2026 (2) TMI 399 - AT - Service Tax

Forfeited security deposits, earnest money and tender fees taxability clarified; non-taxable and extended limitation disallowed

Forfeited security deposits and earnest money deposits were held not to be consideration for a service because forfeiture lacks a quid pro quo or ... Non-taxability of forfeited Security Deposit and Earnest Money Deposit - tender fee as consideration for service versus sale of tender documents - declared service under clause (e) of Section 66E of the Finance Act, 1994 - extended period of limitation and requirement of positive/intentional evasion - HELD THAT:- Both the demands have been confirmed invoking Section 66E(e) of Finance Act, 1994. The demand of forfeited amount (the first issue is acknowledged to have been no longer res integra) this Tribunal has time and again held that the amount of security deposits or earnest money deposits cannot be called as consideration as for an amount to qualify as consideration there has to be “quid pro quo” or “activity for such consideration”, nor even, while forfeiting such amount on account of violation of agreed terms and conditions; no activity being undertaken against the forfeited amount. Hence, the amount cannot be called as the consideration towards the activity which can be called as service defined as 65B (44) of the Act. The circular No. 214/1/2023-ST dated 28.02.2023 has clarified that the amount collected as liquidated damages are not susceptible to tax. It reflects that the nontaxability of the forfeited EMD and SD amounts on account breach of the contract is well settled and stands accepted by the Department. The Commissioner (Appeals) is held to have committed an error while ignoring the settled position of the decided case law and department’s own circular. The demand on first issue is therefore liable to be set aside for the said reasons. Tender fee collected from the bidders - HELD THAT:- It is apparent that since the tender is merely an invitation to the bidder, the fee collected towards providing the said tender document cannot have any element of service. In this case also, there is no ‘quid pro quo’ while receiving the said amount. The appellant is Government local authority. In view of the Department Circular No. 192/02/2016-ST dated 13.04.2016, the services provided in lieu of the being charged by the Government or local authority shall be taxable if an only the payment is made for getting a service in return. As already observed above against receiving the tender fee no service has been rendered by the appellant except providing the tender documents to the bidders which is as good as sale of documents. Otherwise also the tender is merely an offer and not an agreement (as already observed above). Hence, it is held that the tender cost/fee is wrongly held to be an amount received towards provision of service. The order confirming the demand of service tax on this amount is therefore liable to be set aside, we draw our support from the decision of this Tribunal in the case of M/s Ajmer Vidyut Vitaran Nigam Ltd. Vs. Principal Commissioner of CGST & Central Excise, Jaipur [2024 (11) TMI 1445 - CESTAT NEW DELHI]. Invoking extended period of limitation - HELD THAT:- The Hon’ble Apex Court has time and again settled that for invoking the extended period of limitation, there should be an intent to evade duty as was held in M/s Cosmic bychemial [1994 (9) TMI 86 - SUPREME COURT]. It has also been held that extended period is applicable only when something positive other than mere in-action or failure on part of the assessee is proved. Conscious and deliberate act is necessary for invoking the extended period as was held in M/s Gopal Zarda Udyog [2005 (9) TMI 83 - SUPREME COURT]. Both these elements are absolutely absent in the present proceedings. Hence, it is held that the extended period should not have been invoked. Thus the demand for the period till March 2017 is held barred by limitation. In the absence of any mala fide suppression etc, it is held that extended period is wrongly invoked. For the normal period the demand is held to be wrongly confirmed (as discussed above). As a result of entire discussion, the order under challenge is hereby set aside. Resultantly, the appeal is allowed. Issues: (i) Whether forfeited security deposit (SD) and earnest money deposit (EMD) amounts on breach of contract are taxable as consideration for declared service under Section 66E(e) of the Finance Act, 1994; (ii) Whether tender/empanelment fee and supply of tender documents collected from bidders constitute consideration for a taxable service under Section 66E(e) of the Finance Act, 1994; (iii) Whether the extended period of limitation could be invoked against the appellant for the demands in issue.Issue (i): Whether forfeited SD/EMD amounts are taxable as consideration for declared service under Section 66E(e) of the Finance Act, 1994.Analysis: The Tribunal examined whether forfeited amounts involve a quid pro quo or any activity in return that would qualify them as consideration for a service as defined in Section 65B(44). Reliance was placed on consistent tribunal decisions and departmental circulars treating liquidated damages/forfeited deposits as non-taxable. The authority below had upheld demand under Section 66E(e) but subsequent decisions and circulars were considered to establish that forfeited SD/EMD are not consideration for a service.Conclusion: In favour of the Assessee. The demand of service tax on forfeited SD/EMD is set aside.Issue (ii): Whether tender/empanelment fee for providing tender documents to bidders amounts to consideration for a taxable service under Section 66E(e) of the Finance Act, 1994.Analysis: The Tribunal analysed whether the fee involved a contractual arrangement and a quid pro quo constituting a service under Section 65B(44). It noted that a tender is an invitation and that providing tender documents is akin to sale of documents rather than rendering a service. The Department failed to demonstrate any contractual nexus or activity in return amounting to a declared service; departmental circulars concerning government/local authority charges were also considered.Conclusion: In favour of the Assessee. The demand of service tax on tender/empanelment fee is set aside.Issue (iii): Whether the extended period of limitation was rightly invoked by the Department for the assessed demands.Analysis: The Tribunal applied the settled legal test that extended limitation requires proof of positive, conscious, and deliberate suppression or intent to evade tax. Finding no evidence of mala fide suppression or deliberate evasion and noting bona fide belief of no liability and that one issue was already settled in favour of assessee, the Tribunal held that the conditions for invoking extended limitation were not satisfied.Conclusion: In favour of the Assessee. The invocation of extended period is held to be improper and the demands for the extended period are barred by limitation.Final Conclusion: The impugned order confirming service tax demand is set aside in entirety and the appeal is allowed; the demands confirmed below are annulled and are not maintainable.Ratio Decidendi: Amounts forfeited as security deposit or earnest money and fees charged merely for providing tender documents do not constitute consideration (quid pro quo) for a taxable service under Section 65B(44) and Section 66E(e) of the Finance Act, 1994; extended limitation can be invoked only upon proof of positive, deliberate suppression or intent to evade tax.