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:-
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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;”
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:
