2024 (5) TMI 1114 - AT - Service Tax

Electricity company wins service tax exemption on late delivery penalties and non-execution charges under section 66E(e)

The CESTAT NEW DELHI ruled in favor of an electricity generation company regarding service tax liability on income from late delivery penalties and ... Levy of service tax - appellant, engaged in the generation of electricity - Income from late delivery of the materials/goods and non-execution of work - applicability of circular issued by the Department of Revenue - Whether the appellant provided a 'declared service' u/s 66E(e) of the Finance Act - HELD THAT:- A service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a ‘declared service’ u/s 66E(e) read with section 65B(44) and would be taxable u/s 68 at the rate specified in section 66B of the Finance Act. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e) of the Finance Act. Circular dated 03.08.2022 issued by the Department of Revenue regarding applicability of goods and service tax on liquidated damages, compensation and penalty arising out of breach of contract in the context of ‘agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act’. This Circular emphasizes that there has to be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist and such an act or a situation cannot be imagined or presumed to exist merely because there is a flow of money from one party to another. It also mentions that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute ‘consideration’ and such activities will not constitute ‘supply’. The issue in the present appeals is covered by the decisions rendered by the Tribunal in South Eastern Coalfields [2020 (12) TMI 912 - CESTAT NEW DELHI] and Northern Coalfields [2023 (1) TMI 934 - CESTAT NEW DELHI] and, therefore, it has to be held that service tax could not have been demanded from the appellant. In the result, Service Tax Appeal filed by the appellant is allowed and Appeal filed by the department is dismissed. Issues Involved:1. Whether the appellant is providing a 'declared service' under section 66E(e) of the Finance Act.2. Whether service tax can be levied on the amounts received by the appellant for delay in supply or non-compliance with contractual terms.Issue-Wise Detailed Analysis:1. Whether the appellant is providing a 'declared service' under section 66E(e) of the Finance Act:The core issue revolves around whether the appellant's receipt of compensation for delays and non-compliance with contractual terms constitutes a 'declared service' under section 66E(e) of the Finance Act. Section 66E(e) defines 'declared service' as agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. The Tribunal examined whether the amounts received by the appellant fall under this definition.The Tribunal referenced previous decisions, notably in South Eastern Coalfields Ltd. vs. Commr. of C. Ex. & S.T., Raipur, where it was determined that penalties or liquidated damages for breach of contract do not constitute consideration for a 'declared service'. The Tribunal emphasized that the intention behind the agreements was not to tolerate breaches but to ensure compliance with contractual terms. The penal clauses were meant to safeguard commercial interests rather than serve as consideration for tolerating non-performance.2. Whether service tax can be levied on the amounts received by the appellant for delay in supply or non-compliance with contractual terms:The Tribunal also considered the Circular dated 03.08.2022 issued by the Department of Revenue, which clarified that payments such as liquidated damages for breach of contract are not consideration for tolerating an act or situation. The Circular stated that such payments are meant to deter breaches and ensure compliance, and thus do not constitute 'consideration' for any service.The Tribunal concluded that there must be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist. In the appellant's case, the agreements did not specify an obligation to tolerate non-performance as a service. Therefore, the amounts received by the appellant did not qualify as consideration for a 'declared service' under section 66E(e).Conclusion:The Tribunal held that service tax could not be demanded from the appellant for the amounts received as compensation for delays or non-compliance with contractual terms. The order dated 17.10.2017 passed by the Commissioner was set aside, and the order dated 27.05.2019 passed by the Commissioner (Appeals) was upheld. Consequently, Service Tax Appeal No. 51740 of 2018 filed by the appellant was allowed, and Service Tax Appeal No. 51249 of 2019 filed by the department was dismissed.