TMI Blog2023 (1) TMI 934X X X X Extracts X X X X X X X X Extracts X X X X ..... ritory by one person to another and collected in such manner as may be prescribed. Section 66D contains a negative list of services, while section 66E contains a list of declared services. A service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a declared service under section 66E(e) read with section 65B (44) and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e). It would also be pertinent to refer to the Circular dated 03.08.2022 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 presume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the defaulting party shall be liable to pay compensation to the other party for such shortfall in level of delivery or level of lifting in the manner stated in the FSA. (2) In respect of coal supplied by e-auction process, the successful bidder will be required to deposit coal value for supply in a month within a stipulated time period. In case the same is not paid by the successful bidder, the deposit money is forfeited by Appellant company. Further, in case the successful bidder who does not lifts coal within the stipulated time period, the deposit money is forfeited as compensation. (c) Penalty Contractors Others If the contractor does not execute the subject contract in terms of the work order issued for any reason, compensation is charged and after deducting the compensation net amount (i.e. contract amount less penalty is paid to service provider). For the sake of convenience of accounting, instead of charging / debiting contract cost net of compensation, the entire value of work order is generally debited / booked as expense and compensation amount is credited/ booked as Income for control purpose. 4. A show cause notice dated 26.09.2017 was issued to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e- A B appended herewith. It therefore, appears that NCL its coal producing areas had collectively evaded payment of service tax amounting to Rs.14,11,36,387/-(incl. Cess) on these declared services and the same appears liable to be recovered from them under section 73 of the Finance Act, 1994 alongwith interest under section 75 ibid. 5. The appellant submitted a reply to the show cause notice contending that penalty clauses were provided in the contract so that the parties to the contract did not breach the clauses repeatedly as financial consequences flow and that such penal clauses were invoked only in cases where party to the contract did not adhere to the terms of the contract. It was also stated that the appellant collects penalty (compensation) and forfeits security deposit/earnest money deposit for non-compliance of the terms of contract from buyers of coal on the quantity of un-lifted/short lifting of coal in terms of Coal Supply Agreement and not for tolerating any act or situation. The appellant also pointed out that penalty is charged from the vendors if there was a delay in supply of goods ordered by the appellant and that penalty is charged if the contracto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and penalty recoverable/imposable on failure to lift the desired quantity of goods. Similarly the activities i.e. provision of service by service contractors and penalty recoverable/imposable on failure to provide the desired service. Here the service tax is proposed on the penalty imposed/recovered against toleration of act of failure on the part of buyers and service contractors to carry out the contracted job as per terms and conditions of contract. To tolerate an act or to refrain from an act for which consideration in the name of penalty or whatever is received/collected is a taxable service made effective from 01.07.2012 under 'declared service' under section 66E(e) of Finance Act 1994. 7. Shri Hemant Sindhwani, learned Chartered Accountant appearing for the appellant submitted that the issue is covered by the decision of the Tribunal in South Eastern Coalfields Ltd . v/s Commissioner of Central Excise Service Tax, Raipur [ 2021 (55) G.S.T.L. 549 (Tri.-Del) decided on 22.12.2020 ] which was subsequently followed in M/s Krishnapatnam Port Company Limited v/s Commissioner of Central Excise Service Tax, Guntur [ Service Tax Appeal No. 30227 of 2016 deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; 13. The show cause notice and the impugned order indicate that the appellant was charging and collecting an amount under the following three heads: (i) Compensation/penalty from the buyers of coal on the shortlifted/ un-lifted quantity of coal and non- compliance of the terms and conditions of the Coal Supply Agreement, including forfeiture of earnest money deposit/security deposit; (ii) Compensation/penalty from the contractors engaged by the appellant for providing various types of services for breach of the terms and conditions of the contract; and (iii) Liquidated damages from the suppliers of materials for breach of the terms and conditions of the contract. 14. Liability has been fastened upon the appellant under section 65B read with section 66E(e) of the Finance Act for the period from July 2012 till March 2016 for the reason that by collecting the said amount the appellant had agreed to the obligation to refrain from an act or to tolerate the non-performance of the terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized. 28. It also needs to be noted that section 65B (44) defines service to mean any activity carried out by a person for another for consideration. Explanation (a) to section 67 provides that consideration includes any amount that is payable for the taxable services provided or to be provided. The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upply 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 unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute consideration and such activities will not constitute supply . The relevant portion of the Circular is reproduced below: Agreement to do or refrain from an act should not be presumed to exist There has to be an express or implied agreement: oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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