Observing that the ex- gratia charges made by principal to assessee- appellant were towards making good losses or injuries arising from unintended events and did not emanate from any obligation on part of any of the parties to tolerate an act or a situation, CESTAT Allahabad has held that the payment cannot be considered to be for some services. The Tribunal was of the view that for invocation of Section 66E(e) of the Finance Act, 1994, there must be first concurrence to assume an obligation to refrain from an act or tolerate an act, etc., which was absent in the present case.
FULL TEXT OF THE CESTAT JUDGEMENT
As per facts on record the appellant is engaged in the manufacture of confectionaries falling under Chapter 17 of Central Excise Tariff Act, 1985 for and on behalf of the principal manufacturer M/s Parle Biscuits Pvt. Ltd., in terms of the agreement entered between the two. M/s Parle is procuring the raw material and supplying the same to the appellant for manufacture of the confectionaries, which were being cleared by the appellant on payment of Excise duty on MRP as declared by M/s Parle.
2. M/s Parle is making payment of job charges to the appellant on per kilo basis of confectionary as agreed upon between the two. However in case the quantum of goods got manufactured by M/s Parle is less than standard mutually agreed upon quantum, the appellants are entitled ex-gratia job charges to cover up the loss or deficiencies in normal job charges to be received by the appellant. The quantum of ex-gratia to be given to the appellant is computed based upon various factors like „Per Day Maximum Output’ based on production capacity, „Packing Capacity’ of per month and „Output Ratio’ arrived at operating time of the plant to manufacture the confectionaries etc. As such, bills are raised by the appellant and paid by M/s Parle.
3. Entertaining a view that such receipt of ex-gratia job charges by the appellant amounts to providing services, Revenue raised a show cause notice dated 11/04/2016 raising demand of Service Tax for the period July, 2012 to March, 2015. The said show cause notice was contested by the appellant on merits as also on limitation. However not finding favour with the appellant’s contentions, the demand of Service Tax to the tune of Rs.45,03,712/- was confirmed along with confirmation of interest and imposition of penalty of identical amount under Section 78 of the Finance Act, 1994 as also imposition of penalties under Section 77(2) of Finance Act, 1994. The order of Original Adjudicating Authority was upheld and hence the present appeal.
4. After hearing both the sides duly represented by Shri H. P. Kanade, learned advocate appearing for the appellant and Shri Shiv Pratap Singh, learned A.R. appearing for the Revenue, we find that the short issue required to be decided in the present appeal is as to whether the receipt of ex-gratia job charges amount by the appellant amounts to providing any services so as to attract the Service Tax on the same. We find that appellant is admittedly manufacturing confectionaries for and on behalf of the M/s Parle and is clearing the same upon payment of Central Excise duty on the basis of MRP declared by M/s Parle. It is only in situation when the appellant‟s capacity, as a manufacturer, is not being fully utilized by M/s Parle, their claim of ex-gratia charges arises so as to compensate them from the financial damage/injury. As such, ex-gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee.
The Lower Authorities have invoked the provision of the Section 66E (e) of the Act which relates to the definition of the declared services. The same is to the effect that “(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”. Provisions of Section 65B (44) of the Act refers to the process amounting to manufacture or production of goods on which the duty is leviable under Section 3 of the Central Excise Act, 1944 as on service. However no Service Tax is leviable on such services, as the same is covered under the negative list. Further, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is a declared service on which the Service Tax is leviable under Section 66B of the Act.
In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex-gratia job charges. The same are not covered by any of the Acts as described under Section 66E (e) of the Finance Act, 1994. The said Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said clause, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. which are clearly absent in the present case. In the instant case, if the delivery of project gets delayed, or any other terms of the contract gests breached, which were expected to cause some damage or loss to the appellant, the contract itself provides for compensation to make good the possible damages owning to delay, or breach, as the case may be, by way of payment of liquidated damages by the contractor to the appellant. As such, the contracts provide for an eventuality which was uncertain and also corresponding consequence or remedy if that eventuality occurs. As such the present ex-gratia charges made by the M/s Parle to the appellant were towards making good the damages, losses or injuries arising from “unintended” events and does not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be the payments for any services.
5. In view of the foregoing, we find no reasons to uphold the impugned orders. Inasmuch as the appeal stands allowed on merits, the plea of limitation is not being adverted to.
(Order pronounced in the open court on-26/11/2019)