Case Law Details
Paradip Port Trust Vs Commissioner of CGST & Excise (CESTAT Kolkata)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Kolkata considered an appeal against an Order-in-Original dated 24 October 2017, whereby the Commissioner, CGST & Central Excise, Bhubaneswar, had confirmed a demand of service tax under the category of “Declared Service” under Section 66E(e) of the Finance Act, 1994 for the period 2013-14, pursuant to a Show Cause Notice dated 1 August 2016.
The appellant, an autonomous body under the Ministry of Ports, Shipping & Waterways, provides port services, including pilotage, berth hire and licence of plots, for which service charges are recovered in accordance with the Scale of Rates notified by the Tariff Authority of Major Ports, and applicable service tax is collected and deposited. This aspect was not disputed.
The dispute arose from the appellant’s Berth Reservation Scheme, introduced through an Office Order dated 7 January 2012, under which specified users were given priority berthing. The scheme required users to commit to a Minimum Guarantee Tonnage (MGT). If the committed quantity was not achieved, the appellant was entitled to encash the Bank Guarantee equivalent to the wharfage applicable to the shortfall in the MGT quantity as a penalty.
The Commissioner held that forfeiture of the Bank Guarantee for failure to achieve the MGT amounted to tolerating an act or a situation and that, under the agreement, the MGT providers had also agreed to refrain from initiating legal proceedings against the appellant, as the Chairman’s interpretation was to be final and binding. On this basis, the Commissioner concluded that the activity fell within Section 66E(e) of the Finance Act, 1994, which treats agreeing to refrain from an act, tolerate an act or situation, or do an act as a declared service, and therefore held the forfeited amount liable to service tax.
Before the Tribunal, the appellant relied upon several earlier Tribunal decisions, including South Eastern Coalfields Ltd., M.P. Poorv Kshetra Vidyut Vitaran Co. Ltd., Neyveli Lignite Corporation Ltd., and K.N. Foods Industries, to contend that amounts recovered as penalties for non-fulfilment of contractual obligations do not constitute consideration for a declared service under Section 66E(e). The Department supported the Commissioner’s findings and sought dismissal of the appeal.
The Tribunal examined its earlier decision in South Eastern Coalfields Ltd., which had analysed the scope of Section 66E(e) under the negative list regime introduced from 1 July 2012. That decision held that penalties or liquidated damages recovered due to non-performance of contractual obligations are intended to ensure compliance with contractual terms and to deter breaches, rather than to tolerate non-performance. The Tribunal also observed that consideration must flow from the service recipient to the service provider for a taxable service, and that amounts having no nexus with a taxable service cannot form part of the taxable value. It further distinguished conditions of a contract from consideration under a contract, observing that fulfilment of contractual conditions does not automatically constitute consideration for a taxable service.
The Tribunal noted that the earlier decision explained that, for a service to fall under Section 66E(e), the agreement must specifically provide consideration for agreeing to refrain from an act, tolerate an act or situation, or do an act. It further observed that the intention of the contracting parties is ordinarily to ensure compliance with contractual obligations, and penalty clauses are safeguards to protect commercial interests rather than agreements to tolerate contractual breaches. The purpose of imposing compensation or penalties is to discourage defaults and not to treat non-performance as a service.
The Tribunal also noted that the decision in South Eastern Coalfields Ltd. had subsequently been followed in M.P. Poorv Kshetra Vidyut Vitaran Co. Ltd. and Neyveli Lignite Corporation Ltd.
Applying those principles, the Tribunal held that the amount collected by the appellant through encashment of the Bank Guarantee on account of shortfall in the Minimum Guarantee Tonnage could not be regarded as consideration for tolerating an act or a situation, and therefore did not amount to a declared service under Section 66E(e) of the Finance Act, 1994. Consequently, the Tribunal held that the service tax demand was unsustainable, set aside the impugned demand and the penalty, and allowed the appeal with consequential relief in accordance with law.
FULL TEXT OF THE CESTAT KOLKATA ORDER
The instant appeal is directed against the Order-in-Original dated 24.10.2017 passed by the Ld. Commissioner, CGST & Central Excise, Bhubaneswar, whereby he has confirmed the demand of service tax under the category of Declared Service under Section 66E(e) of the Finance Act, 1994, for the period 2013-14 as proposed in the Show Cause Notice dated 01.08.2016.
2. Briefly stated, the facts of the case are that the Appellant is an autonomous body under the Ministry of Ports, Shipping & Waterways, Government of India, and is engaged in providing Port services. The consideration for various services e.g., pilotage, berth hire, licence fees for plot, etc, are recovered by the Appellant in terms of Scale of Rates notified by the Tariff Authority of Major Ports and applicable service tax is being charged and deposited by the Appellant, a fact which is not in dispute.
The Appellant has devised a scheme, known as Berth Reservation Scheme, to accord priority berthing of specified users in the Port. In terms of the said scheme as laid down in Office Order dated 07.01.2012 issued by the Traffic Department of Paradip Port Trust, a Minimum Guarantee Tonnage (MGT) has to be confirmed by the user failing which the user shall be penalised by way of encashment of Bank Guarantee for the equivalent wharfage in respect of the shortfall quantity of the MGT.
3. The Ld. Commissioner has given his findings in para 5.3 of the impugned order which reads as below:
“I find that the amount forfeited by the Noticee, as per clause 7 of the agreement / order, in case of shortfall in the MGFT quantity, the Notice could encash the BG for the equivalent wharfage of the shortfall and thus the MGT providers had to tolerate the lopsided situation. As per the conditions of the Agreement / Order, the MGT providers had to also refrain from an act by agreeing not to file any suit, application against the Noticee, stipulated vide clause 15 of the Agreement / Order, which states that „in case of any dispute, the interpretation of Chairman, PPT will be final and binding on all parties, if the amount of Bank Guarantee is forfeited. Thus, the activity falls within the purview of Section 66E(e) of the Finance Act, 1994. In order to bring more clarity, I reproduce the said Section as under:
66E. Declared Service
e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.
As per Section 66E(e), obligation to refrain from an act or to tolerate an act or a situation, or to do an act, has bene declared as a service. Refrain means to keep oneself from one act or feeling from a particular thing that somebody does….
Thus forfeiting the amount by the Noticee, which was received from the MGT providers, in lieu of the Agreement / Order, amounts to tolerating of an act or a situation and hence the amount forfeited by the Noticee, is liable to Service Tax and the activity falls under the purview of Section 66E(e) of the Finance Act, 1994.”
4. We have heard Sri Pulak Saha, Chartered Accountant and Sri K. Chowdhury, Ld. Departmental Representative, through Video Conferencing and perused the appeal records.
5. The Ld. CA appearing for the Appellant relied on various decisions of the Tribunal including the following decisions to submit that the amount charged in the nature of penalty for non-fulfilment of the contractual obligations by the other party cannot be said towards provision of declared service under Section 66E(e) :-
- South Eastern Coalfields Ltd vs. Commissioner of Central Excise & Service Tax, Raipur 2020-TIOL-1711-CESTAT-DEL
- M.P. Poorv Kshetra Vidyut Vitaran Co. Ltd vs. Pr. Commissioner, CGST, Bhopal 2021 (2) TMI 821-CESTAT- New Delhi
- Neyveli Lignite Corporation Ltd vs. Comm of Central Excise & Service Tax 2021 (7) TMI 1090 – CESTAT Chennai
- K.N. Foods Industries 2019-TIOL-3651-CESTAT-Allahabad
6. The Ld. DR appearing for the Department reiterated the findings of the Ld. Commissioner and prayed that the appeal be rejected being devoid of any merit.
7. We find that the Tribunal in the case of South Eastern Coalfields Limited (Supra) has examined in detail the provisions of Declared Service under Section 66E(e) of the Finance Act, 1994, which was introduced in the Negative List based regime effective from 01.07.2012. In the said case, the issue for consideration before the Tribunal was whether the assessee company was liable to pay service tax under the aforesaid provisions on the liquidated damages and penalty / forfeiture of earnest money deposit for recovery of amount due to non fulfilment of contractual agreement by one of the parties to the agreement. The Tribunal came to a conclusion that by collecting the penal amount as aforesaid, it is not the intention of the assessee to tolerate the non performance of the obligation which was cast upon him as per the commercial contract entered by the assessee with the other party. Rather it was the intention of the assessee that the other party should comply with the contractual obligations and the penal amount was charged only to deter the other party from violating the contractual terms. The relevant portion of the decision is reproduced below:
“23. It would, therefore, be appropriate to examine the definition of ―consideration in section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and predates the Finance Act. The definition of “consideration” is as follows:-
2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.”
24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders is that “consideration” must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. It should also be remembered that there is marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided.
25. It is in the light of what has been stated above that the provisions of section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is 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.
26. 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) 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).
27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized.
28. It also needs to be noted that section 65B(44) defines “service” to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that “consideration” includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.
29. The situation would have been different if the party purchasing coal had an option to purchase coal from ‘A‘ or from ‘B‘ and if in such a situation ‘A‘ and ‘B‘ enter into an agreement that ‘A‘ would not supply coal to the appellant provided ‘B‘ paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under section 66E (e)….”
The above decision has been followed in M. P. Poorv Kshetra Vidyut Vitaran Co. Ltd (Supra) and Neyveli Lignite Corporation Ltd (Supra).
8. We are of the considered view that the above decision of the Tribunal is squarely applicable in the instant case also wherein the amount collected by the appellant by encashment of Bank Guarantee for the shortfall of the quantity as against the Minimum Guarantee Tonnage (MGT) as per the scheme cannot be said towards tolerating any act or a situation on the part of the appellant and thus, there is no rendition of Declared Service under Section 66E(e) by the appellant.
9. Hence, the impugned demand cannot be sustained and is thus set aside. Penalty imposed on the appellant is also set aside. The appeal is thus allowed with consequential relief as per law.
(Pronounced in the open Court on 22.02.2022)
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