TaxTMI 
TaxTMI 
2023 (6) TMI 589
X X X X Extracts X X X X
X X X X Extracts X X X X
....use notice and contended that the said amount received as damages cannot be subjected to levy of service tax. The Commissioner, by order dated 07.08.2017, confirmed the demand proposed in the show cause notice and also imposed penalty upon the appellant for Rs. 37,199/- under section 78 of the Finance Act. It is this order dated 07.08.2017 passed by the Commissioner that has been impugned in this appeal. 2. To appreciate the contentions that have been advanced by Shri J.M. Sharma, learned Consultant for the appellant assisted by Ms. Pooja Agarwal and Dr. Radhe Tallo learned authorized representative appearing for the Department it would be necessary to briefly state the relevant facts. 3. The appellant had placed a purchase order upon M/s Larox Corporation, now known as M/s Outotec Oyi of Finland [foreign supplier] for supply of the filter with spare parts. Clause VI of the purchase order relates to performance guarantee. It provides that the foreign supplier will guarantee the production of 100 ton per hour filter cake with a moisture of less than 8.5%. Clause XII of the purchase order deals with disputes and arbitration and provides that arbitration can be resorted to if a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll make an application to the Tribunal for an award by consent dismissing the Arbitration. 3.2 By an application dated 26 February 2016 the Parties jointly requested the Tribunal to make an award by consent dismissing the Arbitration pursuant to Article 32 of the rules of Arbitration International Chamber of Commerce (2012) and that the parties will each bear half of the ICC costs of the Arbitration and Tribunal costs and each party bears its own costs of the Arbitration. In view of the above, on 14 March 2016 the Tribunal formally closed the proceedings (Article 27 of the Rules). The Tribunal has reviewed the terms of the Parties' joint request and accepts to issue the Award by Consent. At its session of 24 March 2016 the Court fixed the costs of arbitration of USD 338 000 (i.e. fees and expenses of the arbitration and the ICC administrative expenses)." 6. The Settlement referred in Clause 3 of the award is as follows :- "Sarda and Outotec have agreed that for the breach of the contract, Outotec will pay, in accordance with the provisions below, 8.5 million Euros [Eight million and five hundred thousand Euros] ("the Settlement Sum") {which, for the avoidance o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of service being actionable claim under Section 65B ibid shall not sustain". 9. Accordingly, the Commissioner passed the following order:- "20. In light of the above discussions and findings, I pass the following order : (a) I confirm the reduced demand of Service Tax amounting to Rs. 8,08,16,636/- (Rupees Eight Crores Eight lakhs sixteen thousand six hundred and thirty six only), including cess, and order it to be recovered from the Noticee in terms of provisions of Section 73 of the Finance Act, 1994 read with Rule 6 of the Service Tax Rules, 1994. (b) The demand of Rs. 1,17,18,413/- (Rupees One Crore Seventeen Lakhs Eighteen Thousand Four Hundred Thirteen only) is dropped after allowing Noticee the benefit of cum-tax value. (c) I order for recovery of interest form the Noticee at the appropriate rate on the above Service Tax under Section 75 of the Finance Act, 1994. (d) I impose a penalty of Rs. 8,08,16,636/- (Rupees Eight Crores Eight lakhs sixteen thousand six hundred and thirty six only) on the Noticee under the provisions of Section 78 of the Finance Act, 1994. (e) I further impose a penalty of Rs. 37,199/- (Rupees T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uced 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". 16. "Declared Services" have been defined in section 66E and sub-section (3) of section 66E, which is involved in this appeal, is as follows : "66E. Declared services The following shall constitute declared services, namely :- ** (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" 17. The deman....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. 28. It also needs to be noted that section 65B (44) defines "service" to mean any activity carried out by a person for another for considera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n it would also be pertinent to refer to the Circular dated 03.08.2022 issued by the Department of Revenue regarding the 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 situation cannot be imagined or presumed to exist merely because there is a flow of money from one party to another. It also mentions that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute 'consideration' and such activities will not constitute 'supply'. The relevant portion of the Circular is reproduced below: "Agreement to do or refrain from an act should not be presumed to exist There has to be an express or implied agreement: oral or written, to do ....