TaxTMI 
TaxTMI 
2026 (3) TMI 21
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....d and use the capacity to manufacture specified products for LXD at its site in Jhagadia, in accordance with the instructions and specification of LXD and in turn, LXD agreed to take off the products and pay to the Respondent the agreed remuneration. The holding company (LXD) also agreed to pay remuneration/compensation, in case there is any underutilization of capacity. 1.1 During audit, it was observed that during the period between July 2012 to March 2016, the Respondent have claimed charges/compensation of an amount of Rs. 67,53,90,865/ from its holding company LXD towards underutilization of installed production capacity at Jhagadia factory. After investigation, the department issued a Show Cause Notice dated 23.01.2017 to the respondent proposing to demand service tax of Rs.8,68,67,341/- under proviso to Section 73(1) of the Finance Act, 1994, on the basis that the compensation so received by the Respondent from LXD towards underutilization of committed production capacity of the plant, shall constitute consideration for the 'declared service' Section 66E(e) of the Finance Act, 1994 and hence, service tax on the aforesaid amount is liable to be paid by the Responde....
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....ent's location which is outside India (non-taxable territory) and accordingly, Rule 3 of the POPs Rules, 2012, shall apply. * As per Rule 14 of the POPs Rules, 2012, when the provision of a service is determinable in terms of more than one rule, then it shall be determined in accordance with the Rule that occurs later among the Rules that merit equal consideration, and accordingly, Rule 5 shall apply. * For a service to qualify as an export of service, it has to satisfy all the conditions as laid down under Rule 6A of the Service Tax Rules, 1994. Sub-rule 1(f) lays down that the provision of any service or agreed to be provided, shall be treated as export of service, when the provider and the recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of Section 658 of the Finance Act, 1994. The respondent located in taxable territory, is a subsidiary company of the recipient located in a non-taxable territory, and therefore, provision of service between the respondent and LXD shall be treated as merely between the establishments of distinct persons, and therefore, will not be considered as ex....
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....and of Rs. 8.68 crores against the respondent, by the Adj. Authority is not legal and proper and therefore, needs to be quashed. 3. The respondent submitted as follows:- A. Idle cost compensation received by the Respondents for underutilization of capacity of plant is towards cost of goods manufactured by the Respondents and exported. Hence, no duty is liable to be paid. A.1 The Respondents are, manufacturing products like ion Exchange Resins used for purification of liquid. These are exported to LXD either on payment of duty of excise under claim for rebate of such duty or under LUT/bond without payment of duty. They entered into an agreement dated 28.04.2015 with LXD in terms of which Respondents agreed to manufacture and supply the aforesaid product to LXD. The amount to be paid by LXD as consideration for sale of aforesaid product, has been arrived at as Manufacturing fee and Idle Cost Compensation. As per clause 2(1)(a), "The MANUFACTURING FEE shall be paid per unit of PRODUCT delivered to LXD and shall cover cost of INPUT MATERIALS, PRODUCTION COST, SELLING EXPENSES, GENERAL ADMINISTRATION AND OTHER COST plus the MARK UP." The MARK UP has been defined in ....
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....nufacturing fee per unit is arrived at by taking into account total cost divided by the number of units agreed to be purchased by LXD. When actual units purchased are less than the agreed quantity, manufacturing fee has to be re-worked out. The idle cost compensation is nothing but the differential manufacturing fee when actual units purchased and thus, it is for the goods manufactured and not for any service rendered by the Respondents. A clarification was sought by Inox on the issue of inclusion of FFC and MTOP charges in the assessable value of the gases being manufactured and supplied to the customers for the purpose of charging central excise duty. A.5 In the case of Inox Air Products Ltd, upon direction of Hon'ble High Court of Bombay, CBIC vide Letter No F.No.6/03/2013/CX.1 dated 10.11.2014 under General Instruction No. 30/2014-15 dated 19.12.2014 clarified that charges of Fixed facility charges (FFC) and Minimum take or pay charges (MTOP) are directly linked with manufacture and supply of gases irrespective of the fact whether these are paid at the time of sale or at subsequent time. The categorical clarification given by the board are as follows :- (i....
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....ly establishments of a distinct person in accordance with item (b) of Explanation 3 of clause (44) of section 65B of the Act." Explanation 3 (b) an establishment of a person in the taxable territory and any of his other establishments in a non-taxable territory shall be treated as establishments of distinct persons." Explanation 4 A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory" A combined reading of above provisions makes it clear that a person carrying on business through a branch or agency or representation office in any territory shall be treated as having establishment in that territory, meaning thereby, agency or branch of a company in the taxable territory and the head office in a non-taxable territory shall be treated as establishments of distinct persons. B.3 In the case of Director of Income Tax v. E-Funds IT Solution reported at [2014] 42 taxmann.com 50 (Delhi), assessee namely e-Fund Corp. and e-fund Inc were incorporated in USA. They entered into international transactions with their Indian subsidiary....
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.... underutilization of installed production capacity, by treating the same as declared service under Section 66E(e) of the Finance Act, 1994? 4.1 The relevant portion of Section 66E(e) is reproduced below: - 66E. 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; Under the Central Goods and Service Tax Act, 2017, somewhat similar expression in relation to deemed supply appears in Schedule II of the Act in Paragraph 5 - Supply of Services Clause (e) states as under: "Paragraph 5- Clause (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 Section 2(d) of the Indian Contract Act, 1872, expression, "Consideration" has been defined as follows:- "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" It was thus pointed out that doing or abstaining fr....
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....of CGST, Central Excise and Customs, Jabalpur, it was held that recovery of liquidated damages/ penalty from other party could not be said to be towards any service per se, since the said party was not carrying out any activity to receive compensation nor could there be any intention of other party to breach and violate the contract and suffer a loss. It was decided that such penalty and liquidated damages on supply of goods could not be considered for a deemed service. It relied on the decision of South Eastern Coal Fields Ltd. as well as on CBIC Circular No. 178/10/2022- GST dated 03.08.2022. The relevant paras 18,19,20 are reproduced below:- "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; 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 servic....
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....lerate 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 3-8-2022 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 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 un....
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....." (e) Learned AR stated that the department's appeal is admitted in Apex Court as reported at 2021 (54) GSTL J54 (SC). He also cited decision of Bhagwati Power and Steel Ltd Vs. Commissioner of Central Excise, Raipur (CG) as reported in 2023 (8) TMI 900- CESTAT New Delhi in which it was held that amount deducted by the appellant towards compensation for not supplying WHR Boiler in time would not be a deemed service for lack of consideration. CBIC circular No. 214/1/2023 dated 28.02.2023 was also considered in para 7 & 8 as below:- "7. The Circular dated 28th February, 2023 issued by the Board, on which reliance has been placed, is as follows: "Subject: Leviability of Service Tax on the declared service "Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" under clause (e) of section 66E of the Finance Act, 1994 - reg. An issue has arisen on the levy of service tax on liquidated damages arising out of breach of contract, forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period and similar other issues arising ou....
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....n'ble Tribunal relied on the judgement of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has decided not to file appeal against the CESTAT order ST/A/50879/2022-CU[DB] dated 20.09.2022 in this case and also against Order A/85713/2022 dated 12.8.2022 in case of M/s Western Coalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022 dated 08-08-2022), and M/s Neyveli Lignite Corporation Ltd (CA No. 0051-0053/2022) on this ground. 6. In view of above, it is clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining w....
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....not represent consideration for service. However if the deposit is in the nature of a colorable device wherein the interest on the deposit substitutes for the consideration for service provided or the interest earned has a perceptible impact on the consideration charged for service then such interest would form part of gross amount received for the service. Also security deposit should not be in lieu of advance payment for the service. 6. Security deposits forfeited for damages done by service receiver in the course of receiving a service If the forfeited deposits relate to accidental damages due to unforeseen actions not relatable to provision of service then such forfeited deposits. 7. Excess payment made as a result of a mistake If returned it is not consideration If not returned and retained by the service provider it becomes a part of the taxable value. 8. Demurrages payable for use of services beyond the period initially agreed upon e.g. retention of containers beyond the normal period. This will be consideration and is covered by clause (x) of sub -rule (1) to Rule 6 of the Valuation Rules. 2.3.3 Can a consideration for service be paid by ....
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....cision in the matter of Commissioner of Service Tax, Chennai Vs. M/s Repco Home Finance Ltd reported at 2020 (7) TMI 472 -CESTAT Chennai wherein in relation to foreclosure charges levied by the banks, it was held that there was no consideration and therefore, no service is involved as far as foreclosure charges are concerned. Para 27 to 41 of the decision are reproduced below:- "27. What follows from the aforesaid decisions 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 provided under the Act. It should also be remembered that there is marked distinction between "conditions to a contract" and "considerations for the contract". A service recipient may be required to fulfil certain conditions contained in the contract but that would not necessarily mean that this value would form part of the value of taxable services that are provided. 28. It is also necessary to remind ourselves that the word "include" is generally used in interpretation clauses to enlarge the meaning of the words or....
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....tracts 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." 32. What needs to be noted from the aforesaid definition of consideration under Section 2(d) of the Contract Act is that consideration should flow at the desire of the promisor. Thus, if the consideration is not at the desire of the promisor, it ceases to be a consideration. The banks and non-banking financial companies are promisors and the promisees are the borrowers. The contractual relationship between the banks and non-banking financial companies and the customers is repayment of the loan amount over an agreed period. The banks and non-banking financial companies would not desire premature termination of the loan advanced by them as it is in their interest that the loan runs the entire agreed tenure for the banks thrive on interest earned from lending activities. As premature termination of a loan resu....
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....on the contract. Such remedies are said to protect the injured party's restitution and reliance interest. But remedies for breach of contract go beyond the pursuit of these objectives. Their distinguishing feature is that they seek to put the injured party into the position in which he would have been if the contract had been performed. If, for example a seller agrees to sell goods for less than they are worth, and then fails to deliver them, he must compensate the buyer for not having received goods which are worth more than he had agreed to pay for them. Conversely, if a buyer contracts to buy goods for more than they are worth, and then fails to pay for them, he is liable for the agreed price. It is quite immaterial that the value of the goods with which the seller has parted was lower than that price. What the law does in these cases is to protect the injured party's expectation interest. Sometimes it does so directly, by actually ordering the party in breach to perform his part of the contract. Sometimes it does so indirectly by ordering him to pay the injured party damages for loss of his bargain. The result of awarding damages on this basis is to compensate the inju....
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.... "13......................Therefore, the granting of loans or advances is one of the business of the Corporation. As stated above, the Corporation borrows funds from the financial institution at the prevailing rate of interest. If an account is prepaid/foreclosure when the interest rates are falling, the Corporation may have to suffer loss. To overcome this situation, if a premium is charged on the outstanding loan being prepaid, the same cannot be found fault with. I am of the considered view that the Corporation has the power and authority to levy prepayment/foreclosure premium." 37. The foreclosure of loan is, therefore, a material breach of contract as it curtails the loan service period unilaterally, which can prompt the promisor to claim damages. Damages can be determined by Courts or they can also be incorporated in the loan agreements and other commercial contracts so as to ensure certainty in dealings and also serve as a deterrent measure. This aspect of damage is known as liquidated damages. 38. Liquidated damages have been dealt with by Pollock & Mulla in the book titled "The Indian Contract and Specific Relief Acts" (Fourteenth Edition) and the relev....
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....care of by providing for consideration. He advanced the argument that anything which is incorporated or is received as damages or compensation, cannot give rise to any consideration. 7. The Bench after initial arguments from both sides, found that the initial view emerging from various case laws, quoted by either side or even the Board's instructions upto 2017, only indicate as to what cannot be included in the phrase, as has been used in Section 66E(e) (ibid) or even for that matter in relation to "deemed supply" as defined in Annexure-II of CGST Act, 2017. To have better understanding of the proposition, both sides were given time to submit their arguments firstly by indicating as to what can included in the phrase used in Section 66E(e) of Finance Act, 1994 as legislature is not known to have wasted any word and it has to be equally understood by juxtaposing as to what can get included and what cannot be in the phrase of Section 66E(e) "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;". Bulk of the case law as well as clarifications only indicated as to what cannot be included in the phrase. As "Verba legis non sunt sup....
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....g how courts approach obligations to "tolerate" under GST law. In that case, the appellants purchased the reversionary interest in a property that was already subject to an existing lease. The issue before the court was whether, by acquiring the reversion, the appellants made a supply within the meaning of section 9-10. The Full Federal Court found (at paragraphs-) that "when the appellants purchased the reversion, they assumed the obligation of Lake Eerie to honour the lease according to its terms and in that sense entered into an obligation to tolerate an act or situation and in consequence, made a 'supply' by virtue of s 9-10(2)(g)." This decision confirmed that a supply could arise by operation of law through the assumption of obligations, including the obligation to tolerate the tenant's rights of occupation. The Court noted that the concept of "supply" in section 9-10(2)(g) is arguably broader than the ordinary meaning in section 9-10(1), which seemed to require "some act of provision, furnishment, conferral or giving of something." However, the Westley Nominees decision remained unclear on whether positive acts of the supplier are required for a....
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....tself. There may be more than one supply that is related to a settlement. In addition, the subject of the dispute may not be a supply at all (refer paragraph 71) 44. For the purposes of this Ruling, supplies that are related to an out-of-court settlement fall within the three categories of supply described below. This characterization assists in the subsequent analysis of consideration for a supply, which commences at paragraph 100. The existence of a particular supply in relation to a given settlement will not necessarily mean a sufficient nexus exists between that supply and a payment made under the settlement. Supply [F26] The GST Act does not prescribe any sequencing or hierarchy of supplies for taxing purposes. GST becomes payable on the relevant supply. 46. In these circumstances, where the subject of the dispute is an earlier transaction which a supply was made involving the parties, that supply is referred to in this ruling as an 'earlier supply'. Example-Earlier supply 47. Widget Company supplies toys to a retailer. A dispute between the parties over payment for the toys is subsequently resolved through an out-of-court settl....
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....these kinds as 'discontinuance supplies However, whether a discontinuance supply would be a taxable supply would then depend on the requirements of section 9-5 being met in relation to that supply. Disputes resolved by a court order 56 Three recent court judgments have considered the possible application of the provisions of the GST Act to the decisions of the court and payments made in compliance with the orders of the court 57. The three reported decisions are: (i) White J in Interchase Corporation Ltd v ACN 010 087 573 Pty Ltd & Ors [Interchase]: (ii) Underwood Jin Shaiv v Director of Housing and State of Tasmania (No 2) (Shaw), and (iii) Hunter J in Waller Construction Group Limited v Walker Corporation Ltd & Ors [WCG]. 58. In each of these cases, the plaintiff had been awarded a judgment sum and was seeking an indemnity for any future liability to pay GST on the judgment sum, In Interchase, Justice White dismissed the application largely for procedural reasons, though her Honour nevertheless considered the requirements of the GST Act and made the following observations: It is not easy to see how a cour....
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....he payment, act or forbearance was in compliance with a settlement relating to proceedings before a court, or before a tribunal or other body that has the power to make orders. This provision negates any argument that the characterisation of a payment according to section 9-15 either as consideration for a supply or otherwise could be affected by the payment being made in compliance with a court order or settlement relating to proceedings before a court." 8.5 Learned AR also emphasized on the principle of apportionment evolved by various Australian Courts:- "Apportionment 115. Where payment made under a court order or out-of-court settlement has a sufficient nexus with more than one supply, with one or more supplies being taxable and one or more being GST-free or input taxed, the payment will be for each of the relevant parts. This will also be the case where the payment is partly for an item of damages. 116. Where a court order (issued in accordance with the court's judgment on the case) itself dissects and itemises the payment into the heads of claim relating to the individual supplies and/or item of damages, that itemisation will be acc....
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....able supply). An alternative basis for apportionment may be to use industry standards to calculate copyright fees Example-apportionment whore an earlier supply 123. Just before Valentines Day, Flowerbox, a GST registered gift shop, receives a supply of wilted flowers for which it has paid $5,500 and claimed an input tax credit of $500. The supplier refuses to refund any part of this amount and Flowerbox sues the supplier for damages, in the amount of $12.000. Flowerbox has based the amount of its claim on the cost of the flowers ($5,500) plus an amount of $6,500 that it asserts is equal to the loss of profits it would have made from the sale of the flowers. The court rules in favour of Flowerbox, but the total award is reduced to $9,900. The court does not dissect in amount of the award. 124. To apportion this amount, it is reasonable that $5,500 is applied to the reduction in the price of the flowers and the balance ($4,400) to the loss of business. As an alternative, it might be appropriate to use the relative proportions of the original heads of claim as the basis for dissecting the amounts awarded by the court. 126. The GST consequences of a ....
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....ro quo or element of service whenever the quantified damages under the contract are received. He submitted that both 'liquidated damages' as exist in Indian context as well as the other 'damages' cannot be considered as service for lack of consideration. On the specific issue of compensation on capacity as in the instant case, he relied upon the proposition that 'damages' can have no consideration on the basis of decision reported in 2021 (55) GSTL 549 (Tri.Delhi) in the matter of South Eastern Coalfields Ltd Vs. Commissioner, Central Excise and ST, Raipur, in which case compensation/penalty was received from the buyers by coal mining supplier company for short lifted, un-lifted quantity of coal. The security deposit/finance money deposit forfeited for noncompliance of contract by the contractor and liquidated damages from raw material buyer were not considered as "consideration" for tolerating an act and hence, not "declared service" as per Section 66E(e) of Finance Act, 1994, specially when contract did not specify or provide for obligation on assesse to refrain from an act or tolerate an act or a situation and in which decision, it was held that liquidated damages/penalty cannot....
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....estigation and in some advance ruling authorities have upheld taxability." 9.1 He also took us to para 4,5,6 of the clarification to show the scope as it has existed under service tax law as well as GST law now. "4. In Service Tax law, 'Service' was defined as any activity carried out by a person for another for consideration. As discussed in service tax education guide, the concept 'activity for a consideration involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an 'activity for consideration'. The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply. 5. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act in para 5(e) of Schedule II of CGST Act is strikingly similar to the definition o....
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.... service" will not extend the scope of service to work beyond "consideration" and "includes a declared service" even if without consideration as defined in Section 66E(e) and whether agreeing to obligation, has to be prior to and pre-exist in contract or can exist at any stage latter or even at the stage of breach of the contract to extend the scope of the service and exactly what kind of obligation would have been envisaged by the legislature to include in the scope of declared service. The learned Counsel sought time as was also sought by the other side to make further detailed submissions with the help of provisions of Indian Contract Act, 1872 and other legislations, in which similar or somewhat similar phrase is existing for the purposes of levy and other rulings of various countries. 10. Accordingly, during second hearing, following detailed submissions were made by the Senior Advocate. 10.1 The term "consideration" has not been defined in the Finance Act,1994 and therefore, same can be understood through common law or well-established definition under Section 2(d) of the Indian Contract Act,1872 which is of more than 150 years vintage and can be considered to be genera....
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.... where the court found that similar payments were considerationsee VATSC05822(https://www.gov.uk/hmrc-internal-manuals/vat-supply-andconsideration/vatsc05822). More recent case law further indicates that some payments described as compensation or damages are nevertheless actually consideration for supplies. (emphasis supplied) In MEO-C295/17 (http://curia.europa.eu/juris/document/document.jsf?text=&docid=207965&pageIndex=0&doclang=en&mode=Ist&dir=&occ=first&part=1&cid=6571625) the CJEU found that the fact that payments may be categorised as contractual penalties or compensation under national law was irrelevant to the question of whether there was a supply for consideration. In (#)Vodafone Portugal-C43/19 (http://curia.europa.eu/juris/document/document.jsf?text=&docid=227304&pageIndex=0&doclang=EN&mode=re q&dir=&occ=first&part=1&cid=4352595) the Court confirmed that position saying: "In the context of an economic approach, an operator determines the price for its service and monthly instalments, having regard to the costs of that service and the minimum contractual commitment period... ...the amount payable in the event of early termination mu....
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....ght derived by the customer to benefit from the fulfilment of the obligations arising from that contract, irrespective of whether the customer uses that right. Thus, that supply is made by the supplier of services when it places the customer in a position to benefit from the supply, so that the existence of the above mentioned direct link is not affected by the fact that the customer does not avail himself or herself of that right (see, to that effect, judgment of 22 November 2018, MEO- Serviços de Comunicações e Multimédia, C295/17, EU:C:2018:942, paragraph 40 and the case-law cited)." It is therefore essential that there is a direct link between the consideration and the supply. Where this is the case, the supplier will normally have clearly agreed to do something for the customer in return for a payment. It may occasionally be the case that where an agreement does not explicitly allow a customer to do something, the economic reality of the transaction is such that agreement to supply something is nevertheless effectively there. This may be when a similar amount is paid for the hire of something when it is kept beyond the agreed term to that p....
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....idation payment is not inevitable, rather the lease creates an obligation to return the property in the agreed state and it is the default on this obligation that gives rise to the requirement to make dilapidation payment. The tenant takes on a package of rights and obligations when entering the lease, one of which is to return the building in the agreed state. The rent will normally reflect those rights and obligations. If the tenant does not fulfil its obligation to return the building in the required state, it is required to make a further payment so the landlord can restore the building to the agreed condition, and it is in effect a re-imbursement of the cost of goods and services that the landlord faces incurring. It is arguable that this therefore represents additional consideration for the supply of the lease. If the obligation to return the building in the agreed state was not there, it is probable that the rent would be set higher to allow the landlord to cover the costs of rectifying the building at the end of the contract. On the other hand, if the tenant had exceeded the wear and tear that might reasonably be expected during the period of the lease, or....
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....not allowing the milk prices to get depressed through excess supply. So, this is the case where tolerating of an act exists but there is no nexus of activity carried out, being for consideration. He pointed out that the liquidated damages which are ascertained a- priori at the time of entering into contract through prior agreement but will come into effect only on breach of the contract and will not get covered under the phrase of 66E(e) and what can get covered in the scope of the phrase are non-compete obligations like blocking of Senior Advocate by a strong litigant or consideration or other blocking contracts whereby, through agreements amounts are paid for not carrying out business in particular area or in a particular line of profession for some years entered into with apprentices or for contracts in which IPRs are compromised by inventors in favour of employers during course of employment for any inventors carried out and IPRs like patent, Trademark etc. received during the period of employment. A release from suing for infringement between a company who transfers commercial usage of a patent to someone else. Such right to sue for infringement being part of transfer amount c....
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....ight variation in circumstances can give rise to new facts, which can lead to there being no service for consideration and can take the service /supply out of the ambit of "deemed service or supply". 10.4 Coming to the scope of the damages and why they do not form part of the "consideration", he with the help of various authoritative texts submitted the following proposition: - (1). Even if a contract does not explicitly provide for damages, the party that breaches the contract is still liable to pay damages for the said breach. To support his argument, he relied on Pollock & Mulla Indian Contract Act and Specific Relief Act 7th Edition, 1944 to bring out the scope of penalty and liquidated damages as provided in Section 73 of the Contract Act:- "Penalty and liquidated damages. This section boldly cuts the most troublesome knot in the Common Law doctrine of damages. By the Common Law, parties may name a penal sum as due and payable on a breach of contract, that sum being, according to the true intention of the parties, only a maximum of damages. In that case the real damages, and no more, are recoverable. On the other hand, they may by consent assess a fixed me....
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.... (p). But it is quite needless to enter in this place upon the somewhat confusing application of the resulting distinctions, for the manifest purpose of the present section is to get rid of all these questions by carrying out the tendency of the English authorities to its full consequences (q). There may, again, be a conventional sum which is neither damages nor penalty, but, as it has been called a " liquidated satisfaction" (r) the agreed price of liberty to do or omit something. In such a case there is merely a conditional or alternative promise which, if not open to any other objection, will take effect according to its terms. It has been held by a Full Bench of the High Court of Allahabad that the section applies to a compromise decree and that it is open to a Court executing such a decree to go behind it if it contains a stipulation which is by way of penalty (s). The original section has been amended by the Indian Contract Act Amendment Act, 1899. The italicised words indicate the portion newly added in the section. Illustrations (d), (e), (f) and (g) as given below, were also inserted by the same Act. The marginal note 10 the section has ....
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....remembered that in the Middle Ages, and even later, usury meant not taking exorbitant interest, but taking interest at all. (n) Kemble v. Farren (1829) 6 Bing. 141, at p. 148. (o) A. L. Smith L.J., Wilson v Love [1896] 1 Q.B. 626, 631 (p) Clydebank Engineering Co. v. Castaneda [1905] A.C. 5 (an appeal from Scotland, but the Scottish law does not differ on this point from the English); Webster v. Bosanquet [1912] А.С. 394 (Jud. Comm. from Ceylon). See Mahadeoprasad V. Siemens (India) Ltd. (1934) 60 Cal 1379; 149 I.C. 858; A.I.R. 1934 Cal. 285. (q) That this is now fully settled, see Panna Singh v. Arjan Singh, 33 C.W.N. 949; 117 I. C. 485; Α. I.R. 1929 P.C. 179; (1929) All. L. J. 791; Mahadeoprasad v. Siemens (India) Ltd. (1933) 60 Cal. 1379; 149 I.C. 858; Α.I.R. 1934 Cal. 285. (r) See Lord Elphinstone γ. Monkland Iron and Coal Co. (1886) 11 App. Ca. 332, at p. 347. (s) Mohiuddin v. Kashmiro Bihi (1933) 55 All. 334; 142 I.C. 419; A.I.R. 1933 All, 252, overruling a contrary decision of the same Court: Raghunandan Prasad v. Ghulani Ala-uddin Beg (1924) 46 All. 571; 79 I. C. 916; Subbayya v. Pedayya (19....
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....is necessary to ascertain its exact terms, so as to determine its breach. Where the contract is not concluded, no action for its breach or for damages will lie. The paragraph does not apply to cases where the contract is for any reason void, or illegal. A plaintiff cannot claim damages being the loss of income derived from business or transactions, which are unlawful. The fact that a contract is contingent, does not affect the measure of damages; they are assessed in the usual manner. Where the contract is varied, damages are to be assessed to put the plaintiff in the same position as if the varied contract had been carried out. Damages have been awarded on the principles of contract law where lease was not registered." Breach of Contract The section applies only where a contract has been broken; and breach of contract must be proved before setting about the question of damages. Whether there is a breach cannot be decided by a party; it must be adjudicated, and must be proved. No damages can be awarded by the court without coming to any conclusion about breach, merely on the ground that the defendant has been profited by the contract. Thus, a toll contrac....
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....of the contract to have the analysis done by any other analyst." (3). On liquidated damages, he pointed out that in UK, such liquidated damages are pre-determined and are awarded and accepted as such in case of breach of contract. Same in the jurisdiction of UK cannot be disallowed for difficulty in quantification as to what is the quantum of loss suffered and what is the quantum of penalty involved in the case of liquidated damages as both if agreed and contracted for in advance can be enforced. However, Indian courts have treated liquidated damages as a maximum amount as has been contracted by the party within the scope of which Indian courts have exercised jurisdiction to understand what is the quantum of penalty and what is quantum of actual loss, to reduce the amount of penalty if it is found unreasonable. He relied upon Pollock & Mulla Indian Contract and Specific Relief Act, 14th Edition as below:- "Whether the sum named is liquidated damages, or the amount agreed to be paid in performance of the contract, is a matter of construction. In Tejendro Narain Singh, Bakai Singh, the defendant executed, a kabuliat by which he agreed to pay rent at rates of eight a....
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....alments. The Court of Appeal held the letter was not an exercise of option to determine the agreement, and in the absence of consensual termination of the agreement, the owner must be taken to have terminated the agreement, and it would be entitled to only one instalment. There should be no penalty without a breach of contract. A sum which is liable to fluctuate according to extraneous circumstances is not liquidated damages. Damages which are not a direct result of the breach or of any act of the defendant, or are not within the contemplation of the parties, cannot be recovered under this section. Difficulty in Assessment The fact that a precise pre-estimate of damages is difficult strengthens the presumption that the agreed sum is a genuine attempt to estimate the damages to avoid the difficulties of a trial. A good example of such a stipulation is where a lump sum is fixed for breach of a covenant, not to compete loss resulting from such breach is always uncertain in amount and difficult to prove. It has been stated: The mere fact that the damages for a breach would be very difficult to assess does not mean that the agreed sum cannot be liquid....
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....ontains any other stipulation by way of penalty. In Shiva Jute Baling Limited v. Hindley & Co. Ltd., an agreement for supply for 500 bales of jute between an Indian company and a British company contained a clause for payment of 'liquidated damages' for default at the difference between the contract rate and rate on the day following the default plus 10 as per ton, and also a provision for arbitration in accordance with the byelaws of London Jute Association. On disputes having arisen, the arbitrators in London gave an award for liquidated damages as given in the agreement, i.e. the difference in rates plus 10 s per ton. The Supreme Court held that the stipulation was valid as also the award. Both Sections 73 and 74 provide for reasonable compensation, but section 74 contemplates that the maximum reasonable compensation may be the amount which may be named in the contract, but not more, even though according to section. 73, the amount of compensation may exceed the sum named. Penalty The essence of a penalty is a payment of money stipulated as in terrorem of the offending party, the essence of liquidated damages is a genuine covenanted pre-estimat....
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....rmation; (d) a grant, assignment, or surrender of real property; (e) a creation, grant, transfer, assignment or surrender of any right; (f) a financial supply; (g) an entry into, or release from an obligation: (i) to do anything; or (ii) to refrain from an act; or (iii) to tolerate an act or situation; (h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g). 25. Subsection 9-10(2) refers to two aspects of a supply; the thing which passes, such as goods, services, a right or obligation; and the means by which it passes, such as its provision, creation, grant, assignment, surrender or release. Supplies of rights and obligations in other jurisdictions 26. In other jurisdictions, supply is also broadly defined, by first defining the term 'goods' and then treating services as anything that is not goods. For example, in the Sixth VAT Directive of the European Council ('the Sixth Directive'), a supply of services is defined as 'any transaction which does not constitute a supply of goods', and the term includes 'obligations to refrain from an act or to tolerat....
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....ave conditions attached to it whose performance might, by creative use of language, be described as a service.' 34. Mohr v. Finanzamt Bad Segeberg [1996] BVC 293 was another ECJ case in which such a finding was made. In this case, an undertaking by a farmer to refrain from milk production was found not to constitute a supply within the meaning of the Sixth Directive. 35. In Landboden, it was held that for an undertaking to be covered by the common system of VAT, it must imply consumption, and that by undertaking to reduce production, the farmer did not provide either services to an identifiable consumer, or some benefit capable of being a cost component of another person in the commercial chain. 36. Under the GST Act, there will be no GST on a supply unless it is a 'taxable supply'. It is the concept of a 'supply' itself that is the entry point into the GST system. As supply 'is defined broadly and is intended to encompass supplies as widely as possible', we consider that the undertaking to reduce production as dealt with by Landboden would be a 'supply' under paragraph 9-10(2)(g). Whether the supply would be a taxable supply would then depend on the requ....
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....ought into account in assessment of damages; be a token provided by the purchaser as 'an earnest to bind the bargain'; and provide a form of security for performance by the purchaser. 20. For a payment to be considered a 'security deposit' for the purposes of Division 99, it should have the following characteristics: * be held as a security for the performance of an obligation: see paragraphs 21 to 30; * the contract, conduct and intent of the parties to the contract must be consistent with the payment being a security deposit: see paragraphs 31 to 50; * be at risk of forfeiture upon failure to perform the obligation: see paragraphs 51 to 64; and * be a reasonable amount:8 see paragraphs 65 to 108. Held as security 21. For Division 99 to apply, the deposit must be 'held' as security for the performance of an obligation. However, the GST Act does not explain the concept of a deposit that is 'held'. 22. A deposit is 'held' when it is paid to a person in the capacity of stakeholder. Normally, in commercial situations, the supplier will be the holder of the security deposit. It makes no difference who holds the dep....
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....in a satisfactory condition at the agreed time and paying any additional or outstanding hire fees. The supplier either returns the deposit upon the return of the goods, or keeps all or part of the deposit if the goods are not returned, returned late, or returned damaged. Deposit and part payment 31. In analysing contracts, the courts have commonly described a deposit as an 'earnest' that is paid 'to bind the bargain'. A payment made as an earnest has been said to be 'a portion of something, given or done in advance as a pledge of the remainder'. This can be distinguished from paying the first instalment of the total price in a purchase contract, which is to be paid over a period of time, that is, an initial instalment payment, or a part payment. 32. In Howe v. Smith17 (Howe), Fry, LJ described a deposit in the following terms: It is not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract. 33. This view has been adopted by the Commissioner in Goods and Services Tax Ruling GSTR 2000/28,19 in relation to st....
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....ient to demonstrate the potential recipient's keen interest in entering into a purchase contract or hire arrangement. Because there is no contract the 'pre-contract deposit' is held on trust for a specified purpose but remains the beneficial property of the potential recipient. 41. A so called 'deposit' may also be paid by a potential recipient under an agreement, prior to entering into a purchase contract or hire agreement, in return for rights of pre-emption, or for a covenant. 42. In the circumstances described in paragraphs 40 and 41, even though these payments are often called deposits, the Commissioner does not regard them as security deposits for the purposes of Division 99. Neither payment has the characteristics of a security deposit as outlined in this Ruling. 43. The pre-contract deposit referred to in paragraph 40 is not a security deposit because it remains the property of the potential recipient. At the time of payment it is not paid in respect of a supply that is to occur between the parties. It is not subject to forfeiture, and does not secure any contractual obligations between the parties, because, at the time of payment, none are in exi....
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....yment of $550 is not a security deposit for the purposes of Division 99. It is consideration for the taxable supply of a covenant or undertaking of not leasing the property to anyone else. Forfeiture Deposit subject to forfeiture 51. A fundamental requirement of a security deposit is that the parties to a contract clearly understand at its commencement, either through an express term, or by implication, that the deposit may be forfeited if the recipient fails to perform the secured contractual obligations.24 It is necessary, in the Commissioner's view, that there be a mutual intention by the contracting parties to make the deposit subject to forfeiture. If this intention is not present, the deposit is not a security deposit. 52. The important consideration is the intention or understanding between the parties to the contract at its commencement. Therefore, if, at the time that the deposit was paid it was intended and clearly understood that the deposit was subject to forfeiture upon the failure of the recipient to perform their obligations, the deposit is a security deposit. 53. If this clear understanding exists between the parties at t....
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.... and has an understanding, through previous discussions with staff, of the store's commercial practice to refund deposits to valued customers. 61. Since Nick and the supplier have an understanding that deposits are not subject to forfeiture, the deposit paid by Nick is not a security deposit for the purposes of Division. Example 6: Forfeiture clause removed from contract - deposit not a security deposit 62. European Cars Pacifica (Pacifica) enters into a standard contract to sell a luxury motor vehicle to Joseph. Joseph pays a deposit of 10% of the purchase price. The standard contract contains a forfeiture clause. 63. Joseph specifically questions the forfeiture clause and requests that it be removed from the contract. Pacifica agrees. 64. As the contract has been varied to exclude the possibility of forfeiture, the deposit paid by Joseph is not a security deposit to which Division 99 applies. A deposit must be reasonable 65. For a deposit to be a security deposit for the purposes of Division 99, the amount of the deposit must be reasonable. If the amount is set too high, the courts exercising equitable jurisdiction wi....
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....ves of it through a no show, any payment for the intended supply remains consideration for that supply. Also, a cancellation fee is consideration for the intended supply if it represents payment for work done by a supplier in making the intended supply. Cancellation fees as consideration for a different supply Facilitation supply 23. If an intended supply is cancelled or there is a no show, the supplier may still have made a supply. All the things the supplier does to put itself in a position to make the intended supply, that is, to facilitate that supply, is a supply. 24. Examples of things done to facilitate the intended supply may include: * the supplier entering into obligations, and providing corresponding rights to the customer to receive another supply, usually the intended supply, (for example, a right to receive a supply of travel);[8] * making an appropriate booking or reservation or providing a ticket; * making available facilities for the use of the customer, for example, a seat at a venue to watch a performance or event; * arranging for the provision of goods or services to enable the supplier to p....
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.... a right to receive a supply that would be GST-free under either Division 38 or under a provision of another Act; * paragraph 38-85(b), which provides that a supply is GST-free if it is a supply of administrative services directly related to the supply of a GST-free education course, but only if the services are supplied by the supplier of the course; * item 4 of the table in subsection 38-190(1), which provides that the supply of certain rights covered by that item is GST-free; * item 7 of the table in subsection 38-355(1), which provides that the supply of arranging certain kinds of international transport of passengers, goods or insurance is GST-free; and * section 38-360, which provides that a supply is GST-free if the supplier makes the supply in the course of carrying on an enterprise as a travel agent and the supply consists of arranging for the making of a supply, the effective use or enjoyment of which is to take place outside Australia. 29. Similarly, a right to receive an input taxed supply is itself an input taxed supply under paragraph 9-30(2)(b). 30. The Commissioner considers that paragraphs 9-30(1)(b) and 9-30(2)....
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....s a cancellation fee and refunds $1,750 to Che Zhuan. 36. The $250 retained by Abra Cadabra is consideration for the supply of facilitation services directly related to the supply of the GST-free education course by Abra Cadabra. This supply is GST-free under paragraph 38-85(b). Example 2: supply of education course - GST-free supply 37. Following on from Example 1, Che Zhuan attends the first three months of the course but due to an illness in the family returns home. Che Zhuan does not attend the remainder of the course. 38. Although Che Zhuan does not attend part of the course, a supply of the course is still made by Abra Cadabra. The fact that Che Zhuan does not attend for the remainder of the course does not change this. The supply is a GST-free supply of the education course for which the $2,000 fee is consideration. Different goods, services or other things related to the intended supply 39. A customer may cancel an intended supply after the supplier has purchased materials or performed work to enable that supply to be made. The terms of the arrangement may, in these circumstances, provide for the charging of a cancellati....
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....r making refunds. The fee for these services is commonly a flat fee which may be referred to as a cancellation fee, administration fee, change fee or service fee. This fee is consideration for the supply of these services. 45. It does not matter whether the fee is charged separately or taken out of deposits or other monies already paid. The GST treatment is not affected by how the cancellation fee is paid. Example 4: cancellation fee as consideration for a cancellation supply 46. White Hills Enterprises Ltd (White Hills) operates a ski lodge in Australia and takes bookings for ski holiday packages. The terms and conditions as set out on its website and in its brochures state that a booking fee of $55 is charged when a booking is made and if a booking is cancelled, a cancellation fee of $33 applies for services provided in giving effect to the cancellation. Services provided to give effect to a cancellation include arranging for the reimbursement of the balance of amounts paid, informing ski instructors of the cancellation and altering various other arrangements. 47. In December, Wati books and pays $605 (including the booking fee) for a ski holid....
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....ut limiting subsection 9-10(1), a supply includes the supply of services, the creation or surrender of any right and the release from an obligation under paragraphs 9-10(2)(b), 9-10(2)(e) and 9-10(2)(g) respectively. In the context of the broad definition of supply, and having regard to the things included as supplies as set out in subsection 9-10(2), the Commissioner's view is that, if it is not consideration for any other supply, a cancellation fee may be consideration for the creation or surrender of rights and/or a release supply that occurs when an arrangement is cancelled, and/or a combination of these supplies under paragraph 9-10(2)(h). 56. The GST status of the release supply is not determined by the GST status of the intended supply. 57. The Commissioner's view outlined in paragraph 55 of this Ruling is different from a situation where a termination or cancellation payment changes the consideration for the supply. 58. If the termination payment or cancellation fee has a sufficient nexus with an earlier supply, the fee may change the consideration for the earlier supply but is not consideration for a release supply. The change in consider....
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....herefore, any cancellation fee is in the nature of damages, a penalty or compensation. These inputs and activities are, therefore, said not to fall within the meaning of 'supply' for GST purposes. 64. The Commissioner does not accept the views outlined at paragraphs 62 and 63 of this Ruling. The fact that an amount paid in relation to a cancelled arrangement might be described as 'damages', a 'penalty' or 'compensation' does not mean that the amount is not thereby consideration for a supply. An amount can have both the character of damages, a penalty or compensation and also be consideration in connection with a supply. 65. Regardless of whether an amount paid or payable is damages as properly understood (whether it is paid or payable under a liquidated or agreed damages clause or otherwise), the fundamental question to be answered in an Australian GST context is whether the amount is consideration for a supply. The classification of an amount as consideration for a supply or as damages is to be made in accordance with Goods and Services Tax Ruling GSTR 2001/4 Goods and services tax: GST consequences of court orders and out-of-court....
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....ly as there is no connection between the ex-gratia payment and any supply. Adjustment events upon cancellations 74. Prior to the cancellation of an intended supply, the supplier may have attributed the GST payable on the supply to the tax period in which part of the consideration is paid or when an invoice is issued. Conversely, the customer may have attributed the input tax credit on the acquisition on a similar basis. 75. The cancellation of an intended supply may give rise to an adjustment event. Subsection 19-10(1) states that an adjustment event is any event which has the effect of: * cancelling a supply or an acquisition; * changing the consideration for a supply or an acquisition; or * causing a supply or acquisition to become, or stop being, a taxable supply or creditable acquisition. 76. If an intended supply is cancelled, a supplier may have accounted for too much GST for that supply, or a customer may have accounted for too much input tax credit for a creditable acquisition. If this is the case, the supplier or the customer may have an adjustment. Any decreasing adjustment for the supplier, or increasing adju....
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....ged her mind and requests a refund. Dan Office Supplies agrees to the refund less a cancellation fee of $55. Under its returns and cancellation policy, a cancellation fee of $55 applies to cancellation of merchandise specifically ordered by a customer. 76G. In the June tax period, Dan Office Supplies has a decreasing adjustment of $100. It must also account for the GST of $5 on the taxable cancellation supply. Security deposits as cancellation fees 77. Special rules in Division 99 provide that a deposit held as security for the performance of an obligation (security deposit) is not treated as consideration for a supply unless the security deposit is forfeited because of a failure to perform the obligation, or it is applied as all or part of the consideration for a supply. 78. A contract may provide for the forfeiture of a security deposit if a customer cancels the contract. In these cases, under Division 99, the security deposit is treated as consideration for a supply when the deposit is forfeited. 79. In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd (Reliance Carpet), the High Court accepted the finding by the Administ....
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....and car hire, the cost of each and makes all the necessary bookings. Upon confirmation of all the bookings at the time they are made, and in accordance with the requirements of Cyrus, David pays a security deposit of 10%. Cyrus requires payment of the balance 30 days before the date of departure. 86. Under the terms of its arrangement with the overseas hotel, Cyrus is required to pay a security deposit to the hotel. Cyrus is also liable to pay a cancellation fee to the hotel if there is a cancellation within 10 days of the intended stay. 87. The contract between Cyrus and David has a cancellation clause in the following terms: Deposits, Final Payments, Cancellations and Refunds (a) You must pay a deposit equal to 10% of the total cost at the time of booking your tour. If you cancel your booking prior to your final payment you will pay a cancellation fee equal to the amount of the deposit you have paid. (b) You must pay the balance of your tour cost 30 days before the date of your travel. If you cancel your booking after your final payment you will pay a cancellation fee as follows: For cancellations made: * 15 to 30 day....
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....r has not purchased the agreed quantity of the goods in a particular quarter. They submit that the said additional amount so received would be covered under Section 4 of the Central Excise Act, 1944 as value of the excisable goods. The only relationship between the Respondent and the overseas buyer of the goods is goods manufactured and sold. Since the goods are manufactured and exported, no additional central excise duty is also payable on the additional amount received by the Respondent. A.2 It is further submitted that the Central Excise Authorities have not initiated any proceedings against them for demanding any central excise duty on receipt of such additional amount. Therefore, demand raised in the present case under the service tax law is not sustainable at all. They rely on CBIC Circular dated 10.11.2014 wherein it is clarified that such additional amount received by the assessee would be treated as part of the value for the purposes of central excise duty. The relevant part of the said Circular is extracted below: 5. In view of the same, it is clarified that: (a) In the months where there is a supply of gas, all elements of consideration such as....
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....p the Respondent is having with the overseas buyer is supply of goods. They have merely supplied the goods and transferred the title in the goods to the overseas buyer and therefore, it will get excluded from the definition of service itself. B.3 The only activity carried out by the Respondent is to manufacture goods for the overseas buyer and therefore, they have not provided any service to anyone. As per the provisions of negative list as mentioned in Section 66D of the Finance Act, 1994 (reproduced below); SECTION [66D. Negative list of services. - The negative list shall comprise of the following services, namely :- (f) services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption;" The additional amount received for manufacture, sale and export of goods for the overseas buyer would not be classifiable as service. The demand of service tax is not sustainable on this ground as well and the appeal filed by the revenue authorities is liable to be dismissed on this ground. Once the services are covered under Rule 3 of Place of Provision of Services Rules, 2012....
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....der: 5.5.2 What are the criteria to determine if a service is 'directly in relation to' immovable property located in taxable territory? Generally, the following criteria will be used to determine if a service is in respect of immovable property located in the taxable territory (i) The service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable property; (ii) the service is physically performed or agreed to be performed on an immovable property (e.g. maintenance) or property to come into existence (e.g. construction); (iii) the direct object of the service is the immovable property in the sense that the service enhances the value of the property, affects the nature of the property, relates to preparing the property for development or redevelopment or the environment within the limits of the property (e.g. engineering, architectural services, surveying and sub-dividing, management services, security services etc); (iv) the purpose of the service is: (a) the transfer or conveyance of the property or the proposed transfer or conveyance of the property (e.g., real estate services in r....
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....r and that too for consideration. D.2 Section 66E(e) was inserted in statutory provisions because what is taxable under the Service tax law is activity carried out. It means that some activity is carried out and it refers to some positive act of doing something for consideration. There can be doubt that one refrains or abstains from doing something may not be covered by the term "activity carried out". Secondly, if there is guarantee like insurance contract, maintenance contract, someone can say that positive activity is carried out. D.3 Section 66E(e) of the Finance Act, 1994 relating to the declared service- 66E. 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; The charging section under Section 66B read with declared services signifies that there should be an agreement between the service provider and service recipient for provision of services. D.4 The statutory provision is a long sentence and correct way to interpret the same is that: (a) Agreeing to the obligation to refrain from an act, ....
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....tion to the first party for doing or abstaining from such an act. Such contractual arrangement must be an independent arrangement in its own right. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration. 5. The issue also came up in the CESTAT in Appeal No. ST/ 50080 of 2019 in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the hon'ble Tribunal relied on the judgement of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur {2021(55) G.S.T.L 549(Tri-Del)}. Board has decided not to file appeal against the CESTAT order ST/A/50879/2022-CU[DB], dated 20.09.2022 in this case and also against Order A/85713/2022, dated 12-8-2022 in case of M/s Western Coalfields Ltd. Further, Board has decided not to pursue the Civil Appeals filed before the Apex Court in M/s South Eastern Coalfields Ltd. supra (CA No. 2372/2021), M/s Paradip Port Trust (Dy. No. 24419/2022, dated 8-8-2022), and M/s Neyveli Lignite Corporation Ltd. (CA No. 0051-0053/2022) on this ground. 6. In view of above, it is clarified that the activities contemplated under sec....
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....s such a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker, or an RWA tolerating the use of loud speakers for early morning prayers by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation. c. Agreeing to the obligation to do an act - This would include the case where an industrial unit agrees to install equipment for zero emission/discharge at the behest of the RWA of a neighbouring residential complex against a consideration paid by such RWA, even though the emission/discharge from the industrial unit was within permissible limits and there was no legal obligation upon the individual unit to do so. 3. The description "agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" was intended to cover services such as described above. However, over the years doubts have persisted regarding various transactions being classified under the said description. 3.1. Some of the important examples of such cases are Service Tax/GST demands on - i. Liquidated damages paid for breach of contra....
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....rvice of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. There must be a necessary and sufficient nexus between the supply (i.e. agreement to do or to abstain from doing something) and the consideration. 6.1 A perusal of the entry at serial 5(e) of Schedule II would reveal that it comprises the aforementioned three different sets of activities viz. (a) the obligation to refrain from an act, (b) obligation to tolerate an act or a situation and (c) obligation to do an act. All the three activities must be under an "agreement" or a "contract" (whether express or implied) to fall within the ambit of the said entry. In other words, one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either ....
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....he legislation to tax declared services in India is significantly different than other tax jurisdictions. From the language employed in India for taxation of such services, the legislature has consciously used the words "Agreeing to the obligation". This makes the Indian law narrower than laws in other tax jurisdiction. This can be explained as follows. E.2 The 2nd European Council Directive (on harmonisation of legislation of Member States of European Union) issued on 11.04.1967 vide Point No. 9 to the Annexure to the said Directives clarified as under: 9. Regarding Article 6(1) The definition of Provision of services given in the paragraph involves classification of inter alia the following as a provision of services: - the assignment of intangible property; - the carrying out of an obligation to refrain from doing something; - the carrying out of a service rendered by order of a public authority - the carrying out of work on goods if such work is not considered as a supply within the meaning of Article 5(2)(d) and (e) as, for example current maintenance work, the laundering of linen etc.; E.3 The 6th Council....
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....ing outside the contract are outside the scope of Section 66E(e) of the Finance Act, 1994 for the reason that the law in India covers only those transactions which are agreed to be performed as per Indian Contract Law. The Law of obligation is wider than law of contract. For this proposition, a leading commentary of Salmond on Jurisprudence at Para 121 can be referred to wherein it is explained as under: "121. The nature of obligations Obligation in its popular sense is merely a synonym for duty. It's legal sense derived from Roman law, differs from these in several aspects. In the first place obligations are nearly one class of duties, namely those which are the correlatives of right in personam. An obligation is the vinculum juris, or a bond of legal necessity, which binds together 2 or more determinate individuals. It includes for example the nutty to pay a debt to perform a contract, or to pay damages for a Todd but not the duty to refrain from interference with the person, property, or a reputation of others. Secondly, the term obligation is in law the name, not merely of the duty, but also of the correlative right. It denotes the legal relation or vinculum juris ....
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....eventing breach of contract or non-performance and are thus mere 'events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act,, such payments will not constitute 'consideration' and hence such activities will not constitute "supply" within the meaning of the Act. Taxability of these transactions is discussed in greater detail in the following paragraphs. "Consideration" is taxable under service tax. When a contract is broken, the suffering party will be entitled to "damages". Damages are not consideration and therefore not taxable in service tax F.1 An activity carried out for consideration is chargeable....
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....ming on a street does an activity without consideration even though passersby may drop some coins in his bowl kept after feeling either rejoiced or merely out of compassion. They are, however, under no obligation to pay any amount for listening to him nor have they engaged him for his services. On the other hand if the same person is called to perform on payment of an amount of money then the performance becomes an activity for a consideration. Provisions of free tourism information, access to free channels on TV and a large number of governmental activities for citizens are some of the examples of activities without consideration. Similarly there could be cases of payments without an activity though they cannot be put in words as being "consideration without an activity". Consideration itself pre-supposes a certain level of reciprocity. Thus grant of pocket money, a gift or reward (which has not been given in terms of reciprocity), amount paid as alimony for divorce would be examples in this category. However a reward given for an activity performed explicitly on the understanding that the winner will receive the specified amount in reciprocity for a service to b....
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....ontract, there should be an offer, an acceptance by the parties and agreed consideration for the performance of the contract. In case of receipt of compensation for breach of the contract, there is no offer, no acceptance and there cannot be consideration. Reference can be made to leading commentary on Indian Contract Act, 1872 by Pollock & Mulla - 14th Edition wherein Section 73 explains as under: S.73. Compensation for loss or damage caused by breach of contract - when a contract has been broken, the party who suffers by such breach is entitled to receive from the party who has broken the contract compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach which parties knew when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. Compensation for failure to discharge obligation resembling those created by contract - When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured b....
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....the goods, the market price of the goods is Rs.80. The B seller is entitled to compensation of Rs.20 from the purchaser A in this case. G.8 The illustration (d) to Section 73 of the Indian Contract Act, 1872 is also relevant: (d) A contracts to buy B's ship for 60,000 rupees, but breaks his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise. G.9 The illustration (f) to Section 73 of the Indian Contract Act, 1872 is also relevant: (f) A contracts to repair B's house in a certain manner, and receives payment in advance. A repairs the house, but not according to contract. B is entitled to recover from A the cost of making the repairs conform to the contract. G.10 The illustration (m) to Section 73 of the Indian Contract Act, 1872 is also relevant: (m) A sells certain merchandise to B, warranting it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way ....
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.... there must be in effect, if not in terms, an undertaking to answer for resulting special damages The above can be explained by way of an example. Suppose on breach of contract between seller A and buyer B, the seller A has to pay compensation to buyer B. Both the parties agree to pay compensation as per their agreed terms and are not entering in to a separate contract for compensation. The liability to pay damages flows from the Contract Act itself and not from the contract between the parties. G.13 The below Paragraph enunciates the principle of Section 73 of the Indian Contract Act, 1872 so far as breach of contract is concerned as under: Breach of contract This section applies only where a contract has been broken and breach of a contract must be proved before setting about the question of damages. Whether there is a breach cannot be decided by a party and it must be adjudicated and must be proved. No damages can be awarded by the court without coming to any conclusion about breach merely on the ground that the defendant has been profited by the contract. The said commentary further explains as under: In the case of an alter....
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....lear that once the contract is broken, future performance of the contract need not be necessary. A new obligation to pay damages arises under the Indian Contract Act itself and not from the contract. G.15 The said commentary further explains the liquidated damages and unliquidated damages as under: Liquidated and Unliquidated Damages Damages are said to be liquidated when they have been agreed and fixed by the parties. It is the sum which the parties have agreed by contract as payable on default of one of them. Section 74 applies to these damages. In all other cases, the court quantifies or assesses the damages or loss such damages are unliquidated. It is possible that the parties fix an amount as a liquidated damages for a specific type of breach only, then the party suffering from other type of breach may sue for unliquidated damages arising from such breach. Where, under the terms of the contract, it was stipulated that if the goods were not supplied before the date fixed, the purchaser had a right to claim damages at the rate agreed and if they were not delivered within 7 days of the date fixed, then the purchaser was entitled to cancel the c....
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....nstrument of the same nature, or under the provisions of any law or under the orders of the central government or of any state government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable upon breach of the condition of any such instrument to pay the whole sum mentioned therein. Explanation. - A person who enters into contract with government does not necessarily thereby undertakes any public duty or promise to do an act in which the public are interested." G.18 Reference can be made to commentary on Section 74 of the Indian Contract Act, 1872 by Pollock & Mulla (14th Edition). It is explained as under: "The Principle The parties to a contract may agree at the time of contracting that, in the event of a breach, the party in default shall pay a stipulated sum of money to the other, or may agree that in the event of breach by one party any amount paid by him to the other shall be forfeited. This sum is a genuine pre-estimate of damages likely to flow from the breach. It is called 'liquidity damages. If it is not a genuine pre estimate of the loss but an amount intended to secure per....
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....erms of the contract. (iv) When the amount of compensation is ascertained, it is termed as liquidated damages. So far as the law in India is concerned, there is no qualitative difference in the nature of liquidated damages and unliquidated damages. (v) Section 73 and Section 74 of the Indian Contract Act, 1872 do not overlap each other. References to other leading commentaries on the subject H.1 In the commentary on Law of Contract, by G. C. Cheshire, 7th Edition, it is explained as under: Consequences of anticipatory breach In the event of "anticipatory breach", the innocent party has an option; he may either accept the repudiation and enforce the appropriate remedy at once or he may ignore the repudiation and wait until the time for performance arrives. The essential point is that such a repudiation constitutes violation of the contract in omnibus and entitles the other party if he is so minded to sue immediately for its breach. H.2 On the "effect of breach", it is explained as under: A breach of contract, no matter what form it may take, always entitles the innocent party to maintain an action for damages; b....
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....er A for performance of the contract and seller A agrees to pay compensation then, so far as value of 6 units is concerned, it will be treated as value of the supply only. H.7 The difference between liquidated damages and penalty is explained as under: "The parties to a contract may agree beforehand what sum shall be payable by way of damage in the event of breach. For example, a builder agreed that he will pay US$5 a day for every day then if the building remains unfinished after the contractual date for completion, a sum fixed in this manner falls into one of two classes. First, it may be a genuine pre estimate of the loss that will be caused to one party if the contract is broken by the other. In this case, it is called liquidated damages and it constitutes the amount, no more and no less than the plaintiff is entitled to recover in the event of breach without being required to prove actual damage. Thus, Liquidated damages means the sum which the parties have by the contract assessed as the damage to be paid whatever may be the actual damage. Secondly it may be in the nature of a threat held over the other party in terrorism a security to the ....
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....though, else will be seen, it will still be necessary to refer to those primary obligations in assessing the extent of the secondary obligations for example the major of damage is, new from the party in default. Remedies of breach of contract These remedies fall under three heads; 1 every breach of contract entitles the injured party to damages for the loss he has suffered. 2 if the injured party when the breach occurs has already done part though not all of what he was bound to do under the contract, he may be entitled to claim the value of what he has done. In that case, he is said to sue upon quantum meruit. Damages except in the case of a debt, the repayment of which may be specifically not forced at common law, the common law remedy for breach of a contractual promise is that of damages. Assessment of Damages by the parties The parties to a contract not infrequently assess the damages at which the rate of breach of a contract by one or both of them and introduce their assessment into the terms of the contract. By so doing, however, they do not exclude the application of the rule that damages for breach are....
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....ted at the money value the law ought to give him some redress and so it does; it says that he may claim quantum meruit, the reasonable value of the work done. If a man agrees to deliver me 100 quarters of corn, and after I have received 12 quarters, I decline taking anymore, he is at all events entitled to recover against me the value of 12 that I have received. The right to claim quantum meruit does not arise out of the contract as the right to damage does; it is a right conferred outside the contract by the law as a quasi contractual right therefore and not a contractual one and it would be more correct to describe it as an incident of rather than the remedy for the breach of a contract. Breach of a contract is only one of several occasions which give rise to quantum meruit claims and that such claims are sometimes quasi contractual as here but that sometimes they are genuinely contractual. First, a quantum meruit claim is only available if the original contract has been discharged. The contract must have been broken by the defendant in such a way as to entitle the plaintiff according to the principles discussed in Chapter XV, to regard himself as discharged fro....
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....lars/ guidelines issued in foreign tax jurisdictions I.1 Any sum received whether it is consideration of the contract or compensation/ damages for the breach of the contract is governed by similar provisions in India and other tax jurisdictions like Europe, UK and Australia. References can be made to ascertain whether the sum received is consideration for any services or not. HMRC Guideline - VATSC05910 - Consideration: Compensation and liquidated damages that are consideration: When are compensation payments consideration for a supply Historically, HMRC took the view that payments described as compensation were typically outside the scope of VAT. One authority for this was the CJEU case of Société thermale d'Eugénie-les-Bains (C-277/05) http://curia.europa.eu/juris/document/document.jsf? docid=62752 & mode=req & page Index=1 & dir = & occ=first & part=1 & text=& doclang=EN & cid=15243477). In the very particular circumstances of that case, the Court concluded that the deposit received by the hotel was not a part payment for the accommodation, and when a customer cancelled a booking, it was to be treated as outside the scope of VAT as....
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....additional fee for hire. Similarly, if a car is hired for a period of one week and is due to be returned by, say 9:00 AM on Monday but is not in fact returned until 5:00 PM on the following Tuesday, a charge for a late return will normally be made. Such charges are generally designed to both deter the person hiring the car from bringing it back late and to compensate the Hier company for the additional use. The charge will be subject to VAT as it's for the supply of the car, and the customer is aware that an additional charge will be made and how much that charge will be or how the charge will be calculated. Although the use goes beyond that period which is agreed with the customer at the outset of the contract, it is an additional hire fee similar to that in JG Leigh t/a Moor Lane Video. If the customer were to write off the car and the supplier charges fee for doing so, this will not be further consideration for the hire of the car. The supplier does not agree that the customer can write the car off and this is not something one would normally expect as part of the supply. The contract may envisage the possibility that the car will be written off and provide for....
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.... reciprocity needed to link it to the supply is lacking. If on the other hand, it is effectively an additional charge for occupying a space, then it would be a standard rated supply. The level of the fee for breaching the parking terms in comparison to the standard parking fee may be indicative of which category a particular fine would be in. I.2 The principle that emerges from the above is that many times it may be difficult to ascertain or differentiate between compensation and consideration. However, if there is direct link or reciprocity between the amount paid and the beneficial activity carried out, then it will be consideration of supply. I.3 Further reference can be made to HMRC guideline on VAT Supply and Consideration on early termination of contracts. HMRC Guideline - VATSC05920 - Consideration: Compensation and liquidated damages that are consideration: Compensation Payments: Early termination of contracts HMRC's Policy is to treat payments arising out of early contract termination as a further consideration for the contracted supply where the payments are linked to that supply which will normally be the case. Businesses must account ....
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....s, payments that arise from a contract which is broken due to a cause attributable to the customer, being charged to cover the cost to the supplier of making the supply available, or equivalent to what would have been charged for the supply had it gone ahead as intended will be further consideration for that supply. I.4 The principle that emerges from the above is that if any sum is received by the supplier on default of the customer and the amount received is equivalent to the supply, if made available by the supplier, then it can be considered as consideration of the supply. I.5 Further reference can be made to HMRC guideline on VAT Supply and Consideration on early termination of contracts. HMRC Guideline - VATSC05930 - Consideration: Compensation and liquidated damages that are consideration: Liquidated damages Agreements that allow for early termination will invariably include related clauses that provide a formula for payment of compensation in the event of such termination. These amounts are generally expressed as being compensation for loss of earnings and are often referred as a liquidated damage. In the light of MEO and Vodafone Portuga....
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....so, then they may reduce the price they charge for the supply, as what is being supplied has been altered. This will result in less VAT being charged if the supply is taxable. If the adjustment is made retrospectively, the supplier must adjust the VAT they have accounted for under VAT Regulation 38. Price adjustment in these circumstances are common practice and if the customer is asked to pay less it is likely that in economic reality the price has been reduced to reflect the lower value of what was actually provided. If the price is not adjusted, but the supplier agrees to pay liquidated damages to compensate the customer for the actual loss suffered as a result of the breach, the payment will be outside the scope of VAT. This might happen where the knock-on effect of the supplier not fulfilling the supply as originally agreed result in substantive costs to the customer for which they seek recompense. The payment may bear little relation to what was provided and if this is the case, the payment will not be sufficiently linked to the supply to be treated as reduced consideration. Australian Tax Guidelines - Taxability of sum received on out of court settlement J.....
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....nt to a service. He commented that: 'any payment, except perhaps a gift, will have conditions attached to it whose performance might, by creative use of language, be described as a service.'[F17] 34. Mohr v. Finanzamt Bad Segeberg [1996] BVC 293 was another ECJ case in which such a finding was made. In this case, an undertaking by a farmer to refrain from milk production was found not to constitute a supply within the meaning of the Sixth Directive. 35. In Landboden, it was held that for an undertaking to be covered by the common system of VAT, it must imply consumption[F18], and that by undertaking to reduce production, the farmer did not provide either services to an identifiable consumer, or some benefit capable of being a cost component of another person in the commercial chain.[F19] 36. Under the GST Act, there will be no GST on a supply unless it is a 'taxable supply'. It is the concept of a 'supply' itself that is the entry point into the GST system. As supply 'is defined broadly and is intended to encompass supplies as widely as possible'[F20], we consider that the undertaking to reduce production as dealt ....
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....oes not constitute a supply under section 910 of the GST Act. Example - payment for an earlier supply- 102. In the Widget Company example at paragraph 47, the out-of-court settlement reached with the retailer provides for the retailer to make payment in full to Widget for the toys. The supply of the toys is an earlier supply and there is a sufficient nexus between it and the payment. The payment is consideration for that supply. 103. A payment made under a court order or out-of-court settlement may also result in an effective reduction in the price of an earlier supply, perhaps to nil. Where this happens, an adjustment event may be required (refer paragraphs 126 to 136 on GST consequences). Example - reduction in the price of an earlier supply 104. The retailer paid Widget Company the full price for the toys, but subsequently discovered they were cheaper toys than it believed it was purchasing. The dispute was settled with Widget agreeing that the price charged was excessive for the toys. The terms of the settlement provided for Widget to pay back to the retailer an amount that reflects the price difference between the two products. The ....
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.... the dispute. During the discussions, a settlement is reached which provides that Triple dot will make a one off payment of $200,000 to Ozy Rockers. The payment is for the past infringement and the ongoing right for Triple dot to use the signature tune. 122. Apportionment is necessary for the correct GST consequences to attach to the supply of the ongoing right to use the copyright. A reasonable approach is required for calculating the necessary apportionment. In the absence of any further information, it may be reasonable to apportion $50,000 to damages for the breach of contract (which would not attract GST) and $150,000 to the use of the copyright (a taxable supply). An alternative basis for apportionment may be to use industry standards to calculate copyright fees. Australian Tax Guidelines - Taxability of sum received as cancellation fees K.1 There could be consequences of GST liability on payments made when an arrangement under which a particular supply was intended to be made, does not proceed in the manner originally contemplated. In such an event, the suffering party receives cancellation fees. The guidelines issued by Australian Taxation Office ....
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....ut is instead connected with the intended supply. 26. If the intended supply does not proceed because of a cancellation or no show, a facilitation supply is still made to the customer. Any cancellation fee payable by the customer may be consideration for this facilitation supply, which is a different supply to the intended supply. 26A. An example of this is Commissioner of Taxation v. Qantas Airways Ltd (Qantas), in which the High Court considered whether payments received by Qantas Airways Ltd from prospective passengers for flights booked but not taken constituted consideration for a taxable supply. After looking at the specific terms and conditions of carriage, the High Court held (4:1): The Qantas conditions and the Jetstar conditions did not provide an unconditional promise to carry the passenger and baggage on a particular flight. They supplied something less than that. This was at least a promise to use best endeavours to carry the passenger and baggage, having regard to the circumstances of the business operations of the airline. This was a 'taxable supply' for which the consideration, being the fare, was received. 27. If the actual supply....
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....ion, or it is applied as all or part of the consideration for a supply. 78. A contract may provide for the forfeiture of a security deposit if a customer cancels the contract. In these cases, under Division 99, the security deposit is treated as consideration for a supply when the deposit is forfeited. 79. In Federal Commissioner of Taxation v. Reliance Carpet Co Pty Ltd (Reliance Carpet), the High Court accepted the finding by the Administrative Appeals Tribunal that upon entry into the contract the taxpayer had entered into an obligation to do the things it was bound to do under the contract. The High Court also found that, in that case, the supply had been made by the taxpayer before the forfeiture of the security deposit. Further, the High Court accepted that the supply was made in advance of the failure by the purchaser in performance of the terms of the contract which led to the forfeiture of the security deposit to the taxpayer. 80. The High Court found that the security deposit was consideration for the supply, as the connection between the payment of the security deposit and the entry into the contract could be 'readily seen' in the circu....
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.... tolerating LXD's act of controlling the Respondent's manufacturing capacity, LXD agreed to (i) off take the products manufactured in the Respondent's factory and (ii) pay to the Respondent the agreed remuneration. 12.2 The other important factor in this case is that the Respondent themselves have declared in their invoice that the gross value charged therein to LXD is in respect of "Declared Service" in terms of clause (e) of Section 66E of the Finance Act, 1994. Copy of one such invoice is reproduced below:- The Adjudicating Authority in para 16 of his order has also considered the issue of whether the idle cost compensation received by respondent by respondent towards underutilization of installed production capacity of Jhagadia factory and classified by them as 'Declared Service' would qualify as 'export of service' in terms of Place of Provision of Services Rules, 2012? The Respondent has not in any manner denied the above declaration made by them in their invoices. 12.3 The remuneration specified in the agreement consists of the Manufacturing Fee to be paid on per unit basis of the product delivered by the Respondent and Idle Cost Compensation based....
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....blishments of a distinct person in accordance with item (b) of Explanation 3 of Clause (44) of Section 65B of the Finance Act, 1994. As the relationship between the Respondent and LXD does not satisfy this condition, the said payment, cannot be termed as payment towards Export of Service. 12.6 In the case of M/s. Hyundai Motor India Pvt. Ltd. reported at 2024(5) TMI 1339 - CESTAT Chennai, an issue came up for decision was whether Service tax demand is sustainable for the period after 01.07.2012 on the consideration received by the appellant for Extended Warranty Service (EWS)? The Tribunal at para 8.4 of the Order dt.27.05.2024, observed that 'It is to be seen that while offering extended warranty services, the appellant does not render any actual repair work of the vehicle. The consideration (upfront charges) is received for offering to repair the vehicle in the event of happening of a requirement to repair the vehicle in future. It is more like assurance given to a customer.' Hon'ble Tribunal concludes at para 8.8 in this words - 'We have no quarrel that when actual repair work is done, the activity would fall under WCS as defined under Section 65B(54). However, in the present....
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....reeing to the obligation'. 12.8 During the last hearing, two compilations on this aspect pertaining to laws similar to Section 66E(e) of the Finance Act, 1994, from the European Union Laws and Australian Laws. He drew attention of the Bench towards major reference points from the European Union Laws. The Court of Justice of the European Union (CJEU) has given various judgements clarifying as to when such obligations for refrain/tolerate/do type supplies become taxable supply for consideration. One such decision dt. 03.09.2015 by the CJEU is in the case of Asparuhovo Lake Investment Company where the issue was whether supply of service covers cases involving subscription contracts for Consulting Services where a supplier with qualified personnel available for consulting services agrees to be on call for the customer throughout the period of Contract and has agreed not to enter into similar contracts with competitors of the customer. The CJEU held that supply of services includes subscription contracts for supply of consulting services under which the supplier has agreed to be available to the customer during the term of the contract. He also referred to another major judgement by....
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....r the subsequent supply by MBI Properties for toleration or permission to occupy. The High Court held that the rent payable by the tenants was in part, the price for MBI Properties supply of observing and continuing to observe the covenant of quiet enjoyment. The High Court's judgement in MBI Properties acknowledged the conceptual complexity of treating passive toleration as a supply. 12.10 In the case of the Respondent, Learned AR submits that there is no passive toleration involved. It is an active toleration as encompassed in the agreement entered upon by both LXD and the Respondent, with inbuilt remuneration package involving two components - Manufacturing Fee & Idle Cost Compensation, which is very much a part of the agreement. The toleration and the consideration are not for non-supply or defective supply of products, but for holding the manufacturing capacity consisting of the Plant & Machinery of the Respondent exclusively for LXD for the contracted period. Thus, LXD was obliged under the Agreement to pay the Respondent a fixed sum (comprising either the Manufacturing Fee or the Idle Cost Compensation or partly both) for holding the manufacturing capacity of the Plant & ....
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....of such document alone, it gets established and same can be taken as admission by the respondent that they knew it was taxable and the taxability as a declared service existed and therefore, the only issue which has survived is in relation to place of provision of services. On the other hand, respondent have vigorously attacked that service was provided within the scope of "deemed service" on the basis of elaborate arguments which have been duly put forth with the support of case laws by either side to assert their respective positions. It was initially observed by the Bench that most of the decisions cited by either side, only go to indicate as to what is not a "declared service" and how the specific services indicated in the decisions were not in the nature of declared service so as to fall within the phrase of clause (e) of Section 66E i.e. 'agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act'. This Bench rather than opting to pronounce on the issue of why the impugned sum paid/compensation was/was not within the ambit of "declared service", which has so far been the approach in most of the decisions on the subject, including va....
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....on the definition of consideration as is available in Section 2(d) of the Indian Contract Act, 1872 which reads as follows:- "Section 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" 14.3 It is thus clear that to be an "act" for valid consideration under the contract law, the consideration should have moved firstly at the desire of the promisor and then from the promisee side, some act or abstinence should be done and it is only such act or abstinence or promise which is called "consideration" for the promise. It is thus clear that "damages" including "liquidated damages" are not done at the desire of the promisor, but normally are outcomes of accidental acts or undesired actions not done deliberately, which lead to a situation where damages become available as remedy to the party, which has suffered any loss due to such undesired action on the part of second party. Therefore, damages are a consequence of breach and not part of consideration for pro....
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....agreement to refrain can be taken at any time before the first contract ends. Sometimes, it may cause difficulties to cull out as to how much is the amount for non-compete clause and how much is for the normal service, unless it is specifically mentioned in the contracts but a consideration for non-compete clause will be taxable is not doubted. - Payments received for refraining from enforcing easements like some sun light by a house owner of already existing house, or industrial unit refraining from manufacturing activities during certain hours against compensation paid by a neighbouring school to avoid noise can be considered, as such activity of refrain. - Agreeing to the obligation or tolerate an act or a situation can include activities such as shopkeeper allowing a hawker to operate from the common pavement in front of his shop for some monthly payment by the hawker, or a shopping mall management allowing shopping counters to operate in common areas to the entrance hall or contracts for such stalls allowed after making payments to mall management. Agreeing to the obligation to do an act would include the cases where an industrial unit agrees to install zero ....
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....d amount recovered from an employee leaving employment before the agreed period as it was basically a compensation agreement not enforced by one of the parties but was eventually an outcome of breach of contract or its terms. - Compensation received by previous allottees of coal blocks for cancellation of their licenses pursuant to any Supreme Court order as such amount was within the nature of compensation for breach of contract of allotment already done. - Cheque dishonour fine /penalty charge by Power Distribution Company from the customers as the same is in the nature of fine/penalty depending upon contract, with the rider that the cheque will be duly honored and such fine/penalty being in the nature of compensation for breach. - Late payment charges collected by any service provider for late payment of debts, as the same are in the nature of compensation for not making payment in time and therefore committing the breach. Fixed charges collected by power generating company from the state boards or by discoms from individual customer for supply of electricity, as this amounts to breach of an agreement with the minimum power consumption every month made....
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....manufacture, filling, packaging, labelling, safe and secure storage and shipment of PRODUCTS INSTRUCTIONS shall mean the proprietary know-how and information of LXID (including inter alia all experiences, physical data, specifications for products and Input materials, control methods, analytical techniques, safety practices and techniques for evaluation and testing of finished products) provided by LXD to LIPI from time to time for the manufacture of PRODUCTS and for their filling, packaging, labelling, safe and secure storage and shipment. MANUFACTURING FEE shall have the meaning ascribed to it in §2 (1) a. below. MARK -UP shall be a factor applied to the cost of INPUT MATERIALS, PRODUCTION COST, SELLING EXPENSES GERNERAL, ADMINISTRATION EXPENSES, OTHER COSTS to arrive at the MANUFACTURING FEF AND to the fixed manufacturing cost allocated to the IDLE CAPACITY to arrive at the IDLE COST COMPENSATION so as to ensure that LIPL receives a fair and adequate compensation for the function performed, assets employed and risks assumed under this Agreement that meets arm's length principles. Unless amended by the PARTIES mutual written agreement, the MARK-UP shall be ....
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.... (5) All INPUT MATERIALS needed for the manufacture of PRODUCTS shall be purchased by LIPL. However, any change by L.IPL of any supplier of INPUT MATERIALS is subject to prior approval by LXD. which approval shall not be unreasonably withheld. §2 Remuneration (1) LXD shall remunerate LIPL's manufacturing activities to be rendered under this AGREEMENT by paying a MANUFACTURING FEE and an IDLE COST COMPENSATION (if any), whereby a. The MANUFACTURING FEE shall be paid per unit of PRODUCT delivered to LXD and shall cover cost of INPUT MATERIALS, PRODUCTION COST, SELLING EXPENSES, GENERAL, ADMINISTRATION AND OTHER COST plus the MARK UP b. Before the beginning of each quarter, the PARTIES shall mutually determine the MANUFACTURING FEE to be invoiced by LIPI upon delivery per unit of PRODUCT. The said MANUFACTURING FEE shall remain applicable until replaced by a revised MANUFACTURING FEE. c. At the end of each quarter, LIPL shall determine in its equitable discretion whether the MANUFACTURING FEE determined in accordance with $2 (1) b. has covered all actual cost positions as set out in Appendix 2, including the MARK-UP, taking the ARM'....
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.... the department were considered to be in the nature of consideration for providing pre-decided manufacturing capacity and in the event of same not having been fully utilized, the consideration as per the contract was liable to be paid which as per the department was taxable. Whereas on the basis of same terms of the contract, the respondent emphasizes with the support of rulings, that the same was by way of, for idle capacity and thus compensation of breach of contract and therefore not taxable. We have gone through the terms of the contract as well as various rulings to consider if the ideal capacity compensation towards the fix manufacturing cost, can be considered as consideration. The fact is that respondent relying upon the promise made by its parent company in Germany, has created such capacity. In fact, there has been no breach or discharge of agreement and idle capacity as remuneration is duly invoiced and agreement allowed to continue from quarter to quarter. This distinguishes it from a contract breached, as breach leads to discharge of a contract and requirement for entering into a fresh contract arises. 14.7 Here, the principle is not of compensation for damages as t....
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....tained in 2006 Council Directive of the common system of value added Tax dated 28.11.2006 in Article 25, the phrase "obligation to refrain from an act, or to tolerate an act or situation". Similarly, in Australian New Tax System of Goods and Service Tax Act, 1999, Section 9.10 "entering into or release from an obligation" has been mentioned. We are therefore, not convinced with the meaning assigned by the learned Senior Counsel that in Indian context, the meaning is rather narrow and restricted. We find that the phrase "agreeing to an obligation" exists in most of the cited legislations, with different syntax but this makes no difference to the scope of the obligations. We have by way of example taken that an obligation as in the nature of non-compete clause can be undertaken at any time and not necessarily at the time when initial obligation was undertaken. For example, a service contract may not initially provide for a non-compete clause but an obligation may be undertaken for consideration at the time of exiting the service contract. Again, every agreement or promise involves some obligation or the other on part of either promisor or promisee, and therefore "agreeing to an oblig....
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....) The Lower Authorities have invoked the provision of Section 66E(e) of the Act which relates to definition of declared services. The same is to the effect that "(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act". Provisions of Section 65B(44) of the Act refers to the process amounting to manufacture or production of goods on which the duty is leviable under Section 3 of the Central Excise Act, 1944 as on service. However no Service Tax is leviable on such services, as the same is covered under the negative list. Further, agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is a declared service on which the Service Tax is leviable under Section 66B of the Act. 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 subclause proceeds to state various active and passive actions or reactions which are declared to be a servic....
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....either party. 14.11 In South Eastern Coalfields Ltd. vs. Commr. of C. Ex. & ST Raipur reported at 2020 (12) TMI 912 CESTAT New Delhi, the matter pertained to breach of contract for non-lifting the quantity of coal. Therefore, there was a breach of terms and conditions for which compensation was paid and the same was held as damages and therefore not liable to service tax. In this case, the respondent has done something in pursuance of the contract and earmarked capacity in the factory and it was agreed beforehand that remuneration will include an element of unutilized capacity as part of overall remuneration. The possibility of variance in quantum of remuneration cannot be equated with an uncertainty of an event leading to consequence of damages. Remuneration was only made dependent on the quantum of unutilized capacity, and therefore as per the definition of Section 2(d) of Indian Contract Act, there was definitely a consideration and also the capacity was created at the behest of the promiser that is the "Principal" in Germany. Thus here, the principle and situation are different from the cited case as consideration existed and situation was pre-envisaged, only quantum of r....
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....roducts for LXD at its site in accordance with the instructions and the specifications and LXD agrees to off take the products and pay to LIPL the agreed remuneration pursuant to the agreement. It is also mentioned in the remuneration clause as follows:- "(2) The total remuneration and compensation to be paid by LXD to LIPL in accordance with the preceding § 2 (1) is designed to leave LIPL with a fair and adequate compensation for the functions performed, assets employed and risks assumed under this AGREEMENT that meets arm's length principles. Accordingly, this § 2 and, in particular, the factor to be applied as MARK-UP shall be reviewed by the PARTIES each year." It is thus clear that an ear marked capacity is required to be placed at the disposal of LXD by LIPL and remuneration of LIPL will include a manufacturing fees plus idle cost compensation which has been pre-conceived in case there is unutilized capacity out of capacity to be maintained, as directed by LXD to LIPL. We find that this situation is different from liquidated damages as the agreement itself envisages that in all probability there will be some idle capacity with LIPL which has to be he....
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.... and going by the terms of the agreement what has been essentially provided is a "declared service" and has to be treated as such. Simply, the use of expression "compensation" cannot prevent a close scrutiny of the terms of contract and nature of the same, or whether the same was a consideration for agreeing to an obligation to do or not to do an act. After going through the whole gamut of various clauses in the agreement, it is clear that 'what has been provided for', is very much within the parameters of "declared service" as per definition of Section 66E(e) of Finance Act, 1994. 15. Now this brings us to the second issue that if there was a supply of "declared service", as we have held, whether what has been provided for and the activities carried out are in the nature of export or, are in the nature of services provided in India relating to plant and machinery and therefore, immovable property or not? In this context, it is useful to go through the detailed discussion, which has been undertaken by the learned Commissioner in the impugned order with relevant portion of the findings in this regard being as follows: - "Provision w.e.f. 01/07/2012 Section 66B, ....
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.... (i) location of service provider or (ii) location of service receiver or (iii) place of performance of service. I have examined Rules serially from 4 to 12 and noticed that Rules make specific provision in respect of specified services. So in case of services specified in Rule 4 to 12, the place of provision will be determined as per the respective rules and in the case of any other service, the Rule 3 will apply. The Department has alleged in the show cause notice that idle cost compensation paid by LXD is on account of underutilization of fixed establishment of plant and machinery. The plant as such is an immovable property in terms of Rule 3 of the General Clauses Act. 1987 and therefore, the agreement is in the nature of grant of right to use the immovable property. As per the provisions of Rule 5 of the POPS Rules, 2012, the place of provision of service will be where the immovable property is located or intended to be located which in the present case is the assessee's factory premises. The provisions of Rule 5 ibid are reproduced herein below: Rule-5 Place of provision of services relating to immovable property - The ....
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...., 1994. However, in terms of Section 4 of the General Clauses Act, 1897, the definition of immovable property provided in sub-section 3 (26) of the General Clauses Act will apply, which states as under: "Immovable Property" shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth." It may be noted that the definition is inclusive and thus properties such as buildings and fixed structures on land would be covered by the definition of immovable property. The property must be attached to some part of earth even if underwater. 5.5.2 What are the criteria to determine if a service is 'directly in relation to immovable property located in taxable territory? Generally, the following criteria will be used to determine if a service is in respect of immovable property located in the taxable territory: (i)the service consists of lease, or a right of use, occupation, enjoyment or exploitation of an immovable property: (emphasis supplied) (ii) the service is physically performed or agreed to be performed on an immovable property (e.g. maintenan....
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....ich may include rent collection, arranging repairs and the maintenance of financial accounts. (viii) The supply of hotel accommodation or warehouse space. 5.5.4 What if a service is not directly related to immovable property? The place of provision of services rule applies only to services which relate directly to specific sites of land or property. In other words, the immovable property must be clearly identifiable to be the one from where, or in respect of which, a service is being provided. Thus, there needs to be a very close link or association between the service and the immovable property. Needless to say, this rule does not apply if provision of service has only an indirect connection with the immovable property, or if the service is only an incidental component of a more comprehensive supply of services. For example, the services of an architect contracted to design the landscaping of a particular resort hotel in Goa would be land-related. However, if an interior decorator is engaged by a retail chain to design a common decor for all its stores in India, this service would not be land-related. The default rule Le. Rule 3 will apply in th....
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....se needs to be tested to identify whether Rule 5 can be made applicable in the facts of present case. To understand the scope of activity performed by the noticee, it is important to understand the terms of the manufacturing agreement entered into between LXD and the noticee which is for activity of manufacture to be undertaken by the noticee for LXD and accordingly, remuneration is paid per unit of the product delivered to LXD. The manufacturing cost of per unit of the product includes the cost of input materials, production cost, selling expenses, general administration, other cost plus the mark up. The said agreement also provides the clause of remuneration in terms of idle cost compensation in case of losses suffered by the noticee due to underutilization of the plant production capacity which is also determinative by accounting the manufacturing cost of product sold to the LXD. The department alleges that idle cost compensation is basically towards grant of rights to use immovable property, i.e. grant of right to use the plant and machinery. This allegation is not correct as there is no direct connection with immovable property and has only an indirect connection with....
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.... The place of provision for declared services provided by the noticee is rightly as per terms of Rule 3 of the POPS Rules as per which place of provision of service shall be the location of service receiver. The principal effect of Rule 3 is that (a) where the location of receiver of a service is in the taxable territory, such service will be deemed to be provided in the taxable territory and service tax will be payable; (b) if the receiver of service is located outside the taxable territory, no service tax will be payable on the said service. In the present case, since the service recipient, i.e. M/s. Lanxess Deutschland GmbH, Kennedyplatz 1, 50569 Cologne, Germany is located in Germany which is not in the taxable territory, the services provided by the noticee are outside the taxable territory Furthermore, service provider (Lanxess India Pvt Ltd) is engaged by the service recipient (LXD- located outside taxable territory) in terms of a contract with a promise to reimburse idle cost compensation to the service provider. The terms of the contract and remuneration are already noted and discussed in the above paras. Location of service r....
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....d Office also outside India and is thus a business establishment outside the taxable territory. Therefore, Section 66B would apply and no Service Tax would be chargeable on the service provided by noticee as their services are provided outside taxable territory. This view is also supported by Advance Ruling authority in Tandus Flooring India Private Limited Vs. Commissioner of Service Tax, 2014 (33) STR 33 (AAR). For determining whether these services can be treated as Export of Services, the conditions of Rule 6A of Service Tax Rules, 1994 needs to be visited, which are as under:- "RULE [6A. Export of services. (1) The provision of any service provided or agreed to be provided shall be treated as export of service when,- (a) the provider of service is located in the taxable territory, (b) the recipient of service is located outside India, (c) the service is not a service specified in the section 66D of the Act, (d) the place of provision of the service is outside India, (e) the payment for such service has been received by the provider of service in convertible foreign exchange, and (f) the provider o....
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....nt and machinery but due to short purchase of goods by LXD which was dependent on the sale cost of manufactured goods. The understanding of the department to account the compensation received by the noticee for provisions of service in terms of Rule 5 of the POPS Rules is not sustainable. The agreement is clearly towards sale of manufactured goods and not for provision of any kind of service, whatsoever. I completely agree with the above contention also. Thus, I find that M/s. Lanxess India Pvt Ltd were not required to pay Service Tax for the period from 2012-13 (from July, 2012) to 2015-16." 15.1 The inapplicability of constraint in item (b) of explanation 3 of clause (44) of Section 65B of the Finance Act, 1994 has correctly been analyzed by the Adjudicating Authority by holding that export to German Entity by Indian Entity is possible as both are distinct incorporated entities - one in non-taxable territory and the other in taxable territory of India. We uphold his analysis as above and hold that conditions of export have been duly complied with. From elaborate discussion made available by the learned Adjudicating authority in his order which has been challenged before us by ....
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....f immovable property is well founded and deserves to be accepted by us in conclusion arrived at, but for reason that service is "deemed service" and not for any other reason given by him. "Deemed Service" is a species of service segregated from all other services, as it exists only by operation of a deemed legal fiction. 15.2 Therefore, while we agree on the basis of documentary evidence of invoice as well as analysis done by us that the service is "declared service" in terms of Section 66E(e) of the Finance Act, 1994 and we decide the first issue in favour of Revenue. We are unable to convince ourselves that the place of provision of service is not the place of recipient of service and therefore, same is nothing but export of service. In view of the foregoing, we hold that the Place of Provision of Service is outside India as unutilized capacity service (which is a "declared service") is received in terms of benefit by the service recipient at its own location. Same is therefore within the ambit of export of services and it is accordingly answered that the "declared services" of the nature impugned before us are provided outside India at the location of the recipient. We are ne....