2020 (1) TMI 6 - AT - Service Tax

Appellate Tribunal rules ex-gratia job charges not taxable under Service Tax

M/s K.N. Food Industries Pvt. Ltd. Versus The Commissioner of CGST & Central Excise, Kanpur

The Appellate Tribunal CESTAT ALLAHABAD held that ex-gratia job charges received by the appellant were not subject to Service Tax as they were deemed ... Valuation of services - payment of job charges - revenue's view is that such receipt of ex-gratia job charges by the appellant amounts to providing services - 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? - HELD THAT:- The 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. 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. Appeal allowed - Inasmuch as the appeal stands allowed on merits, the plea of limitation is not being adverted to. Issues:- Whether the receipt of ex-gratia job charges by the appellant amounts to providing services attracting Service Tax.Analysis:The appellant, engaged in manufacturing confectionaries for a principal manufacturer, received ex-gratia job charges from M/s Parle when their production capacity was underutilized. The Revenue alleged that these charges constituted a service attracting Service Tax. The appellant contested this, arguing that the ex-gratia charges were a form of compensation for low utilization of their production capacity, not a service. The Lower Authorities invoked Section 66E (e) of the Act, defining declared services, and Section 65B (44) covering services related to manufacturing. However, it was noted that no Service Tax was leviable on such services as they fell under the negative list. The ex-gratia charges did not fall under the definition of declared services as they were compensation for unforeseen events, not obligations to refrain from or tolerate acts. The contracts provided for compensation in case of delays or breaches, indicating a remedy for uncertain eventualities, not services provided. Therefore, the ex-gratia charges were deemed not to be payments for services, and Service Tax was not applicable.The Tribunal found that the ex-gratia charges were not for services but for compensating the appellant for unforeseen events, and thus, did not attract Service Tax. The appeal was allowed on merits, and the issue of limitation was not addressed. The judgment was delivered on 26/11/2019 by the Appellate Tribunal CESTAT ALLAHABAD, with detailed analysis provided by Hon’ble Smt. Archana Wadhwa, Member (Judicial), and Hon’ble Mr. Anil G. Shakkwar, Member (Technical). The appellant was represented by Shri H. P. Kanade, while Shri Shiv Pratap Singh appeared for the Revenue. The order clarified that the ex-gratia charges were not considered payments for services, as they were compensation for unintended events, not obligations to refrain from or tolerate acts. The judgment emphasized the distinction between compensatory payments and payments for services, ultimately determining that Service Tax was not applicable to the ex-gratia charges received by the appellant.