TaxTMI 
TaxTMI 
2025 (5) TMI 486
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....al charges towards liquidated damages/ penalties from various contractors/ suppliers etc. and showing the same as their income, but were not paying service tax on such amount w.e.f. 01.07.2012. They conducted investigation by recording statements of Shri Pankajkumar J. Sheth AGM (Finance) of the Party No.1. After scrutiny of the documents and going through the sample copies of the work orders/ agreements/ letter of intents (LOI) of various contractors/ vendors, they ascertained that an amount of Rs.40,43,92,244/- (in the case of Party No.1) has escaped payment of service tax during the period from 01.07.2012 to June 2017. The revenue issued a show cause notice dated 28.03.2018 proposing demand of service tax of Rs.4,99,97,827/- from the Party No.1 along with the applicable interest. It also proposed invocation of Sections 76, 77 and 78 of the Finance Act, 1994 for imposition of penalty on the Party. A sperate penalty under Section 78 A of the Finance Act, 1994 was proposed on Shri Pankajkumar J. Sheth AGM (Finance). 1.2 The revenue also initiated investigation against Party No.2 (i.e. M/s. Gujarat Industries Power Company Limited, Vadodara) on the same issue. After conducting th....
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....of LOI and the delay is not due to force majeure or due to owner's default then the contractor has to pay the owner compensation for delay @ rate of 0.5%(half percent) of total contract value per week of delay subject to maximum of 10%(ten percent) of the contract value(value of Land, equipment supply, erection and commissioning i.e. without value of O&M). The decision of the Owner/Engineer-in-charge in regard to the amount to be recovered from the Contactor will be final and binding on the Contractor. M/s. LSML is liable to pay compensation over and above Liquidated damages for shortfall in Performance, Guarantee/Warrantee/Defects etc., as per terms of RFP." c) Such contractual obligation mandates/authorizes M/s GIPCL to terminate the service/ the order for supply of goods, if the said suppliers/ contractors commit breach of the terms and conditions contained therein. In cases where the said suppliers/contractors willfully defaulted in terms of making the supply of goods or execution of the work within the time frame and/or within the quality parameters prescribed on the Supply/ work order, M/s GIPCL is authorized to recover an amount which they labelled as 'liqui....
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....owing activities if carried out by a person for another for consideration would be treated as provision of service- i) Agreeing to the obligation to refrain from an act: It means any act which binds a person, of not to do or not doing a particular manner. ii) Agreeing to the obligation to tolerate an act or a situation. It means to accept an act or a particular situation which is imposed by a condition or circumstance in a legally enforceable contract, agreement or any other document. iii) Agreeing to the obligation to do an act: It means to perform or to do something as necessarily mandated in an agreement, contract, or any other document which is required under any law for the time being in force. h) In the present case, the Party No.1 has entered into agreements/contracts with various Vendors/Service Providers with a time clause stipulating that the activity under the agreement/contract has to be completed within a specified time frame and failing the schedule would attract penalty In pursuance to these agreements/contacts, the Noticee have deducted certain portion from payments of various Vendors/Service Providers who failed to act as per tim....
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.... dt. 06.09.2012 of Hon'ble Supreme Court, in the case of BALCO Vs. Kaiser Aluminium Technical Services Inc. observing that " the terms of the contract will have to be understood in the way parties wanted and intended them to be. The Court can not interpret the contract between two parties like interpreting a statute. He also mentioned that it is not only merely tolerating or agreeing to tolerate an act or situation but agreeing to the obligation to tolerate an act or situation which is liable to facts under Section 66 E (e ). They never agreed to tolerate the delayed or non- performance of contract by their vendors. 3.3 The views expressed by Principal Commissioner, CGST, Surat in his order dated 04.03.2019 have been upheld by this Tribunal in the cases of Lende Engineering India Private Limited V. CCE & ST, Vadodara 2024 (10) TMI 1544 - CESTAT AHD, Gujarat State Electricity Corporation Limited V. CCE & ST, Surat 2024 (11) TMI 473 - CESTAT AHD and South Eastern Coalfields Ltd - 2020 (12(TMI)912 - CESTAT Del. 3.4 The learned Advocate also mentioned that the extended period of limitation cannot be invoked in the present case as there was no deliberate and wilful suppression on ....
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....n within the ambit of the term service." Therefore, amount claimed by M/s. GIPCL, Vadodara and M/s. GIPCL, Surat as liquidated damages or forfeited or consideration for tolerating an act of not performing the contractual obligation by the service provider is liable to service tax. 4.3 The word "Tolerate" is defined as; "a to suffer' as per Black's Law Dictionary b. to allow to be done or exist' as per Chambers Dictionary c. 'allow the existence or occurrence of anything' as per Law Lexicon Dictionary." 4.4 He therefore, justified confirmation of service tax demand and penalty against M/s. GIPCL, Vadodara. On the same ground, he pressed that the prayer of the department in the case of M/s. GIPCL, Surat may be allowed in the interest of justice. 5. On the other hand, Learned Advocate on behalf of M/s. GIPCL, mentioned that what the company has recovered liquidated damages from their Contractors/ Vendors due to non-fulfilment / delayed fulfilment of work order/service. Such income cannot be said to be out of any service, and therefore, the demand of service tax by Revenue on this income in respect of both the companies is not cor....
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....he above declared service under sub 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:- 12. "Declared services" has been defined sub-section(e) of Section 66E, as follows : Declared services "66E. The following shall constitute declared services, namely :- xx xx xx (e) agreeing to the obligation to refrain from anact, or to tolerate an act or a situation, or to do an act;" 13. The show cause notice and the impugned order indicate that the appellant was charging and collecting an ....
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....nsideration; (iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner. xx xx xx Explanation. - For the purposes of this section, - (a) "consideration" includes - xx xx xx (b) xx xx xx (c) xx" xx xx (Emphasis supplied) 17. Section 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in Section 66B in such manner and within such period as may be prescribed. 18. It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of Section 67. What needs to be noted is that each of these refer to "where the provision of service is for a consideration", whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a "consideration" for the provision of such service. Explanation to sub- section (1) of Section 67 cle....
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....sideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply of goods provided by the service recipient to the service provider is neither an amount "charged" by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined." (Emphasis supplied) 21. The aforesaid view was reiterated by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats [2018 (10) G.S.T.L. 401 (S.C.)] and it was observed that since service tax is with reference to the value of service, as a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon. 22. In this connection it would also be pertinent to refer to TRU Circular dated 20 June, 2012 issued by the Central Board of Excise and Customs as an Education Guide when the Negative List based taxation regime was introduced from July, 2012 to clarify various aspect....
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....t of the value of taxable services that are provided. 25. It is in the light of what has been stated above, the provisions of Section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under Section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another 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 : (i) consideration for agreeing to the obligation to refrain from an act; or (ii) consideration for agreeing to tolerate an act or a situation; or (iii) consideration to do an act. 26. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligati....
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....that 'A' would not supply coal to the appellant provided 'B' paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under Section 66E(e). 30. The activities, therefore, that are contemplated under Section 66E(e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. 31. In this connection, it will be useful to refer to a decision of the Supreme Court in Food Corporation of India v. Surana Commercial Co. and Others [(2003) 8 SCC 636]. The Supreme Court pointed out that if a party promises to abstain from doing something, it can be regarded as a consideration, but such abstinence has to be specifically mentioned in the agreement. The relevant portion of the judgment is reproduced below : "Under the main agreement, a party had contracted for the conversion of whole arhar grain into dal. Subsequently, by another supplemental agreement, the party agreed to upgrade the dal. It was held that as soon as the first agreement....
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....be 'everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies'. 34. The question referred for preliminary hearing, in essence, in the aforesaid decision was whether 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, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The sum paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed : "26. Since the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit, there is no direct connection between the service rendered and the consideration received (Apple and Pear Development Council, par....
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.... of the booking would be leviable to service tax under Section 66E(e). The Tribunal held that the retention of the amount on cancellation would not attract service tax under Section 66E(e) and the relevant portion of the decision is reproduced below : "3. So far as the first issue is concerned, the appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retain the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permissible abated value. It is the case of the Revenue that upon cancellation by the customers, the gross amount received by the appellant qualifies the receipt under Section 66E(e). 4. Ld. Commissioner (Appeals) in confirming the demand under this head has observed that retention of such cancellation charges is not against the provisions of intended services but for not availing the said services by the customers, which the appella....
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....age/injury. As such, ex gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee. xxx xxx xxx In the present case apart from manufacturing and receiving the cost of the same, the appellants were also receiving the compensation charges under the head ex gratia job charges. The same are not covered by any of the Acts as described under Section 66E(e) of the Finance Act, 1994. The said Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said clause, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. which are clearly absent in the present case. In the instant case, if the delivery of project gets delayed, or any other terms of the contract gests breached, which were expected to cause some damage or loss to the appellant, the contract itself provides for compensation....
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....rty was not completed before the expiry of the stipulated period. The plaintiff, therefore, sought a decree for possession of land and building and a decree of Rs. 6500/- as compensation for use and occupation of the building. It was alleged that the agreement stood cancelled because the defendant committed a default in performing the agreement and the sum of Rs. 25,000/- paid by the defendant stood forfeited. 40. It is in this context and in the context of Section 74 of the Contract Act, that the Supreme Court observed : "20. Section 74 declares the law as toliability upon breach of contract where compensation is by agreement of parties pre- determined, or where there is a stipulation by way of penalty. But the application of the enactment is not restricted to cases where the aggrieved party claims relief as a plaintiff. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract for predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulat....