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2022 (5) TMI 253 - AT - Service TaxLevy of service tax - liquidated damages/compensation charges received by the Appellant towards the breach and non-compliance of Minimum Guaranteed Tonnage (MGT) as per Agreement - consideration for declared service or not - HELD THAT:- The penalty clause is provided in the impugned Agreement dated 12.07.2011 to safeguard the commercial interest of the Appellant – (1) to compensate the Appellant for financial damage/injury in case of failure to achieve the MGT and also (2) to discourage the service recipient from repeatedly breaching the terms and conditions of the Agreement dated 12.07.2011 and the penal clause is invoked only in cases where the service recipient does not adhere to the contractual condition of ‘MGT’ as per Agreement dated 12.07.2011. As per Finance Act, 1994, the basic element to charge Service Tax is the element of service i.e. there should be an activity in the form of service or declared service. However, in the instant case, the said amount has not been collected towards any activity liable for Service Tax but as compensation/penalty for breach of terms and conditions of the contract [Agreement dated 12.07.2011] i.e. non-compliance of MGT. Thus, such compensation charges are not covered within the definition of taxable service under the Finance Act, 1994 and hence not liable for Service Tax. In the instant case, the parties entered into the said Agreement dated 12.07.2011 for import of a specified quantity of coal and for availing various port services for the same and not for flouting the terms of the agreement so that the penal clauses were the reason for the execution of the Agreement dated 12.07.2011 for an agreed consideration. It is only in situations where the condition of ‘MGT’ is not satisfied by the service recipient, the Appellant’s claim for penalty/compensation/liquidated damages - the term service is defined to mean any activity carried out by a person for another for consideration. The recovery of liquidated damages/penalty from the other party in the instant case cannot be said to be towards any service per se, as the Appellant did not carry on any activity to receive the ‘compensation charges’. Hence, scope of levy of Service Tax cannot be extended to apply to situations where the actual activity was non-existent. The issue of leviability of Service tax on penalty, liquidated damages, compensation, forfeiture amounts, cancellation charges etc. stands settled by various pronouncements wherein it has consistently been held that the said amounts recovered as charges for breach or non-compliance of contractual terms and conditions cannot be construed as ‘consideration’ for ‘refraining or tolerating an act’ and were thus not leviable on Service Tax in terms of Section 66E(e) of the Finance Act, 1994 - reliance can be placed in the case of M/S K.N. FOOD INDUSTRIES PVT. LTD. VERSUS THE COMMISSIONER OF CGST & CENTRAL EXCISE, KANPUR [2020 (1) TMI 6 - CESTAT ALLAHABAD] and M/S LEMON TREE HOTEL VERSUS COMMISSIONER, GOODS & SERVICE TAX, CENTRAL EXCISE & CUSTOM [2019 (7) TMI 767 - CESTAT NEW DELHI]. Appeal allowed - decided in favor of appellant.
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