Case Law Details
Pankaj Ispat Ltd Vs Commissioner of Central Excise (CESTAT Delhi)
Forfeited amount for Order Cancellation was not consideration for any service, and therefore not subject to service tax: CESTAT Delhi
In the case of Pankaj Ispat Ltd. vs. Commissioner of Central Excise, the CESTAT Delhi addressed whether the amount forfeited due to the cancellation of an order could be considered taxable as a service under Section 66E(e) of the Finance Act, 1994. The appellant, registered for providing taxable services such as Transport of Goods by Road, had forfeited amounts from a buyer who breached a contract. The Department argued that the forfeited amount was a consideration for “Declared Services” and issued a show cause notice for recovery of service tax along with penalties. However, the Tribunal observed that Section 66E(e) applies only when there is an agreement to tolerate an act, refrain from an act, or perform an act, none of which occurred in this case. The Tribunal, referencing several precedents and circulars, concluded that the forfeited amount was not consideration for any service, and therefore not subject to service tax. The order against the appellant was set aside, and the appeal was allowed.
FULL TEXT OF THE CESTAT DELHI ORDER
Present appeal has been filed to assail the Order-in-Appeal No.63/2017 dated 16.04.2018. The facts which had culminated into the said order, in brief, are as follows:-
That the appellant is registered as the provider / recipient of taxable services namely „Transport of Goods by Road/Goods Transport Agency Service‟. During the audit of its record of „Financial Year 201213 it was observed that appellant had received a monetary consideration due to cancellation of deal entered for purchase of goods from M/s. Shri Kapileswar Steel, Raipur. Department formed the opinion that the said amount is an amount towards consideration for rendering „Declared Services‟ as defined under section 66E of the Finance Act. With this observation vide Show Cause Notice No.78/2016-17 dated 12th August, 2016 Service Tax amounting to Rs.3,63,384/- is proposed to be recovered from the appellant alongwith the appropriate interest. Penalties under section 76 & 77 of the Finance Act are also proposed to be imposed. Proposal was initially confirmed vide Order-in-Original No.01/2016-17 dated 23rd January, 2017. The appeal against the said order has been rejected vide the impugned Order-in-Appeal.
2. We have heard Ms. Kainaat, ld. Counsel for the appellant and Mr. Sanjeev Kumar Ray, ld. Authorised Representative for the Revenue.
3. Ld. Counsel for the appellant has mentioned that the amount in question is an amount forfeited on account of breach of contract and as such the same is wrongly held to be covered under section 66E (e) of the Finance Act. It is mentioned that the issue stands already settled. Following decisions have been relied upon:-
1. Northern Coalfields Ltd. Vs. Commr. & CUS [2023 (71) GSTL 63 (Tri.)]
2. Krishnapatnam Port Co. Ltd. Vs. CCE [2023 (72) GSTL 259 (Tri.)]
3. G.M. (Finance), Bharat Heavy Electricals Ltd. Vs. CC & CE [(2023) 4 CENTAX 400 (Tri.)]
4. Madhya Pradesh Poorva Kshetra Vidyut Vitran Co. Ltd. Vs. Commr. CGST & CE [2022 (67) GSTL 86 (Tri.)]
5. M. P. Poorva Kshetra Vidyut Vitran Co. Ltd. Vs. Pr. CGST & CE [2021 (46) GSTL 409 (Tri)]
6. South Eastern Coalfields Ltd. Vs. CCE & ST [2021 (55) GSTL 549 (Tri.
7. Amit Metaliks Ltd. Vs. Commr. CGST [2020 (41) GSTL 325 (Tri.)]
8. Mount Everest Breweries Ltd. Vs. Commr. CGST & CE [F.O. No. 50802/2023]
4. Ld. Counsel further submitted that subsequent to those decisions even Department has issued the following Circulars which have dealt with the issue on the levy of service tax on the liquidated damages arising out of breach of contract forfeiture of salary or payment of bond amount.
1. Circular No.178/10/2022-GST dated 03.02.2023
2. Circular No.214/1/2023-ST dated 28.02.2023
5. Finally, submitting that the demand is otherwise barred by time, the order under challenge is prayed to be set aside and the appeal is prayed to be allowed.
6. Ld. Departmental Representative though has reiterated the findings arrived at in the order under challenge. However has acknowledged that the issue involved vis-à-vis leviability of service tax on the forfeited amount is no more res-integra.
7. Keeping in view the submissions of both the parties herein, perusing the decisions relied upon and also section 66E (e) of Finance Act, we foremost have observed that under the said section 66E(c) the declared service is defined to mean “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 :
- To refrain from an act or
- To tolerate an act or a situation or
- To do an act
8. In other words, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. which is clearly absent in the present case.
9. The activities that are contemplated under Section 66E(e) ibid are activities where the agreement specifically refers to any of the activities mentioned in Para 6 above and there is a flow of consideration for such activity. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from or tolerate or do an act, would be a „declared service‟ under Section 66E(e) ibid. 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. In other words, the amount charged has to be necessarily a consideration for the taxable service provided under the Finance Act. Resultantly, it becomes clear that, the compensation received for making good the financial damages/injury cannot be said to be „consideration‟ at all and has no nexus with any taxable service. Reliance in this regard is placed on the decision in the case of M/s. K.N. Food Industries Pvt. Ltd. v. Commissioner of CGST & Central Excise, Kanpur [2019-VII-731-CESTAT-ALH-ST] = 2020 (38) G.S.T.L. 60 (Tri. – All.).
10. Reverting to the facts of the present case, it is observed that the appellant had agreed to sell TMT Bars to M/s. Shri Kapileswar Steel Raipur pursuant to the order for supply placed by the later. However, Shri Kapileswar cancelled the said purchase order. This cancellation has been treated as a breach of contract. Appellant vide two letters dated 28.02.2013 and 31.03.2013 has conveyed that the amount of Rs.18,90,000/- and Rs.10,50,000 respectively has been forfeited by the appellant subsequent to buyer failing to perform his part of contract with the appellant. The act of forfeiting the amount in the given circumstances doesn’t confirm to the meaning of „Declared Service’ as discussed above.
11. We also observed that this Tribunal in the case of South Eastern Coal Fields Ltd. vs. CCE & ST, Raipur reported in 2021 (55) GSTL 549 has already held as follows:-
“ There is marked distinction between “conditions to a contract” and “considerations for the contract”. A service recipient may be required to fulfill 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. Hence, payment of the impugned „compensation charges‟ in the present case merely amounts to fulfillment of the condition envisaged in Para No. 6.5.3 of the Agreement dated 12-7-2011 and not consideration for the said contract [Agreement dated 12-7-2011].
12. Further, the 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. Reliance in this regard is placed on the following decisions :
(i) M/s. K.N. Food Industries Pvt. Ltd. v. Commissioner of CGST & Central Excise, Kanpur [2019-VIL-731-CESTAT-ALH-ST] wherein it was held that if a contract provides for an eventuality which is uncertain and also remedy if that eventuality occurs, such charges made towards making good the damages, losses or injuries arising from unintended events cannot be considered to be the payments for any services under Section 66E(e) of Finance Act, 1994.
(ii) M/s. Monnet Ispat & Energy Ltd. v. CCE & ST, Raipur [2018 (9) TMI 1514] – while deciding whether Service Tax liability arises on the UI Charges received by the Company in terms of Section 66E(e) of the Finance Act, 1994, the Court held that UI Charges have been received by the Appellant only in those cases where the buyer has drawn more electricity than what was scheduled for him and does not amount to consideration for declared service.
(iii) M/s. Lemon Tree Hotels v. Commissioner, GST, Central Excise & Customs – 2020 (34) G.S.T.L. 220 (Tri. – Del.)/[2021] 127 com 247 (New Delhi – CESTAT) [2019 (7) TMI 676] wherein it was held that „cancellation charges‟ collected in lieu of cancellation of booking of hotel room does not attract Service Tax in terms of Section 66E(e) of the Finance Act.
(iv) In M/s. South Eastern Coalfields Ltd. v. CCE & ST, Raipur [supra]-The Tribunal held that the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the Appellant towards “consideration” for “tolerating an act” leviable to Service Tax under Section 66E(e) of the Finance Act cannot be sustained and also relied on the following decisions of the Hon‟ble Supreme Court :
(a) Commissioner of Service Tax v. M/s. Bhayana Builders (P.) Ltd. [2018 (2) TMI 1325] = 2018 (10) G.S.T.L. 118 = [2018] 91 taxmann.com 109/66 GST 320 wherein the Apex Court observed that 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 under the Finance Act.
(b) Union of India v. International Consultants and Technocrats [2018 (10) G.S.T.L. 401 (S.C.)] – since Service Tax is with reference to the value of service, as a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the Service Tax payable thereupon.
(v) M/s. M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. v. Principal Commissioner CGST and CE, Bhopal [2021 (2) TMI 821]/2021 (46) G.S.T.L. 409 (Tri. – Del.), wherein the ratio of the decision in the case of M/s. South Eastern Coalfields (supra) was followed and the order confirming the demand of Service Tax on the amount collected towards liquidated damages and theft of electricity was set aside.
12. From the perusal of these decisions it becomes abundantly clear that the issue of considering a forfeited amount as an amount of consideration towards declared services stands already settled in favour of the assessee. The same is already held to not to be the consideration towards any service. In fact the cancellation of contract itself is already held to not to be a service. With these findings we hereby set aside the present order. Consequent thereto the appeal in hand is hereby allowed.
[Dictated and pronounced in the open Court]
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