Chennai Metro Rail Ltd Vs Commissioner of GST & Central Excise (CESTAT Chennai)
CESTAT Chennai held that the amount of damages received for tolerating the breach of contract by contractors and sub-contractors is not consideration. Any amount, which is not a consideration for provision of service, cannot be subjected to service tax.
Facts- Chennai Metro Rail Ltd. (CMRL) is a joint venture between the Government of India and the Government of Tamil Nadu that builds and operates Chennai Metro, which is proposed to ba a rapid transport serving the city of Chennai.
Intelligence developed by the officers of Directorate Generate of GST Intelligence, Chennai Zonal Unit revealed that CMRL have not paid service tax on the consideration received by them for tolerating the non-performance of agreed obligations by their contractors. It appeared to the department that CMRL is liable to pay service tax of Rs.14,31,75,822/- and Rs.23,72,71,674/- on the taxable amounts received and retained by CMRL along with interest for not paying their service tax liability within the prescribed time and on account of various acts of omission and/or commission on their part have rendered themselves liable to penalty u/s. 76, 77 and 78 of the Finance Act, 1994.
A Show Cause Notice was issued to demand the service tax amount of Rs.14,31,75,822/- received through encashment of performance Guarantee / Bank Guarantee and Rs.23,72,71,674/- towards collected/ retained as liquidated damages during the period along with interest and for imposition of penalties under various sections of Finance Act, 1994.
The Adjudicating Authority vide the order impugned dropped the proceedings relating to Performance Guarantee, whereas, confirmed the demand with regard to liquidated damages. Being aggrieved, both revenue and assessee has preferred the present appeal.
Conclusion- Held that in the case of the CMRL, Revenue has not pointed out any such contractual arrangement which is an independent arrangement in its own right to receives damages by tolerating breach of contract. The amounts retained towards liquidated damages and also invoked as bank guarantee are not a consideration for tolerating breach of contract. Any amount, which is not a consideration for provision of service, cannot be subjected to service tax. We hence do not agree that CMRL had received a consideration for tolerating the delay in execution of the projects contracted by them. The benefit of the CBIC circular and the judgments mentioned in the circular and by the appellant are applicable to this case. A demand for service tax on the monies received through encashment of performance Guarantee / Bank Guarantee and that collected/ retained as liquidated damages for non-performance and failure to comply with the agreed obligation by various contractors / sub-contractors, hence fails.
FULL TEXT OF THE CESTAT CHENNAI ORDER
Appeal No. ST/40046/2020 filed by Chennai Metro Rail Ltd. (CMRL) and Appeal No. ST/40058/2020 is filed by Revenue and cross-objection in Misc. Application No. 40366 of 2023 filed by the assessee CMRL are against the impugned order passed by Commissioner of GST and Central Excise, Chennai South Commissionerate vide Order in Original No. 23/2019 dated 30.8.2019 (impugned order).
2. Brief facts of the case are that Chennai Metro Rail Ltd. herein after referred to as CMRL, is a joint venture between the Government of India and the Government of Tamil Nadu that builds and operates Chennai Metro, which is proposed to be a rapid transport system serving the city of Chennai, Tamil Nadu. CMRL were centrally registered with the erstwhile Service Tax Commissionerate, Chennai. Intelligence developed by the officers of Directorate Generate of GST Intelligence, Chennai Zonal Unit revealed that CMRL have not paid service tax on the consideration received by them for tolerating the non-performance of agreed obligations by their contractors. It appeared that the Performance Guarantee executed in the form of Bank Guarantee was encashed by CMRL for violation of agreed obligations and that it is a consideration received by CMRL from the contractors for tolerating the financial loss due to non-performance of the contractors. Besides that, CMRL have retained / collected consideration as liquidated damages for non-performance and failure to comply with the agreed obligation by various contractors / subcontractors. It appeared to the department that CMRL is liable to pay service tax of Rs.14,31,75,822/- and Rs.23,72,71,674/- on the taxable amounts received and retained by CMRL along with interest for not paying their service tax liability within the prescribed time and on account of various acts of omission and/or commission on their part have rendered themselves liable to penalty under section 76, 77 and 78 of the Finance Act, 1994. It also appeared that Shri P.K. Parthiban, Joint General Manager (Finance) is instrumental in the contraventions by CMRL leading to loss of revenue. Therefore, a Show Cause Notice dated 29.9.20218 was issued to demand the service tax amount of Rs.14,31,75,822/- received through encashment of performance Guarantee / Bank Guarantee and Rs.23,72,71,674/- towards collected/ retained as liquidated damages during the period along with interest and for imposition of penalties under various sections of Finance Act, 1994 on the appellant as well as the Joint Managing Director shri P.K. Parthiban. After due process of law, the Adjudicating Authority vide the order impugned dropped the proceedings relating to Performance Guarantee holding that the amount of Rs.115.8 crores is a compensation for the huge default of the contractors and no service tax is payable on the same and that the argument of the assessee claiming it to be an ‘actionable claim’ is sustainable. As regards the activity of collecting liquidated damages, the Adjudicating Authority held that it is an act of agreeing to an obligation to tolerate the act and situations created by the contractors, the appellant is liable to pay service tax being a declared service under section 66E(e) read with Section 65B(22) of the Finance Act, 1994 confirmed the demand of Rs.20,81,25,159/- being the service tax payable on the liquidated damages / retention money collected during the period from 2013 – 14 to 2017-18 (upto June 2017) under section 73(2) of the Finance Act, 1994 along with appropriate interest under sec. 75. The adjudicating authority also imposed equal penalty under section 78 of the FA. The penalty proposed under section 78A against the Joint Managing Director Shri P.K. Parthiban was dropped by the adjudicating authority holding that he is not a signatory to the contracts and neither to the bank guarantee nor the collection of liquidated damages.
3. Aggrieved against confirmation of service tax demand of Rs.20,81,25,159/- along with interest and imposition of equal penalty by the Adjudicating Authority, CMRL has filed Appeal No. ST/40046/2020. Revenue has filed Appeal No. ST/40058/2020 against the dropping of demand of Rs.14,31,75,822/- pertaining to encashment of performance / Bank Guarantee which is a consideration for an act of agreeing to an obligation to tolerate all the acts and situations under section 66E(e) of the Act. We take up both the appeals against the impugned order for disposal together.
4. We have heard Shri P. Ravindran, learned counsel for the Chennai Metro Rail Ltd. and Shri Rudra Pratap Singh, learned Additional Commissioner (AR) for the Revenue.
4.1 Shri P. Ravindran, learned counsel submitted that the Appellant M/s Chennai Metro Rail Ltd, (hereinafter referred to as CMRL) is a joint venture between the Government of India and the State Government of Tamil Nadu with equal partnership. It builds and operates Chennai Metro, the elevated & underground rail network in the city of Chennai towards fulfilling its mission of meeting the modern transportation needs of the citizens of Chennai. CMRL engages various companies as contractors to execute specified works for CMRL given the high cost of the project involved and in public interest. The contracts entered into between CMRL, and the contracting entities require clear and strict clauses on performance and provision for compensation and even termination in the event of breaches by the contracting parties. The contracts inter alia stipulated scheduled time for the completion of each activity of the work and any delay in execution shall attract liquidated damages. Since certain contractors failed to execute work as per the terms of contract, CMRL retained some amount towards liquidated damages and invoked bank guarantees for the slippage of the scheduled performance on the civil contracts. The Service Tax Department has sought to recover service tax on the amount retained by CMRL as damages from the contractor on the basis that the amount retained as damages was consideration for tolerating breach of contract and was allegedly liable to service tax under section 66E(e) of Finance Act 1994. The Appellants are now in Appeal before the Hon’ble Tribunal. He further submitted that out of the sum of Liquidated damages involved in the SCN of Rs. 170,72,40,005/-, the balance of liquidated damages as on date is Rs. 27,46,21,489/-. The contractor-wise details are as follows –
