TaxTMI 
TaxTMI 
2022 (8) TMI 540
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....heard at length and various arguments were extended by both the sides. Reliance on certain decisions was also made. 2.1 Learned counsel had relied on the decision of tribunal in the case of M/s. South Eastern Coalfields Ltd.- 2021 (55) GSTL J54 (SC). Most of the decisions relied by the learned counsel had taken the support of the aforesaid decision of tribunal in the case of South Eastern Coalfields Ltd. (supra). The said decision was challenged before the Hon'ble Apex Court and appeal has been admitted reported at -2021 (54) GSTL J54 (SC). 03. To understand the exact nature of transaction, the learned counsel was asked to submit certain details of the documents to determine the exact nature of transaction however, by an affidavit of Shri Ajith Kumar TR, CFO of the appellant company it was submitted that the said request for additional data amounts to going beyond the show cause notice and therefore, the appellant had submitted that they are not in a position to submit the said information. 04. Meanwhile, it is noticed that the CBIC has issued a circular No.178/10/2022-GST dated 3rd August, 2022 in which it has stated its stand on the issue of taxability of various transac....
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....e) of Schedule I of CGST Act if the same constitutes a "supply" within the meaning of the Act. The said expression has following three limbs: a. Agreeing to the obligation to refrain from an act- Example of activities that would be covered by this part of the expression would include non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a consideration paid by the other party. Another example of such activities would be a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighbouring housing project, which wants to protect its sunlight, or an industrial unit refraining from manufacturing activity during certain hours against an agreed compensation paid by a neighbouring school, which wants to avoid noise during those hours. b. Agreeing to the obligation to tolerate an act or a situation- This would include activities such a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the....
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....is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an "activity for consideration'. The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply. 5. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act in para 5 (e) of Schedule II of CGST Act is strikingly similar to the definition of contract in the Contract Act, 1872. The Contract Act defines 'Contract as a set of promises, forming consideration for each other. 'Promise' has been defined as willingness of the promisor' to do or to abstain from doing anything. *Consideration' has been defined in the Contract Act as what the promise' does or abstains from doing for the promises made to him. 6. This goes to show that the service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A c....
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.... the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non-performance and are thus mere 'events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under....
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....at a contract is entered into for execution and not for its breach. The liquidated damages or penalty are not the desired outcome of the contract. By accepting the liquidated damages, the party aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfilment of the promise by the other party. 7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as "liquidated damages' is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable. 7.1.5 Examples of such cases are damages resulting from damage to property, negligence, piracy, unaut....
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....security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of pre- payment of loan and of making arrangements for the intended supply by the tour operator respectively. Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principa....