2025 (7) TMI 1141
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....The short question that arises for consideration in the present appeal is concerned with amounts collected by the appellant in the form of fines/penalties, liquidated damages, forfeiture of earnest money/security deposits etc. from the contractors who failed to provide the services within the agreed stipulated time/standards. During the course of audit of the appellant's records, an amount of Rs. 1,39,59,368/- was found to be collected by the appellants towards the said heads. The department alleged that the said amount was collected in lieu of 'tolerating the act' of service providers/contractors for poor performance or not meeting the obligations in full i.e. lesser than the contractual obligations/requirements. Out of the aforesaid amount confirmed by the authority below, a demand of Service Tax for Rs.5,90,451/- pertains to such retained/collected amounts on account of fines/penalties, security deposit/earnest money forfeited and liquidated damages as recovered from the contractors. The balance amount of Service Tax demand confirmed amounting to Rs. 11,20,080/- on unclaimed amounts was dropped by the learned Commissioner (Appeals). The moot question therefore, involved in the p....
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....dt. 4.11.2024 respectively. 6. We find that the issue has since been settled. The above referred decisions of the CESTAT, in the appellant's own case, relied on the Tribunal decision in the case of South Eastern Coalfields Ltd Vs. CCE & ST, Raipur (2021 (55) GSTL-549 (Tri. Delhi). The observations of the Tribunal in the said case are as follows:- "25. It is in the light of what has been stated above that 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 agr....
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....he contract and a penalty is imposed only if there is non-compliance. 29. The situation would have been different if the party purchasing coal had an option to purchase coal from 'A' or from 'B' and if in such a situation 'A' and 'B' enter into an agreement 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. 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." 7. As per order of the apex court dated 11.07.2023 in CA No. 2372/2021 (CCE & ST Vs South Eastern ....
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.... or tolerate or to do an act between the parties concerned. 10. The Department has also issued Circular No.214/1/2023-ST dated 28.02.2023 analysing the provisions of Section 66E(e) read with 65B(44) of the Finance Act, 1994 and clarified that the activities contemplated under Section 66E(e) of the act ibid, were those where one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act. These are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. The said position had been clarified at great length by CBIC vide its Circular number 178/10/22-GST dt. 3.8.2022, wherein it had gone into various associated aspects. Relevant extract thereof pertaining to liquidated damages, penalties imposed, cancellation charges, etc. are extracted below:- Liquidated Damages 7.1 Breach or non-performance of contract by one party results in loss and damages to the other party. Therefore, the law provides in Section 73 of the Contract Act, 1972 that when a contract has been broken, the party which suffers by such breach is entitled to receive from the other party compensation for any loss ....
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....arty 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, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of 'an agreement to sell' an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in ....
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.... a facility, namely, of acceptance of late payment, early termination of a lease agreement, of prepayment 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 principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply, as discussed in detail in the later paragraphs. Compensation for cancelation of coal blocks 7.2 In the year 2014, coal block/mine allocations were cancelled by the Hon'ble Supreme Court vide order dated 24-9-2014. Subsequently, Coal Mines (Special Provisions) Act, 2015 was enacted to provide for allocation of coal mines and vesting of rights, title and interest in and over the land and mines infrastructure together with mining leases to successful bidders and allottees. In accordance with Section 16 of the said Act, prior (old) allottee of mines were given compensation in the year 2016 towards the transfer of their rights/....