2025 (4) TMI 569 - AT - Service Tax

Income from forfeited security deposits, earnest money, and contractor penalties not subject to service tax under section 66E(e)

M/s HINDUSTAN ZINC LTD Versus COMMISSIONER OF CGST & CENTRAL EXCISE-UDAIPUR

M/s HINDUSTAN ZINC LTD Versus COMMISSIONER OF CGST & CENTRAL EXCISE-UDAIPUR - TMI ISSUES PRESENTED and CONSIDEREDThe core legal question considered in this judgment is whether the income received by the appellant as 'forfeiture of security deposit/earnest money deposit' and 'fine penalties recovered from contractors' constitutes a taxable declared service under Section 66E(e) of the Finance Act, 1994, and is liable to service tax.ISSUE-WISE DETAILED ANALYSISRelevant legal framework and precedents: The relevant legal framework involves Section 66E(e) of the Finance Act, 1994, which pertains to declared services. The Tribunal referenced several precedents, including decisions in South Eastern Coal Fields Ltd. vs. CCE & ST, Raipur, M/s. K.N. Food Industries Pvt. Ltd. v. Commissioner of CGST & Central Excise, Kanpur, and M/s. Monnet Ispat & Energy Ltd. v. CCE & ST, Raipur, among others. These cases consistently held that amounts recovered as charges for breach or non-compliance of contractual terms cannot be construed as consideration for refraining or tolerating an act and are thus not liable for service tax under Section 66E(e).Court's interpretation and reasoning: The Tribunal interpreted that the amounts in question do not qualify as consideration for any service rendered. The Tribunal emphasized the distinction between conditions to a contract and considerations for a contract, noting that fulfilling a condition does not translate to providing a taxable service. The Tribunal relied on prior decisions that established that penalties, fines, and forfeited amounts are not consideration for declared services.Key evidence and findings: The Tribunal noted the appellant's argument that the amounts were not consideration for any service, as there was no quid pro quo or activity undertaken in exchange for the amounts. The Tribunal also took into account the department's circular clarifying that service tax under Section 66E(e) applies only when agreements specifically refer to activities with a flow of consideration.Application of law to facts: Applying the legal framework and precedents, the Tribunal concluded that the amounts received by the appellant as forfeiture of deposits and penalties did not constitute consideration for any declared service. The Tribunal found no basis to treat these amounts as taxable under Section 66E(e).Treatment of competing arguments: The Tribunal acknowledged the department's position but found it inconsistent with established precedents and the department's own circular. The Tribunal highlighted the importance of judicial consistency and criticized the lower authorities for ignoring binding precedents.Conclusions: The Tribunal concluded that the amounts in question are not subject to service tax as they do not constitute consideration for any service rendered under Section 66E(e). The Tribunal set aside the orders under challenge and allowed the appeals.SIGNIFICANT HOLDINGSThe Tribunal preserved crucial legal reasoning that distinguished between 'conditions to a contract' and 'considerations for a contract,' emphasizing that penalties and forfeited amounts are not consideration for declared services. The Tribunal reiterated that such amounts are not taxable under Section 66E(e) of the Finance Act, 1994.The Tribunal established the core principle that amounts recovered as penalties or for breach of contract are not consideration for a service and thus not subject to service tax. The Tribunal's final determination was to set aside the orders under challenge and allow the appeals, reinforcing the principle of judicial consistency and adherence to binding precedents.