AI Drafter 
TaxTMI 
TaxTMI 
2024 (11) TMI 473
X X X X Extracts X X X X
X X X X Extracts X X X X
.... penalty for the same will constitute as consideration for the service rendered and service tax is payable on such consideration. Similarly, the appellant also received income under the "Notice pay" from their employees for failing to comply with the terms of employment. Such an act of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" constitutes a declared service under Section 66 E (e) of the Finance Act, 1994 and charges recovered for the same constitute as consideration for the service rendered and liable for the service tax. Accordingly, a show cause notice date 01.02.2017 was issued which was adjudicated whereby, on demand of service tax on both the grounds has been confirmed by the adjudicating authority along with demand of interest and imposition of penalty. Being aggrieved by the order in original appellant filed appeal before the Commissioner (Appeals) who concurring with the views taken by adjudicating authority upheld the Order-In-Original and rejected the appeal. Therefore, the present appeal filed by the appellant. 2. Mrs. Neeta Ladha, Learned Chartered Accountant, appearing on behalf of the appellant sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....declared service under Section 66 E (e) of Finance Act, 1994 which reads as under:- "(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;" As per the plain reading of the above declared service undersub Clause (e), the activity of not completing the contract within the stipulated time period as provided under contract does not fall under the aforesaid entry. Further, it is a penalty which is imposed on the contractor for not completing the work within the stipulated time period. Therefore, such penalty is not the consideration towards any service. Accordingly, the same does not fall under the declared service as provided under Section 66 E (e) of Finance Act, 1994. This issue is no longer res-integra in the light of the decision cited by the appellant in the case of South Eastren Coalfields Ltd wherein, the principal bench of the Tribunal, New Delhi has disposed of a bunch of appeals by passing following order:- "10. The issue that is involved is whether the appellant is providing a "declared service" contemplated under Section 66E(e) of the Finance Act, which service became taxable w.e.f. July 1, 2012. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....period from July, 2012 till March, 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non- performance of the terms of the contract by the other party. 15. Section 65B(44) defines 'service' to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under Section 66E(e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66B provides that service tax shall be levied at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while Section 66E contains a list of declared services. 16. Section 67 of the Finance Act deals with valuation of taxable service for charging service tax. It is reproduced below :- "67.(1) Subject to the provisions of this Chapter, where service tax is ch....
X X X X Extracts X X X X
X X X X Extracts X X X X
....", as was expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between "conditions" to a contract and "consideration for the contract". It has been prescribed under the said GST Rules that certain "conditions" contained in the contract cannot be seen in the light of "consideration" for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided. 20. The Supreme Court in Commissioner of Service Tax v. M/s. Bhayana Builders [2018 (2) TMI 1325 = 2018 (10) G.S.T.L. 118 (S.C.)], while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The observations are : "The amount charged should be for "for such service provided" : Section 67 clearly indicates that the gross amount charged by the service....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nition is inclusive it will not be out of place to refer to the definition of "consideration" as given in section 2(d) of the Indian Contract Act, 1872 as follows - xx xx xx (Emphasis supplied) 23. It would, therefore, be appropriate to examine the definition of "consideration" in Section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of "consideration" is as follows :- "2(d) When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise." 24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders is that "consideration" must flow from the service recipient to the service provider and should accrue to the benefit of the service provider and that the amount charged has necessarily to be a consideration for the taxable service pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntion 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 consideration. Explanation (a) to Section 67 provides that "consideration" includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....there was no consideration for supplemental contract." (Emphasis supplied) 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'. 33. It would be apt to refer to a judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d'Eugenic- les-Bains v. Ministere de I'Economie, des Finances et de I'Industrie as it deals with the issue whether an obligation to refrain from an act or to tolerate an act or situation would result in supply of services when a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service. Under Article 2(1) of the Sixth Directive, 'the supply of goods or services effected for consideration....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the contracting parties are at liberty - subject to the mandatory rules of public policy - to define the terms of their legal relationship, including the consequences of a cancellation or breach of their obligations. Instead of defining their obligations in detail, they may nevertheless refer to the various instruments of civil law. 29. Thus the parties may make contractual provision - applicable in the event of non-performance - for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics. xx xx xx 32. Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client's exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ain the whole amount or part of it. Accordingly, I hold that the retention amount (on cancellation made) by the appellant does not undergo a change after receipt. Accordingly, I hold that no service tax is attracted under the provisions of Section 66E(e) of the Finance Act. Accordingly, this ground is allowed in favour of the appellant." (Emphasis supplied) 36. A Division Bench of the Tribunal in K.N. Food Industries examined the provisions of Section 66E(e) in the context of an assessee manufacturing for and on behalf of M/s. Parley and clearing the same upon payment of central excise duty. In a situation when the capacity of the assessee was not fully utilized by M/s. Parley, ex gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of Section 66E(e) to levy tax on the amount so received. The Tribunal held that the ex gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nce has been placed by the Learned Authorized Representative of the Department on the decision of the Supreme Court in Fateh Chand. The submission is that the word "suffering" is synonymous to "tolerating" and the Supreme Court in Fateh Chand held that a reasonable compensation for breach of contract has to be proportionate to the actual injury suffered. Thus, according to the Learned Authorized Representative of the Department it has been acknowledged by the Supreme Court that in a case of breach of contract, one party tolerates an act or situation. 38. The decision of the Supreme Court in Fateh Chand does not help the Department. The facts indicate that the Delhi Improvement Trust had granted lease hold rights for ninety years to Dr. M.M. Joshi in respect of a property. The relevant clauses of the agreement are :- (i) The plaintiff has agreed to sell the building to the defendant for Rs. 1,12,500/-. (ii) Rs. 1000, being earnest money deposit, was to be paid to the plaintiff at the time of the execution of the agreement. (iii) The plaintiff had to deliver actual possession to the defendant on March 30, 1949 and the defendant had to give Rs. 24,0....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... property. The Supreme Court, therefore, held that plaintiff would be entitled to retain only an amount of Rs. 1000/- that was received as earnest, out of amount of Rs. 25,000/-. 42. The conclusion drawn by the Learned Authorized Representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is 'synonymous' with 'tolerating' or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct. 43. It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards "consideration" for "tolerating an act" leviable to service tax under Section 66E(e) of the Finance Act. 44. The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed." In view of the above judgment, it is clear that penalty towards non fulfillment of the condition of the contract will not fall under Section 66 E (e) of Finance Act, 1994, therefore the ser....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1994 ('Act') as follows: (44) "service" means any activity carried out by a persons 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. 6. This includes Declared Services defined in Section 66E of the Act reading thus: 66E. Declared services The following shall constitute declared services, namely:- (a) renting of immovable property; (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 2.9 Provision of service by an employee to the employer is outside the ambit of service. 2.9.3. Would amounts received by an employee from the employer on premature termination of contract of employment be chargable to service tax? No. such amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would be chargeable to service tax. However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act. 11. The query raised relates to a contra situation, one, where amounts have been received by an employee from the employer by reason of premature termination of contract of employment, and the taxability thereof. The Board has answered in the negative, pointing out that such amounts would not be related to the rendition of service. Equally, so in my view, the employer cannot be said to have rendered any service per se much less a taxable service and has merely facilitated the exit of th....