Relinquishment charges are compensatory for breach of contract, not consideration for services under section 66E(e), exempt from service tax.

CESTAT NEW DELHI held that relinquishment charges collected by the appellant do not constitute consideration for declared services under section 66E(e) of the Finance Act and are therefore not liable to service tax. The Tribunal determined that such charges are compensatory in nature for breach or non-performance of contract rather than payment for service rendition. Following the precedent in South-Eastern Coalfields Ltd., the order dated 04.03.2021 by the Principal Commissioner was set aside and the appeal was allowed.

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Issues Involved:
1. Taxability of relinquishment charges under section 66E(e) of the Finance Act.
2. Nature of relinquishment charges as compensation or consideration for service.
3. Applicability of the Negative List under section 66D(k) of the Finance Act.

Summary:

1. Taxability of Relinquishment Charges:
The main issue for consideration was whether the demand of service tax on relinquishment charges under section 66E(e) of the Finance Act, on the ground that these charges are in the nature of consideration for the declared service of tolerating relinquishing access rights, is justified. The appellant argued that relinquishment charges are not for any service but are compensation for pre-mature termination of access by power generating companies from the ISTS network.

2. Nature of Relinquishment Charges:
The appellant contended that the relinquishment charges are compensatory and not for any service provision. The Principal Commissioner, however, viewed these charges as standalone and taxable under section 66E(e) of the Finance Act. The Tribunal disagreed, stating that compensation or damages for breach or non-performance of a contract are not consideration for any service and thus not subject to service tax. The Tribunal referenced several decisions, including South Eastern Coalfields Ltd. and Northern Coalfields Ltd., which established that compensation for breach of contract does not constitute consideration for service.

3. Applicability of the Negative List:
Given the Tribunal's decision that relinquishment charges are not consideration for a declared service, it was unnecessary to examine the alternative argument that these charges are part of the electricity transmission service and thus covered under the Negative List under section 66D(k) of the Finance Act.

Conclusion:
The order dated 04.03.2021 by the Principal Commissioner was set aside, and the appeal was allowed. The relinquishment charges were deemed not taxable under section 66E(e) of the Finance Act, as they are compensatory in nature and not consideration for any service.

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