TaxTMI 
TaxTMI 
2023 (1) TMI 934
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.... Financial Statements on account of compensation with caption of Penalty from Customer, Liquidated Damages and Penalty on Supplier. Such amount were booked in four different Financial Codes, and the nature of such bookings in the Financial Codes has been described by the appellant in the following manner:- (a) Penalty /Liquidated Damages on Supplier of goods - As per the terms of Supply order, in case of delay in supplying the ordered goods or there is quality deficiency in supplied items, penalty at a specified percentage is charged on the concerned vendor. For the sake of convenience of accounting, instead of showing the net purchase cost, the agreed price of goods is debited (shown as expense) and the penalty amount is credited (shown as Income) separately. (b) Penalty from Customers - This basically covers two types of bookings: (1) As per Fuel Supply Agreement (FSA) generally entered with power house customers, there is a clause in the agreement which stipulates liability of the seller (Appellant) or the coal buyer in case of short delivery or lifting respectively, as the case may be. If for a particular financial year, the level of delivery by appellant company or the l....
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....t in the name of compensation/penalty from the contractors engaged by them for providing various types of services viz. transportation, OBR removal, repair & maintenance service, works contract service etc. for breach of terms & conditions of the respective contracts. It was also noticed that NCL were also recovering/claiming amount in the name of liquidated damages from the material suppliers for breach of terms & conditions of the contracts. Accordingly, in terms of provisions of section 65B of the Finance Act, 1994 read with section 66E(e) ibid, such amount charged by NCL from the buyers of coal/service providers etc. under the respective agreements appears pertain to the declared services under clause (e) of section 66E attracting levy of service tax. M/s NCL and its coal producing areas have recovered Rs.111,01,92,788/- towards EMD forfeitures, penalty & liquidated damages respectively from the buyers of coal, contractors and material suppliers during the period from July 2012 till March 2016. The location-wise details of amount collected under the above heads and the tax liability payable thereon by M/s NCL are tabulated as per Annexure C-1 to C-8, D-1 to D-12 & E-1 to E-12. ....
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....of non-performing the work as desired and short or non-lifting of coal as per the agreement. The service contractors are undoubtedly the service providers and there is no dispute in regards to penalty, liquidated damage charges, against delay in delivery of work and non-fulfillment or violation of contract as agreed upon. Further, the purchase of coal and lifting of coal by the buyers are also activities. The sale and purchase cannot be ruled out from the scope of term 'activities'. The activity of purchase and lifting of goods is service and if the penalty is imposed or recovered on the failure of lifting or short lifting or cancellation by the seller from the buyers, then the penalty is a consideration to tolerate the failure to lift/short lift/cancel the desired quantity of purchase within time against the likely loss on any counts to be fell on the seller/vendor. 31.2 Further, the Notice's contention that any action relating to the trading of goods will not be service and not attract the provisions of 66E as the activity of trading of goods is a non-taxable service as per section 66D effective from 1st July 2012 does not hold good and misplaced. I find that the Notice is ....
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....rch 2016. 11. Section 65B(44) of the Finance Act defines "service" to mean any activity carried out by a person for another for consideration, and includes a declared service, but does not include what is mentioned in "a, b and c". The relevant portion of the definition of "service" is reproduced below: "Section 65B(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include- (a) an activity which constitutes merely,- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (iii) a transaction in money or actionable claim; (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force" 12. "Declared services" have been defined in section 66E and sub-section(e) of section 66E, which is involved in this appeal, is as follows : "66E. Declared serv....
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....ther when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the: a. consideration for agreeing to the obligation to refrain from an act; or b. consideration for agreeing to tolerate an act or a situation; or c. consideration to do an act. 17. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a 'declared service' under section 66E(e) read with section 65B (44) and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e). 18. In South Eastern Coalfields, the Tribunal examined at length the provisions of section 66E(e) of the Finance Act and made the following observations:- " 27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; fo....
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....tivity. 32. In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between 'conditions to a contract' and ' considerations for a contract'." 19. The issue in the present case is covered by the aforesaid decision rendered by the Tribunal and, therefore, it has to be held that service tax could not have been demanded from the appellant. 20. In this connection it would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding applicability of goods and service tax on liquidated damages, compensation and penalty arising out of breach of contract in the context of 'agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act'. This Circular emphasizes that there has to be an express or implied agreement to do or abstain from doing something against payment of consideration for a taxable supply to exist and such an act or a situ....