2023 (4) TMI 436 - AT - Service Tax

Judgment modifies demand confirmation on consultancy charges, liquidated damages exempt from service tax.

The judgment set aside the confirmation of demand on consultancy charges and liquidated damages, finding them exempt from service tax. However, the ... Liability of service tax - consultancy services (by deploying its engineers to the contractors for assisting them) - liquidated damages (damages/ penalties recovered by the appellant from the contractors where the terms and conditions of the contract were breached) - manpower recruitment services (short payment of service tax) - legal services (short payment of service tax) - period 2013-2014 to 2016-2017 - appellant is a public sector undertaking established by the Government of Madhya Pradesh for transmission of electricity within the city of Jabalpur and is a successor company of the State Electricity Board. Consultancy Services - HELD THAT:- The appellant provides consultancy services to contractors and power DISCOMS while laying the power or electricity transmission lines, erection of electricity poles and construction of electricity sub-stations. The appellant collects the amount for consultation services which are incidental to the transmission activities as the appellant has the expertise in power transmission. If the poles, lines or sub-stations are not erected or constructed as per the specifications, it will not be possible to transmit electricity. The issue that arises for consideration is as to whether service tax could be levied on the amount collected by the appellant towards consultancy charges. This issue was examined by a Division Bench of the Tribunal in MADHYA PRADESH POORVA KSHETRA VIDYUT VITRAN CO. LTD. VERSUS PRINCIPAL COMMISSIONER CGST AND CENTRAL EXCISE BHOPAL [2021 (2) TMI 155 - CESTAT NEW DELHI] and after placing reliance upon the decision of the Gujarat High Court in TORRENT POWER LTD. VERSUS UNION OF INDIA [2019 (1) TMI 1092 - GUJARAT HIGH COURT], where it was held that all services related to transmission and distribution of electricity are bundled services, as contemplated under section 66F(3) of the Finance Act, and are required to be treated as a provision of a single service of transmission and distribution of electricity, which service is exempted from payment of service tax. In the present case the amount collected towards consultation services is in connection with services which are incidental to the transmission activities carried out by the appellant - The demand, therefore, cannot be sustained. Liquidated Damages - amount collected by the appellant towards liquidated damages or penalty - HELD THAT:- This issue was also examined by the Division Bench of the Tribunal in M/S MADHYA PRADESH POORVA KSHETRA VIDYUT VITARAN COMPANY LIMITED VERSUS COMMISSIONER OF CGST & CENTRAL EXCISE, MADHYA PRADESH [2022 (4) TMI 773 - CESTAT NEW DELHI] and after referring to the decision of the Tribunal in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR [2020 (12) TMI 912 - CESTAT NEW DELHI] which decision has been accepted by the Board, observed that no service tax can be levied on the amount collected towards liquidated damages or penalty for breach of any of the terms of the contract. Manpower Recruitment Services - HELD THAT:- The contention of the appellant that most of the service providers were public limited or private limited who discharge their own liabilities was not accepted as the appellant could not substantiate this contention with documents. Learned counsel for the appellant has also not placed any material to substantiate this contention. There is, therefore, no error in the order passed by the Commissioner confirming the demand on service tax under manpower supply services. Legal Services - HELD THAT:- In regard to confirmation of service tax proposed in the show cause notice towards legal services, the appellant has not also been able to substantiate that certain amount towards stamp duty was included. Such being the position the confirmation of demand under legal service is justified. The confirmation of demand on the amount collected on account of consultancy charges or liquidated damages cannot be sustained and is set aside - the confirmation of demand under manpower supply services and legal services is upheld - Appeal allowed in part. ISSUES PRESENTED AND CONSIDERED 1. Whether service tax is leviable on amounts collected by a state transmission utility as consultancy charges for services incidental to laying transmission lines, erection of poles and construction of substations. 2. Whether service tax is leviable on amounts recovered by the transmission utility as liquidated damages/penalties from contractors for breach of contract. 3. Whether service tax is leviable on amounts paid for manpower recruitment/supply services engaged by the transmission utility. 4. Whether service tax is leviable on amounts paid for legal services by the transmission utility, including whether any portion represented non-taxable stamp duty. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Levy on consultancy charges incidental to transmission activities Legal framework: The analysis rests on the exemption of transmission and distribution of electricity from service tax and the concept of bundled services under the Finance Act (section 66F(3) referenced in precedent), whereby ancillary services related to an exempted principal service are treated as part of the single exempted service. Precedent treatment: The Tribunal followed a prior Division Bench decision and the Gujarat High Court authority holding that activities related or ancillary to transmission and distribution of electricity are exempt from service tax and that such services form a bundled single service for exemption purposes. Interpretation and reasoning: The consultancy services provided by the utility were integral to and incidental to its transmission activities (planning, erection, specification compliance). Because these consultancy charges are related to transmission and distribution, they fall within the bundle of services treated as transmission and distribution of electricity. The Tribunal applied the principle that ancillary services to an exempt principal service are themselves exempt when they are part of the bundled service contemplated by section 66F(3). Ratio vs. Obiter: Ratio - Ancillary consultancy services that are inextricably linked to the exempted transmission and distribution of electricity form part of the single bundled exempt service and are not separately liable to service tax. This follows prior bench and High Court authorities applied as binding precedent for like facts. Conclusion: Confirmation of service tax demand on consultancy charges is not sustainable and is set aside. Issue 2 - Levy on liquidated damages / penalties recovered from contractors Legal framework: The inquiry examines whether amounts characterized as liquidated damages/penalties for breach of contract fall within taxable consideration for services or are outside the service tax net. Precedent treatment: The Tribunal relied on a prior Division Bench decision and a Tribunal decision accepted by the Board, which held that no service tax is leviable on amounts collected as liquidated damages or penalty for breach of contract. Interpretation and reasoning: Liquidated damages/penalties are compensatory in nature for breach and not consideration for a taxable service; they are not payments for a service rendered by the recovering party to the payer. The Tribunal adopted the line of authority that treats such recoveries as not constituting consideration for a taxable service and therefore not taxable. Ratio vs. Obiter: Ratio - Amounts recovered as liquidated damages or penalties for contractual breach are not liable to service tax because they do not represent consideration for provision of a taxable service. Conclusion: Confirmation of service tax demand on liquidated damages/penalties is not sustainable and is set aside. Issue 3 - Levy on manpower recruitment / supply services Legal framework: Liability for service tax on manpower recruitment or supply services depends on whether the assessee can demonstrate that the personnel engaged are employees of independent service providers (thereby placing liability on those providers) or whether the assessee itself effectively procured taxable manpower supply services. Precedent treatment: The Commissioner's confirmation was upheld because the appellant failed to substantiate its factual assertions with documents; no new contrary precedent was dispositively applied to displace that factual finding. Interpretation and reasoning: The transmission utility contended that most service providers were separate companies discharging liabilities themselves; however, it produced no documentary evidence to substantiate that the manpower was supplied by independent entities and that the liability to pay service tax lay elsewhere. On facts, absence of supporting material rendered the Commissioner's finding justified. The Tribunal treated the matter as one of factual proof rather than pure legal principle, applying the usual onus on the assessee to substantiate exemptions or non-liability. Ratio vs. Obiter: Ratio (fact-specific) - Where an assessee cannot substantiate with documents that manpower supply was provided by independent service providers who alone were liable to service tax, a confirmed demand for service tax on manpower supply services is sustainable. This is a factual finding and not a broad legal innovation. Conclusion: Confirmation of demand under manpower supply services is upheld. Issue 4 - Levy on legal services and inclusion of stamp duty components Legal framework: For legal services, service tax applies unless the assessee proves that payments included non-taxable components (e.g., stamp duty) or other non-taxable disbursements; burden lies on the assessee to demonstrate the taxable and non-taxable composition. Precedent treatment: The Tribunal upheld the Commissioner's conclusion because the assessee failed to establish that part of the amounts represented non-taxable stamp duty or other excluded items; no contrary legal authority was treated as displacing that approach. Interpretation and reasoning: The appellant asserted that certain amounts included stamp duty, which would not be subject to service tax, but did not produce documentation or evidence to segregate stamp duty from professional/legal fees. In the absence of such evidence, the confirmed demand for service tax on legal services was justified. The Tribunal emphasized evidentiary burden rather than altering the substantive tax position on legal services. Ratio vs. Obiter: Ratio (fact-specific) - Where an assessee fails to substantiate that payments for legal services include non-taxable stamp duty or identifiable non-taxable components, service tax may properly be confirmed on the aggregate amount claimed as legal service fees. This is a factual application of proof burden principles. Conclusion: Confirmation of demand under legal services is upheld. Overall Disposition The Tribunal modified the impugned order by setting aside the confirmed demands for consultancy charges and liquidated damages/penalties, while upholding confirmation of demands for manpower supply services and legal services based on the assessee's failure to substantiate non-liability; appeal allowed in part and the Commissioner's order modified accordingly.