Krishnapatnam Port Company Limited Vs Commissioner of Central Excise & Service Tax (CESTAT Hyderabad)
Issue of leviability of Service tax on penalty, liquidated damages, compensation, forfeiture amounts, cancellation charges etc. stands settled by various pronouncements wherein it has consistently been held that the said amounts recovered as charges for breach or non-compliance of contractual terms and conditions cannot be construed as ‘consideration’ for ‘refraining or tolerating an act’ and were thus not leviable on Service Tax in terms of Section 66E(e) of the Finance Act, 1994.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
The Appellant is engaged in rendering ‘Port Services’ to importers and exporters and vide Agreement dated 12.07.2011, entered into a contract with M/s. Simhapuri Energy (P) Ltd. (hereinafter referred to as the ‘service recipient’) wherein the service recipient agreed to import a specified quantity of coal in a specified period of time and the Appellant agreed to render ‘port services’ for the same for a consideration. The said Agreement also provides for payment of penalty/liquidated damages/’compensation charges’ of Rs.100/MT by the services recipient in the event of failure to achieve the ‘Minimum Guaranteed Tonnage’ [hereinafter referred to as MGT]. The relevant extract is reproduced below for ready reference:
“6.5 SEPL/PTC commits minimum volumes as under from the date of NTP and KPCL agrees for the facilities accordingly:-
1) ………….
2) ………….
3) ………….
SEPL/PTC shall be liable to pay a compensation charge of Rs.100/- (Rupees One Hundred only) per MT for the difference (shortfall) of quantity in the event not achiving minimum guaranteed tonnage for the respective period.”
2. The Service Tax Department, Guntur issued a Demand Notice to Appellant proposing to recover Service Tax amounting to Rs.1,13,85,022/- on the ground that the receipt of ‘compensation charges’ amounts to consideration for providing taxable service. The Commissioner of Central Tax, Guntur vide Order dated 31.12.2015 has confirmed the demand for normal period as well as for extended period of limitation along with equivalent penalty holding that the said activity amounts to a ‘declared service’ under Section 66E(e) of the Finance Act, 1994. Hence the present Appeal before the Tribunal.
3. The core issue thus relates to whether the liquidated damages/’compensation charges’ received by the Appellant towards the breach and non-compliance of ‘MGT’ as per Agreement dated 12.07.2011 can be viewed as ‘consideration’ for “declared service” as contemplated under Section 66E(e) of Finance Act, 1994 for the purpose of charging Service Tax.
4. Heard both sides through video conferencing and perused the Appeal records.
5. We find that penalty clause is provided in the impugned Agreement dated 12.07.2011 to safeguard the commercial interest of the Appellant – (1) to compensate the Appellant for financial damage/injury in case of failure to achieve the MGT and also (2) to discourage the service recipient from repeatedly breaching the terms and conditions of the Agreement dated 12.07.2011 and the penal clause is invoked only in cases where the service recipient does not adhere to the contractual condition of ‘MGT’ as per Agreement dated 12.07.2011.
6. We find that as per Finance Act, 1994, the basic element to charge Service Tax is the element of service i.e. there should be an activity in the form of ‘service’ or ‘declared service’. However, in the instant case, the said amount has not been collected towards any activity liable for Service Tax but as compensation/penalty for breach of terms and conditions of the contract [Agreement dated 12.07.2011] i.e. non-compliance of ‘MGT’. Thus, such ‘compensation charges’ are not covered within the definition of taxable service under the Finance Act, 1994 and hence not liable for Service Tax.
7. As per Section 66E(e) of Finance Act, 1994,’declared service’ means “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”. Thus, for invocation of the said clause, there has to be an action, passive action or reaction which is declared to be a service namely;
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