Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. Vs Commissioner of Central Goods and Services Tax (CESTAT Delhi)
Summary: CESTAT Delhi held that amounts recovered by Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. from employees who resigned without serving the stipulated notice period were compensation for failure to perform the employment contract and not consideration for a taxable declared service under Section 66E(e) of the Finance Act, 1994. The appellant, a Rajasthan Government public sector undertaking engaged in electricity transmission, had recovered Rs. 28,10,698/- from employees on premature resignation. The Department demanded Service Tax of Rs. 3,55,472/-, with interest under Section 75 and penalty under Section 78, alleging that the employer had agreed to tolerate employees leaving without notice in return for consideration.
The Tribunal distinguished contractual consideration from compensation. Consideration is received for successful performance of the contract and represents its object, whereas compensation arises when a party reneges upon or fails to perform contractual obligations. The fact that compensation is predetermined as liquidated damages does not convert it into consideration. Referring to Section 2 of the Indian Contract Act, 1872, the Tribunal explained that consideration must represent something desired by the promisee. Section 66E(e) applies where refraining from an act, tolerating an act or situation, or doing an act is itself the purpose of the agreement and consideration flows for that activity. It does not apply merely because compensation becomes payable upon breach of an agreement entered into for another purpose. The Tribunal referred to precedents concerning loan pre-payment charges, contractual penalties, coal-block compensation and machine-availability compensation, including South Eastern Coalfields Ltd. Vs Commissioner of Central Excise and Service Tax and MNH Shakti Limited Vs Commissioner.
