
a) Issuance of the NIT/RFP document for the selection of an implementing agency for the Pilot implementation of LDMS project
b) Review and Monitor the Implementation of the Pilot LDMS project for successful Go-Live
c) Coordination with all the stakeholders for successful implementation of Pilot LDMS project
d) Upon successful Go-Live, RISL shall set-up a PMU at DoL by hiring an external Consulting agency, who shall assist the DoL, GoR in day-to-day operations and provide technical support during the O&M Period of one year.
e) During the Implementation and O&M Period, RISL shall make payments to the implementing agency as per the agreed payment terms and SLA.
f) All the activities/services as mentioned in Clause No. 3 above.
*******
7. Project Cost
The total estimate project cost, including 2% contingency and RISL Service charges is as under: –
| Phase-I Cost | Phase-II Cost | Total Proj. Cost | |
| Total CAPEX (In Rs.) | INR 3,76,17,750 | INR 1,19,45,500 | INR 4,95,63,250 |
| Total OPEX (In Rs.) | INR 72,27,906 | INR 2,95,48,906 | INR 3,67,76,813 |
| Contingency @2% of CAPEX+OPEX | INR 8,96,913 | INR 8,29,888 | INR 17,26,801 |
| RISL Service Charge (In Rs.) Excl. Taxes | INR 38,59,406 | INR 35,85,944 | INR 74,45,349 |
| Total Project Cost (In Rs.) | INR 4,96,01,975 | INR 4,59,10,238 | INR 9,55,12,213 |
| INR 4.96
Crores |
INR 4.59 Crores | INR 9.55
Crores |
8. Taxes/Duties:
The DoIT&C shall pay all tax/duties, as applicable, at the time of billing
9. Payment terms and conditions:
RISL, upon successful completion of the respective milestones as per Clause No. 6 above, shall raise the Invoice to DoIT&C, GoR for payments to the implementing agency including RISL service charges.”
28. The appellant had submitted a statement of estimate of expenditure to the State Government regarding computerization and the same is reproduced below:
| “S.No. | Details of Work/Description | Amount (INR) |
| 1. | Operationalization expenses for the execution of Pilot project of DoL Govt. of Rajasthan by RISL | 10,00,000.00 |
| 2. | RISL approved Service Charges for Turnkey Projects including taxes on S. No. 1 | 1,12,360.00 |
| Total (Rupees Eleven Lacs Twelve Thousand Three Hundred Sixty Only) | 11,12,360.00 | |
You are requested to kindly release the aforementioned amount at the earliest.”
29. The appellant, thereafter, issued a notice inviting tender on 21.10.2012 and the relevant portion is reproduced below:
“Notice Inviting Tender-NIT
Tender Reference No: F4.2(63)/RISL/Tech/2012/7668 Dated: 21/12/2012
RajCOMP Info Service Limited (RISL), on behalf of Department of Labour (DoL.), Govt. of Rajasthan (GoR), invites electronic bids/proposals (e-Bids) from the eligible bidders for the selection of a System Integrator (SI)/Service Provider for the Pilot implementation of Labor Department Management System (LDMS) project for DoL. GoR.”
30. The work order dated 22.04.2013, on the basis of the above notice inviting tender, was given to M/s. Compucom Software Limited with a copy to the State Government. A contract was also entered between the appellant and M/s. Compucom Software Limited and this contract also provided for liquidated damages in case the said company failed to supply or complete the work.
31. The invoices were raised by the vendors on the appellant. The payment sanction order date 24.09.2013 also specifically stated that the payment will be made from the budget head ‘Computerization of Department of Labour, Government of Rajasthan (New)’. The utilization certificate for the Financial Year 2013-14 regarding implementation of the Labour Department Management System Project was also submitted by the appellant to the State Government.
32. The appellant also raised an invoice on the State Government for the services provided for the Financial Year 2013-14 and the same is reproduced below:
“INVOICE
To,
The Secretary & Commissioner,
Department of Information Technology & Communications,
IT Building, Yojana Bhawan Campus,
Jaipur
Subject: Invoice for RISL Service Charges during FY 201314 in “Pilot Implementation of LDMS Project” for Dept. of Labour (DoL), GoR by RISL
Reference: RISL’s Utilisation Certificate No.
F4.2(63)/RISL/Tech/2012/ dated 28/03/2014
Sir ,
With reference to the above, please find below the requisite details.”
| S.No. | Details of the Work/Description | Amount (INR) |
| 1 | RISL’s approved service charges @10% calculation on Rs. 22,53,250.00/- as per details given in Utilisation Certificate No. F4.2(63)/RISL/Tech/2012 dated 28/03/2014 | 2,25,325.00 |
| 2. | Service Tax including cess @12.36% on S.No. 1 above | 27,850.00 |
| Total Amount (In Figures): | 2,53,175.00 | |
| Total Amount (In Words): Rupees Two Lakhs Fifty Three Thousand One Hundred Seventy Five Only | ||
33. It would, therefore, be seen that the amount paid by the State Government Departments to the appellant are reimbursements, which cannot be subjected to levy of service tax. The only consideration received by the appellant was the ‘service charge’ on which service tax was discharged by the appellant.
34. It has also been submitted, in the alternative, by the learned counsel for the appellant that as the appellant was acting as a pure agent no service tax can be levied on the consideration paid by the service recipient (State Government) to the vendors. In this connection reference has been made to rule 5(2) of the Valuation Rules. The relevant portion of rule 5 is reproduce below:
“Inclusion in or exclusion from value of certain expenditure or costs.
5.(1) Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.
Explanation.–For the removal of doubts, it is hereby clarified that for the value of the telecommunication service shall be the gross amount paid by the person to whom telecommunication service is actually provided.
(2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:—
i. the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
ii. the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
iii. the recipient of service is liable to make payment to the third party;
iv. the recipient of service authorises the service provider to make payment on his behalf;
v. the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
vi. the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
vii. the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and
viii. the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Explanation 1.—For the purposes of sub-rule (2), “pure agent” means a person who—
(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.”
35. It would be seen from sub-rule (2) of rule 5 of the Valuation Rules that expenditure or cost incurred by the service provider as pure agent of service recipient has to be excluded from the value of taxable service if the conditions stipulated in the rule are satisfied.
36. The appellant has demonstrated as to how the conditions are satisfied and the same are reproduced below:
| Conditions as per rule 5(2) of the Valuation Rules | Remark as to how the appellant is satisfying the conditions of the said rules |
| (i) The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or service procured | The appellant acted as an agent of the State Government, whereby it facilitated the implementation of the projects. Further, the appellant made the payment to the vendors for goods and services procured for the State Government. |
| (ii) The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service. | The services/ goods provided by the vendors were used by the State Government and its Departments for the projects being implemented by it. |
| (iii) The recipient of service is liable to make payment to the third party; | Departments of the State Government was liable to fund the projects, which is clear from the MOUs. |
| (iv) The recipient of service authorises the service provider to make payment on this behalf; | The appellant was authorised to pay the vendors on behalf of the State Government, which is evident from the MOUs, reports for estimation of project cost and utilization certificates. |
| (v) The recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party; |
The State Government authorised the appellant to appoint vendors for execution of the projects. Payments were subject to verification of utilization certificates, along with corresponding invoices of the vendors. |
| (vi) The payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service; | Payments made to vendors were shown in respective invoices and in the utilization certificates. Service charges were independently collected, basis separate invoices. |
| (vii) The service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and |
The appellant recovered the entire amount paid to vendors from the State Government. Amount (service charge) collected over and above suffer service tax, which has been paid by the appellant |
| (viii) The goods or services procured by the service provider from the third party as a pure agent of the recipient of serviceare in addition to the services he provides on his own account. | In lieu of agency services, the appellant recovered service charge on which service tax was paid. These are over and above goods/services procured as pure agent from the vendors. |
37. The aforesaid factual position demonstrated by the appellant are clearly borne out from the record and the contracts.
38. Thus, as all the conditions of rule 5(2) of the Valuation Rules are satisfied, the appellant acted as a pure agent as a result of which the amount collected by the appellant from the State Government for payment to the vendors cannot be subjected to service tax.
39. In this connection reference can also be made to the clarificatory CBEC letter dated 19.04.2006, which is reproduced below:
“4.1.8 The service provider in the course of providing any taxable service may incur certain expenditure or cost as a pure agent of the client. The service provider seeks to exclude such expenditure or cost incurred by him as a pure agent of his client (generally known as reimbursable expenditure) from the value of the taxable services.
4.1.9 There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value.”
40. In National Informatics Centre Service, a similar dispute arose before the Tribunal relating to the amount paid by the Government to the appellant therein for execution of projects. Several ministries of the Government of India had appointed the appellant for implementation of projects relating to computerization/networking. The appellant identified the vendors and negotiated with them. The payments made to the vendors were settled by the appellant in terms of the approvals given by the ministries. The appellant discharged service tax on the amount received by it towards ‘administrative charges’. In connection with the taxability of the amount received by the appellant, including the amount paid to the vendors, the Tribunal observed that no service tax can be demanded on the amount received and/or the amount spent out of the amount received for the purpose of the project. The relevant portion of the decision of the Tribunal is reproduced below:
“22. Having considered the rival contentions, we are satisfied that the respondent has provided only “Consulting Engineer Services”, on which they have discharged the service tax liability. We further find that the work order issued by the Government Department is in the nature of cost plus contract, wherein the respondent has been appointed as the implementing agency on behalf of the Government Department and the money has been received as a trustee. Further, the respondent is liable to account for every single rupee spent for on behalf of the Government. They are not entitled to appropriate a single rupee more than the agreed 7% as agency charge or administrative charges. Further, the activity of the respondent is held to be in the nature of pure agent. As such, no service tax can be demanded on the amount of advance received and /or on the amount spent out of that advance for the purpose of the project. It is also an admitted fact that the respondent has themselves not done any erection, commissioning or installation. Such work has been done by the vendors and/or by agencies appointed by the respondent /assessee. We further find that the assessee/respondent herein has only done the work of advising and assisting the sponsoring agency in selecting various venders, who would supply and /commission various items of work. The personnel, working with the respondent, are also by and large professionally equipped computer engineers.”
(emphasis supplied)
41. What follows from the aforesaid discussion is that the amount received by the appellant from the State Government for payment to vendors is not a consideration for any service said to be rendered by the appellant to the State Government and, therefore, no service tax could be levied. This is for the reason that the amount which the appellant has received is not a consideration for provision of any service. The appellant was appointed merely as a Nodal Agency to supervise and monitor the overall execution of the projects. Infact, the amount paid by the State Government Department to the appellant are reimbursements which cannot be subjected to levy of service tax and in any view of the matter the appellant was acting as a pure agent as all the conditions stipulated in rule 5(2) of the Valuation Rules are satisfied.
42. In view of the aforesaid discussion it would not be necessary to deal with the other submissions advanced by the learned counsel for the appellant for setting aside the demand of service tax.
43. The second demand which has been confirmed relates to the amount collected by the appellant from vendors on account of breach of agreement. This amount, which is called liquidated damages, has been held to be susceptible to service tax under section 66E(e) of the Finance Act by the Commissioner as an amount received for tolerating an act. According to the appellant, the liquidated damages recovered on account of breach or non-performance of a contract is not a consideration in lieu of any service. It is infact, in the nature of a deterrent so that such a breach is not repeated.
44. To examine this issue it would be useful to refer to the definition of “service” as defined under section 65B(44) of the Finance Act. “Service” has been defined to mean any activity carried out by a person for another for consideration, and includes a declared service. “Declared services” have been defined in section 66E of the Finance Act and sub-section(e) of section 66E of the Finance Act, which is involved in this appeal, is as follows:
“66E. Declared services
The following shall constitute declared services, namely:-
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(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;”
45. 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:
i. consideration for agreeing to the obligation to refrain from an act; or
ii. consideration for agreeing to tolerate an act or a situation; or
iii. consideration to do an act
46. 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 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) of the Finance Act.
47. This issue was examined at length by a Division Bench of the Tribunal in M/s. South Eastern Coalfields Ltd. and the observations are as follows:
“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.
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 is that the other party complies with the terms of the contract and a penalty is imposed only if there is noncompliance.
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.
********
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’.”
48. In this view of the matter, service tax could not have been levied on the amount recovered as liquidated damages.
49. The demands confirmed against the appellant by orders dated 16.01.2017 and 18.05.2018 that have been assailed in Service Tax Appeal No. 50631 of 2017 and Service Tax Appeal No. 52613 of 2018, therefore, cannot be sustained.
50. The Commissioner has filed Service Tax Appeal No. 51698 of 2017 against that part of the order dated 16.01.2017 by which penalty against the appellant has been dropped by granting the benefit of section 80 of the Finance Act. It would not be necessary to examine whether the benefit of wavier of penalty under section 80 of the Finance Act was available to the appellant or not since the entire demand is being set aside.
51. The result would be that the orders dated 16.01.2017 and 18.05.2018 passed by the Commissioner are set aside and Service Tax Appeal No. 50631 of 2017 and Service Tax Appeal No. 52613 of 2018 are allowed. Service Tax Appeal No. 51698 of 2017 filed by the Commissioner is, however, dismissed.
(Order Pronounced on 18.02.2022)
Notes:-
1. the appellant
2. the Commissioner
3. the Finance Act
4. the State Government
5. Department of IT&C
6. 2013 (29) S.T.R. 9 (Del)
7. 2018 (3) TMI 357 – Supreme Court
8. 2018 (2) TMI 1325 – Supreme Court
9. the Valuation Rules
10. 2018 (8) TMI 902 – CESTAT, New Delhi
11. 2020 (12) TMI 912 – CESTAT, New Delhi
