Ex-gratia amounts received do not attract service tax under Section 66E as they compensate damages not services

CESTAT Allahabad held that ex-gratia amounts received do not attract service tax under Section 66E of the Finance Act, 1994. Following precedent in K.N. Food Industries case, the Tribunal ruled that ex-gratia payments made to compensate for damages, losses, or injuries from unintended events do not constitute payment for services, as they do not arise from any obligation to tolerate acts or situations. The impugned order was set aside and appeal was allowed.

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Issues:
Challenge to Order-in-Appeal regarding service tax on ex-gratia amount received.

Analysis:
The Appellant, engaged in biscuit manufacturing, entered into an agreement with another company to use spare manufacturing facility. Service tax was demanded on the ex-gratia amount received due to underutilization of capacity. The Appellant contended that the ex-gratia was not for refraining or tolerating any act, hence not covered under Section 66E of the Finance Act, 1994. They argued that it was part of job work charges and not a consideration for any service. Additionally, they highlighted that the ex-gratia was compensatory in nature for underutilization. The Appellant also cited a CBIC circular supporting their stance. The Tribunal referred to a previous case where it was held that ex-gratia charges for underutilization compensation do not constitute a service liable for service tax. The Tribunal agreed with this precedent, emphasizing that the ex-gratia was not a payment for any service but a compensation for unintended events, not arising from an obligation to tolerate an act. Consequently, the impugned order was set aside, and the appeal was allowed with consequential relief.

This judgment involved the interpretation of the applicability of service tax on ex-gratia amount received for underutilization of manufacturing capacity. The Tribunal considered the nature of the ex-gratia payment, determining it to be compensatory in case of underutilization, not constituting a service liable for service tax. The decision was based on a previous ruling that clarified ex-gratia charges for underutilization compensation do not fall under the definition of service for tax purposes. The Tribunal found the facts of the present case aligned with the precedent, leading to the setting aside of the impugned order and allowing the appeal with consequential relief.

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