2023 (12) TMI 310 - AT - Service Tax

Appellant not liable for service tax under section 66E(e) as no tolerance agreement existed with machine receivers.

KORES INDIA LTD. Versus COMMISSIONER OF CGST & CENTRAL EXCISE, Indore

KORES INDIA LTD. Versus COMMISSIONER OF CGST & CENTRAL EXCISE, Indore - TMI 1. ISSUES PRESENTED AND CONSIDERED 1. Whether the write-back of previously provided contingent amounts (booked as 'balance written back'/excess provisions) arising from an obligation to compensate for under-performance of supplied machines constitutes a 'declared service' under section 66E(e) - specifically, whether it is an agreement 'to refrain from an act, or to tolerate an act or a situation, or to do an act.' 2. Whether the admitted facts (provision of 20% performance deduction payable to purchasers if machines under-performed within one year and subsequent write-back when no liability arose) amount to an act of tolerance by the supplier such that service tax is payable on the amount written back. 3. Whether penalty for evasion of service tax can be imposed where the write-back has been treated as taxable declared service but the supplier had discharged excise duty on the entire transaction value and the write-back represented reversal of a contingent liability. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of write-back of contingent provision as a 'declared service' under section 66E(e) Legal framework: Section 66E(e) defines certain activities as 'declared services,' including 'agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.' The legal question is whether the contractual commitment to pay compensation for under-performance, and subsequent reversal of that provision, falls within that definition. Precedent treatment: No prior judicial or quasi-judicial precedents are cited or relied upon in the judgment; the Tribunal's reasoning proceeds from statutory text and factual matrix. Interpretation and reasoning: The Tribunal examined the supply contract clause and accounting treatment. The supplier agreed to compensate purchasers if supplied machines performed below committed standards within one year, and accordingly made a contingent provision (20% of value) which, if not triggered, was written back. The Tribunal distinguished between an agreement to 'tolerate an act or a situation' and a commitment to remedy deficient performance of goods. The Court reasoned that toleration implies refraining from interfering with or accepting some act/situation by the party alleged to tolerate; here the obligation was to compensate the purchaser for under-performance, not to tolerate any act or situation. The Tribunal found that any 'tolerance' would, if at all, reside with the purchaser (accepting under-performance), not with the supplier who undertook a remedial/compensatory obligation. Ratio vs. Obiter: Ratio - the contractual commitment to pay compensation for under-performance and the associated write-back of contingent provisions do not, on the facts, amount to 'agreeing to tolerate an act or a situation' under section 66E(e). Obiter - observations about the location of possible 'tolerance' (i.e., on the part of the recipient) and general remarks distinguishing compensatory obligations from tolerance may be considered ancillary reasoning supporting the ratio. Conclusion: The write-back of the contingent provision cannot be taxed as a declared service under section 66E(e); the supplier did not agree to tolerate an act or situation, but to compensate for non-performance, and therefore the statutory provision invoked by the department is inapplicable. Issue 2 - Whether admitted facts disclose an act of tolerance by the supplier such that service tax liability arises on the written back amount Legal framework: Liability under the declared services provision requires an agreement to tolerate or refrain from action; factual satisfaction of that agreement is necessary to bring amounts within taxable scope. Precedent treatment: No prior authority applied; decision based on textual and factual analysis of the contract and accounting entries. Interpretation and reasoning: The Tribunal relied on the specific contractual clause (performance deduction charges) and accounting treatment showing that the amount in question was provisioned as a contingent liability and later written back when no liability materialised. The Tribunal emphasised that the supplier had discharged excise duty on the full transaction value at the time of sale, demonstrating that the write-back was not additional consideration retained for tolerating any act. Given that the supplier's obligation was to compensate for under-performance, it did not amount to tolerance; hence the core factual predicate for invoking section 66E(e) (an agreement to tolerate) is absent. Ratio vs. Obiter: Ratio - where an amount recorded as a contingent provision for potential future compensation is written back because the contingency does not arise, such write-back does not constitute consideration for a declared service of 'tolerating an act or situation.' Obiter - statements about the correct accounting characterisation of such provisions in other fact patterns. Conclusion: The admitted facts do not disclose any act of tolerance by the supplier; consequently no service tax liability arises on the written-back amount under section 66E(e). Issue 3 - Liability to penalty for alleged evasion where the substantive service tax demand is unsustainable Legal framework: Penalty for evasion presupposes liability to tax and, generally, some element of mens rea or negligence/recklessness in tax shortfall; where there is no legal basis for the tax demand, imposition of penalty must be assessed against the absence of tax liability and facts regarding intent. Precedent treatment: No precedents were invoked; Tribunal applied principles relating to penalty linked to substantive liability and malafide intent. Interpretation and reasoning: Having held that the write-back does not amount to a declared service and that there is no service tax liability, the Tribunal reasoned that claim of evasion cannot stand and penalty cannot be imposed. The Tribunal also noted that the supplier had discharged excise duty on the entire sale consideration, and that there was no factual basis to infer malafide intent to evade tax. Ratio vs. Obiter: Ratio - absent a legal basis for tax liability, penalty for evasion is not imposable; lack of malafide intent further negates penalty. Obiter - related comments about irrelevance of malafide intent once liability is negatived. Conclusion: Penalty is not sustainable and is set aside because the substantive service tax demand lacks legal foundation and there is no evidence of evasion or malafide intent. Cross-References and Net Disposition Issues 1 and 2 are interrelated: the legal characterization (Issue 1) controls the factual conclusion whether an act of tolerance existed (Issue 2). Because both fail, Issue 3 (penalty) necessarily falls. The Tribunal set aside the impugned demand and penalty, holding the appeal allowed.