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Issues: (i) Whether CENVAT credit of service tax paid on GTA services used for outward transportation of goods from the factory gate to the customers' premises was admissible where the sales were on FOR destination basis; and (ii) whether amounts recovered as fines, penalties, retention money and liquidated damages for breach or non-performance of contract were liable to service tax as a declared service under section 66E(e) of the Finance Act, 1994.
Issue (i): Whether CENVAT credit of service tax paid on GTA services used for outward transportation of goods from the factory gate to the customers' premises was admissible where the sales were on FOR destination basis.
Analysis: The relevant invoices and contractual documents showed that freight was included in the sale value and was not separately charged, establishing that the supplies were made on FOR destination basis. On that footing, the place of removal was the buyers' premises and the outward transportation formed part of the eligible input service chain. The denial of credit on the ground that no evidence supported FOR delivery was therefore unsustainable. The tribunal also followed the earlier view that the Supreme Court decision in Ultra Tech Cement did not lay down an exhaustive test for determining place of removal in every case.
Conclusion: The issue was decided in favour of the assessee and the CENVAT credit on GTA services was held admissible.
Issue (ii): Whether amounts recovered as fines, penalties, retention money and liquidated damages for breach or non-performance of contract were liable to service tax as a declared service under section 66E(e) of the Finance Act, 1994.
Analysis: A taxable declared service under section 66E(e) requires an agreement specifically to refrain from an act, tolerate an act or situation, or do an act, coupled with a flow of consideration for that precise obligation. The contractual penal clauses in the present case were only safeguards enforcing performance and did not show that the parties had agreed to provide a service of toleration for consideration. The amounts recovered were therefore in the nature of contractual consequences for breach, not consideration for a taxable service.
Conclusion: The issue was decided in favour of the assessee and the demand of service tax on fines, penalties, retention money and liquidated damages was held not sustainable.
Final Conclusion: The impugned order could not be sustained on merits and was set aside, with the appeal succeeding in full.
Ratio Decidendi: Where outward freight is included in the sale price under FOR destination supplies, credit on GTA services may be admissible if the buyers' premises constitute the place of removal; and contractual penalties or liquidated damages are not taxable as declared services unless there is a specific agreement to tolerate an act for consideration.
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