2024 (8) TMI 263 - AT - Service Tax

Liquidated damages and forfeited amounts from contract breach not taxable under Section 66E(e) Finance Act

PANKAJ ISPAT LTD Versus COMMISSIONER OF CENTRAL EXCISE-RAIPUR (C.G.)

CESTAT New Delhi held that liquidated damages and forfeited amounts arising from breach of contract do not constitute consideration for declared services ... Levy of service tax - declared service - liquidated damages arising out of breach of contract forfeiture of salary or payment of bond amount - agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - HELD THAT:- The activities that are contemplated under Section 66E(e) ibid are activities where the agreement specifically refers to any of the activities, there is a flow of consideration for such activity. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from or tolerate or do an act, would be a ‘declared service’ under Section 66E(e) ibid. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. In other words, the amount charged has to be necessarily a consideration for the taxable service provided under the Finance Act. Resultantly, it becomes clear that, the compensation received for making good the financial damages/injury cannot be said to be ‘consideration’ at all and has no nexus with any taxable service. It is observed that the appellant had agreed to sell TMT Bars to M/s. Shri Kapileswar Steel Raipur pursuant to the order for supply placed by the later. However, Shri Kapileswar cancelled the said purchase order. This cancellation has been treated as a breach of contract. Appellant vide two letters dated 28.02.2013 and 31.03.2013 has conveyed that the amount of Rs.18,90,000/- and Rs.10,50,000 respectively has been forfeited by the appellant subsequent to buyer failing to perform his part of contract with the appellant. The act of forfeiting the amount in the given circumstances doesn’t confirm to the meaning of ‘Declared Service’. It becomes abundantly clear that the issue of considering a forfeited amount as an amount of consideration towards declared services stands already settled in favour of the assessee. The same is already held to not to be the consideration towards any service. In fact the cancellation of contract itself is already held to not to be a service. Appeal allowed. Issues:- Whether the forfeited amount due to a breach of contract constitutes consideration for a declared service under section 66E of the Finance Act.- Whether the demand for service tax is time-barred.Analysis:1. The appellant, registered for taxable services, received a monetary consideration due to a canceled deal for goods, leading to a service tax demand. The appellant contended that the forfeited amount was not covered under section 66E(e) of the Finance Act, citing settled decisions and circulars issued by the Department.2. The Tribunal analyzed section 66E(e), emphasizing that declared services involve refraining from, tolerating, or doing an act for consideration. The Tribunal noted that the forfeited amount lacked a nexus with taxable services and was not a consideration for services provided, citing relevant case law to support its stance.3. Reviewing the facts, the Tribunal found that the appellant forfeited amounts due to a canceled purchase order, which did not align with the definition of declared services under section 66E(e). The Tribunal referenced a previous case to support its conclusion regarding the distinction between contractual conditions and considerations.4. The Tribunal referenced various decisions to establish that charges for breach of contract, penalties, liquidated damages, and forfeited amounts are not considered consideration for declared services under the Finance Act. These decisions clarified that such amounts do not form part of taxable service value, emphasizing the necessity of a nexus between the charged amount and the service provided.5. Based on the precedents and legal interpretations, the Tribunal concluded that forfeited amounts due to breach of contract do not constitute consideration for declared services. The Tribunal set aside the service tax demand, ruling in favor of the appellant and allowing the appeal.6. The Tribunal's detailed analysis of relevant legal provisions, case law, and precedents provided a comprehensive understanding of the issues at hand, ultimately leading to a favorable decision for the appellant.