2019 (11) TMI 183 - AT - Service Tax

Tribunal rules settlement amounts not subject to service tax under Finance Act

The Tribunal set aside the demand for service tax on the settlement amounts and compensation received by the Appellant, holding that these amounts were ... Declared service (agreeing to obligation to refrain from an act) - Actionable claim (exclusion from 'service') - Benefit arising out of land / Development right not a service - Point of Taxation Rules not to enlarge charge beyond statutory levy - Taxable event is rendition of service (not receipt of payment)Declared service (agreeing to obligation to refrain from an act) - Actionable claim (exclusion from 'service') - Benefit arising out of land / Development right not a service - Point of Taxation Rules not to enlarge charge beyond statutory levy - Taxable event is rendition of service (not receipt of payment) - Taxability of amounts received under Development Agreements/Settlement Agreements as service under Section 66E(e) of the Finance Act. - HELD THAT: - The Tribunal found that the Development Agreements and the consequent Settlement Agreements were entered into and the relevant events occurred before introduction of the declared service in clause (e) with effect from 01.07.2012; the taxable event for service tax is rendition of service and not later receipt of payment, so Point of Taxation Rules cannot be used to create liability where none existed on the date the agreements were entered into. The Settlement Agreements represented compensation/liquidated damages arising from failure to deliver development rights and, on the facts, created an actionable claim or a benefit arising out of immovable property (development right). Such claims fall within the exclusion of 'transaction in money or actionable claim' from the definition of 'service' and, as benefits arising out of land/development rights, are not taxable services under Section 65B(44). Reliance on precedents dealing with actionable claims and with development-rights transactions supports that these receipts are not service consideration. Accordingly the demand based on characterising the settlement receipts as declared service was unsustainable. [Paras 20, 21, 23, 24, 26]Amounts received under the Development Agreements/Settlement Agreements are not taxable as a declared service under Section 66E(e); they constitute actionable claims or benefits arising out of immovable property and the demand is set aside.Declared service (agreeing to obligation to refrain from an act) - Actionable claim (exclusion from 'service') - Liquidated damages / compensation for non supply not a service - Taxability of compensation received from M/s Amit Mines Limited for non supply of manganese ore as service under Section 66E(e) of the Finance Act. - HELD THAT: - The Tribunal held that the compensation received from M/s Amit Mines (liquidated damages / debit note honoured by the seller) arose out of a failed sale/supply of goods and represented compensation for non performance of a contract for sale. Such receipts are in the nature of liquidated damages/actionable claim arising from a sale contract and do not amount to rendering of a declared service under Section 66E(e). The order below treating that compensation as service was therefore unsustainable. The Tribunal also observed that reliance on GST/CGST decisions concerning different statutory schemes and factual matrices does not alter the conclusion under the Finance Act. [Paras 13, 25, 27, 28]Compensation received from M/s Amit Mines for non supply is not taxable as a declared service; the demand insofar as it relates to that compensation is set aside.Final Conclusion: The appeal is allowed. The impugned Order in Original confirming service tax demand in respect of the settlement receipts and the compensation from M/s Amit Mines is set aside: the sums are either actionable claims or benefits arising out of immovable property (development rights) and are not taxable as declared services under Section 66E(e); Point of Taxation Rules cannot be used to fasten a charge where the taxable event did not exist on the relevant dates. Issues Involved:1. Whether the amount of Rs. 45,08,09,200/- paid to the Appellant as per the 'Settlement Agreement' and the compensation of Rs. 1,97,50,000/- received for non-supply of manganese ore are liable for service tax under 'Declared Service' under Section 66E(e) of the Finance Act, 1994.Detailed Analysis:1. Taxability of Settlement Amounts under Section 66E(e) of the Finance Act, 1994:The Appellant, engaged in the manufacture and sale of M.S. Billets and M.S. Rods, entered into a 'Development Agreement' with 31 companies for land development. Due to the failure of the landowners to provide a contiguous piece of land, the Development Agreement was terminated, and the Appellant received a settlement amount of Rs. 45,08,09,200/- from various landowners. The Department sought to tax these amounts under Section 66E(e) of the Finance Act, which pertains to 'Declared Service' including 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.'The Appellant argued that the amounts received were not for any taxable service but were compensation for breach of contract. The Tribunal found that the Development and Settlement Agreements were concluded before the introduction of Section 66E(e) on July 1, 2012, and thus could not be taxed under the new provision. The Tribunal relied on precedents that established the taxable event is the rendition of service, not the receipt of payment (CCE & CE vs. Schott Glass India Pvt Ltd, Vistar Construction Pvt Ltd vs. Union of India).2. Nature of Settlement Amounts as Actionable Claims:The Appellant contended that the settlement amounts constituted 'actionable claims' as defined under Section 3 of the Transfer of Property Act, 1882, and thus were excluded from the definition of 'service' under Section 65B(44) of the Finance Act. The Tribunal agreed, noting that the compensation received was a debt created by the Settlement Agreement, falling within the scope of actionable claims, which are not liable for service tax.3. Compensation for Non-Supply of Manganese Ore:The Appellant received Rs. 1,97,50,000/- as compensation from M/s Amit Mines Limited for non-supply of manganese ore. The Department attempted to tax this amount under Section 66E(e). The Tribunal found that this compensation was for breach of a sale contract, not for any service rendered, and thus did not fall under the purview of Section 66E(e). The Tribunal emphasized that the compensation was for non-performance of a contract for the supply of goods, which is not a taxable service.4. Applicability of Rule 5 of the Point of Taxation Rules, 2011:The Tribunal rejected the Department's reliance on Rule 5 of the Point of Taxation Rules, 2011, which deals with the point of taxation for new services. The Tribunal noted that the agreements in question were entered into before the introduction of Section 66E(e), and thus Rule 5 could not retrospectively create a tax liability.5. Registration of Agreements:The Adjudicating Authority had held that the non-registration of the Development and Settlement Agreements by the Appellant meant they could not be relied upon. The Tribunal disagreed, stating that under the Registration Act, 1908, these agreements were not compulsorily registerable and were validly negotiated settlements.6. Limitation and Penalty:The Appellant argued that the demand was barred by limitation as there was no fraud, collusion, or suppression of facts. The Tribunal agreed, noting that the Appellant had conducted its business in a bona fide manner, regularly filed returns, and maintained transparent accounts. Consequently, the Tribunal found no grounds for imposing penalties under Section 78(1) of the Finance Act.Conclusion:The Tribunal set aside the demand for service tax on the settlement amounts and compensation received by the Appellant, holding that these amounts were not liable for service tax under Section 66E(e) of the Finance Act. The amounts were deemed actionable claims, and the agreements were concluded before the introduction of the declared service provision. The appeal was allowed with consequential relief to the Appellant.