2026 (1) TMI 578 - AT - Service Tax

Payments to state police for security and ancillary fees - reverse-charge service tax not attracted; demands set aside

Whether payments made by the appellant attract service tax under the reverse-charge mechanism: Tribunal examined charges paid to State police for security ... Liability of appellant to pay service tax - reverse charge mechanism - amounts which the appellant had paid to the State Police Department for the security services provided by the police - vendor registration charges, tender cost, inspection charges and Board of Director Settlement fee - amounts recovered as penalty on non-fulfilment of the conditions of the tender. HELD THAT:- It is found that for demands on these three issues for an earlier period were confirmed by the Commissioner and on appeal, this Tribunal in M/S AJMER VIDYUT VITARAN NIGAM LIMITED VERSUS PRINCIPAL COMMISSIONER OF CGST & CENTRAL EXCISE, JAIPUR [2024 (11) TMI 1445 - CESTAT NEW DELHI], set aside the demands. There are no reason to take a different view for this demand pertaining to a subsequent period in respect of the same appellant on the same issues - the demand of service tax, interest and penalty set aside - appeal allowed. Issues: (i) Whether amounts paid by the appellant to the State Police Department for security services are taxable on reverse charge basis as business support services; (ii) Whether vendor registration charges, tender cost and inspection charges collected by the appellant are taxable as services; (iii) Whether amounts recovered as pre-term resignation compensation and penalties for non-fulfilment of tender conditions are taxable under Section 66E(e) as consideration for tolerating an act.Issue (i): Whether reimbursement to State Police for security services renders the appellant liable to service tax on reverse charge basis as business support services.Analysis: The Tribunal examined applicability of erstwhile and post-negative-list provisions invoked in the demand, the nature of police functions as statutory/sovereign duties, and the conditions set out in departmental guidance for charges collected by sovereign/public authorities. The Tribunal also relied on earlier binding decision addressing police charges and the regulatory framework governing user fees collected under the Police Act.Conclusion: The demand for service tax under reverse charge for amounts paid to the State Police is not sustainable and is set aside. This conclusion is in favour of the assessee.Issue (ii): Whether vendor registration charges, tender cost and inspection charges collected by the appellant constitute taxable services.Analysis: The Tribunal considered the character of the charges (vendor registration and tender participation fees) and the nature of meter inspection in relation to the appellant's exempt activities in electricity distribution. It treated vendor registration and tender costs as incidental to bidding/registration and not a service provided by the appellant, and found inspection of meters to be related to exempt distribution activity.Conclusion: Service tax demands in respect of vendor registration charges, tender cost and inspection charges are set aside. This conclusion is in favour of the assessee.Issue (iii): Whether amounts recovered as compensation for pre-term resignation and penalties for non-compliance with tender conditions are taxable under Section 66E(e) as consideration for tolerating an act.Analysis: The Tribunal analysed whether such recoveries constitute consideration for providing a service of tolerating an act or are instead compensatory sums for loss/damage. It referred to departmental guidance and precedents distinguishing amounts paid in relation to employment or as compensation from taxable consideration for toleration services.Conclusion: Demands of service tax on amounts recovered for pre-term resignation and tender non-compliance are not sustainable and are set aside. This conclusion is in favour of the assessee.Final Conclusion: The demands of service tax, interest and penalties relating to the three issues decided are quashed for the periods and amounts in question; consequential relief to the appellant is directed.Ratio Decidendi: Charges collected by a statutory/public authority for performing statutory duties in accordance with law, deposited to the government treasury, and levied as per statutory authority are not taxable as services; reimbursements to sovereign authorities do not convert statutory duties into taxable business support services, and amounts recovered as compensation for loss are not consideration for a toleration service under Section 66E(e) of the Finance Act, 1994.