Tribunal rules penalties not subject to service tax under Finance Act; interest and penalty imposition unsustainable.

The tribunal ruled in favor of the appellant, determining that the amounts collected as penalties or liquidated damages were not subject to service tax. The tribunal held that the appellant's actions did not constitute a "declared service" under section 66E(e) of the Finance Act, as there was no clear agreement specifying consideration for tolerating an act or situation. Consequently, the imposition of interest and penalty was deemed unsustainable, leading to the setting aside of the Commissioner's order and allowing the appeal.

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Issues Involved:
1. Whether the appellant is providing a "declared service" under section 66E(e) of the Finance Act.
2. The applicability of service tax on compensation/penalty collected from buyers of coal, contractors, and suppliers.
3. The invocation of the extended period of limitation under section 73(1) of the Finance Act.
4. The imposition of interest and penalty.

Issue-wise Detailed Analysis:

1. Declared Service Under Section 66E(e):
The core issue was whether the appellant's actions constituted a "declared service" as per section 66E(e) of the Finance Act, which became taxable from July 1, 2012. Section 65B(44) defines "service" as any activity carried out by a person for another for consideration, including declared services. Section 66E(e) specifies that agreeing to the obligation to refrain from an act, tolerate an act or situation, or do an act constitutes a declared service. The tribunal held that there must be a clear agreement specifying the consideration for such activities. The appellant's agreements did not specify any obligation to tolerate an act or situation for consideration, thus not meeting the criteria for a declared service.

2. Applicability of Service Tax on Compensation/Penalty:
The appellant collected amounts under three heads: compensation/penalty from coal buyers for short-lifted/un-lifted coal, compensation/penalty from contractors for breach of terms, and liquidated damages from suppliers for breach of contract. The Principal Commissioner argued that these amounts were for "tolerating an act" and thus taxable. However, the tribunal referred to the South Eastern Coalfields Ltd. case, which clarified that such penalties are safeguards for commercial interests and not considerations for tolerating an act. The tribunal concluded that the penalties and liquidated damages were not for any service provided by the appellant but were deterrents for non-compliance, thus not attracting service tax.

3. Extended Period of Limitation:
The show cause notice invoked the extended period under section 73(1) for the period from July 2012 to March 2016, alleging evasion of service tax. The tribunal did not find sufficient grounds for invoking the extended period, as the appellant's actions did not constitute a declared service under section 66E(e).

4. Imposition of Interest and Penalty:
Given that the tribunal found no service tax liability, the imposition of interest and penalty was also deemed unsustainable. The appellant's actions were not for tolerating any act or situation for consideration, and thus, no service tax was due.

Conclusion:
The tribunal set aside the order dated 27.04.2018 passed by the Commissioner, concluding that the appellant was not liable to pay service tax on the amounts collected as penalties or liquidated damages. The appeal was allowed, and the order was pronounced in the open court.

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