2023 (4) TMI 1075 - AT - Service Tax

Contractual Adjustments and Forfeitures Not Taxable Under Section 66E(e) of Finance Act

The CESTAT New Delhi held that amounts recovered as contractual adjustments and forfeiture of earnest money due to contractor's breach do not constitute ... Levy of Service tax - amount booked as ‘contractual adjustments’ towards contractor’s failure to lift and sell the prescribed quantity of material from the mines during the currency of contract - Forfeiture of earnest money deposit on account of contractors failure to honor the terms of the contract like delayed/non-payment, further sale of material at more than the prescribed ceiling rate, execution of contract fraudulently by giving incorrect information - Amount booked as other receipts which included aforesaid two amount. HELD THAT:- The impugned order has observed that the appellant has received the amount as consideration for the failure on the part of the contractors to honor the terms of the contract or violating the conditions of the contract. Accordingly, the amount have been held to be taxable under clause (e) of section 66E of the Finance Act. In M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR [2020 (12) TMI 912 - CESTAT NEW DELHI], the Tribunal held that liquidated damages recovered on account of breach or non-performance of contract are not consideration in view of any service but are in the nature of deterrent imposed so that such a breach or non-performance is not repeated. The Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs also provides that service tax cannot be levied on the amount collected for the said purpose - thus demand on contractual agreement do not sustain. Alleged short-payment of tax to the extent of dead rent/surface rent paid by the appellant to the State Government - reverse charge mechanism - HELD THAT:- For the purpose of levying service tax, the taxable event is construed as the time when the service is provided or agreed to be provided. Thus, in order to determine whether levy of tax is applicable on a particular activity, it is necessary to determine the point of time when such activity is provided or agreed to be provided. In the present case, the agreement between the appellant and State Government for grant of mining rights was executed on 02.01.2016 and on this date, the transactions involving assignment of right to use natural resource was not taxable - prior to 01.04.2016, barring a few exceptions, all services provided by the Government were covered under the negative list and accordingly, not subjected to service tax. With effect from 01.04.2016, however, section 66D(a)(iv) of the Finance Act was amended and 'all services provided by the government to a business entity were excluded from the negative list of services. Thus, services rendered by the government to a business entity became chargeable to service tax with effect from 01.04.2016 - In the present case, the appellant received services in relation to assignment of right to use natural resources from the State Government by virtue of the agreement dated 02.01.2016 and, therefore, the provisions of service tax, as were in force prior to 01.04.2016, would be applicable. Grant of natural resources was not excluded from the scope of negative list prior to 01.04.2016 and so no tax implication can be fastened on the appellant for such period - demand do not sustain. Consideration regarding the fee paid to the Directors by the joint venture company - HELD THAT:- In this connection, it needs to be noted that the amount was only ‘held’ by the appellant on behalf of the joint venture/Directors and cannot be treated as income against provision of any service. Even otherwise, the transaction pertaining to this amount is between the joint venture company and the Directors and the appellant has no role to play. Whether the appellant provided any services to the State Government against the area development charges? - HELD THAT:- For a service to be taxable, it is necessary that there should exists a service provider and service recipient relationship between the two parties. On a careful perusal of order dated 30.12.1996 issued by the State Government, it is apparent that the appellant was made entitled to 30% of the area development charges received by the State Government. These charges were paid to the appellant for meeting its administrative expenses, especially since the appellant is operating as a public sector undertaking of the State Government. There is no mention of any service which would be performed by the appellant in exchange of such amount. Thus, allocation of area development charges by the State Government can be regarded as income of the appellant, but it cannot be treated as consideration towards a service. It is, therefore, not possible to sustain the impugned order dated 27.03.2019 passed by the Principal Commissioner - Appeal allowed. Issues Involved:1. Non-payment of service tax on income from forfeiture and contractual adjustments.2. Non-payment of service tax on royalty paid to the State Government under Reverse Charge Mechanism.3. Non-payment of service tax on Director sitting fee.4. Non-payment of service tax on area development charges.Summary:Issue 1: Non-payment of service tax on income from forfeiture and contractual adjustmentsThe Principal Commissioner held that amounts collected as 'contractual adjustments' and 'income from forfeiture' were taxable under section 66E(e) of the Finance Act, as they constituted consideration for tolerating an act or situation. However, the Tribunal referenced the decision in South Eastern Coalfields vs. Commissioner of Central Excise and Service Tax, which clarified that liquidated damages for breach of contract are not consideration for any service but a deterrent. The Circular dated 28.02.2023 by the Central Board of Indirect Tax and Customs also supported this view. Therefore, the demand was not sustained.Issue 2: Non-payment of service tax on royalty paid to the State Government under Reverse Charge MechanismThe Principal Commissioner argued that dead rent/surface rent paid to the State Government was another form of royalty and thus taxable. However, the Tribunal noted that the agreement for mining rights was executed on 02.01.2016, before such services became taxable on 01.04.2016. As the taxable event occurred prior to this date, the demand was not sustainable.Issue 3: Non-payment of service tax on Director sitting feeThe Principal Commissioner held that fees paid by the joint venture company to the appellant's Directors were income for services provided by the appellant and thus taxable. The Tribunal found that the amount was merely 'held' by the appellant on behalf of the joint venture/Directors and not income from any service provided by the appellant. Therefore, the demand was not sustained.Issue 4: Non-payment of service tax on area development chargesThe Principal Commissioner treated the area development charges received by the appellant as consideration for taxable services. The Tribunal noted that these charges were allocated to meet the appellant's administrative expenses and were not linked to any specific service provided. Thus, there was no service provider-recipient relationship, and the demand was not sustained.Conclusion:The Tribunal set aside the impugned order dated 27.03.2019 passed by the Principal Commissioner and allowed the appeal.