Custom, Excise & Service Tax Tribunal
Rajasthan Co Operative Dairy ... vs Principal Commissioner Of Cgst And ... on 22 July, 2025
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO.3
Service Tax Appeal No. 50892 Of 2020
[Arising out of Order-in-Appeal No. 174(SM)ST/JPR/2020 dated 06.05.2020 passed
by the Commissioner (Appeals) of Central Excise & Central Goods, Service Tax,
Jaipur]
Rajasthan Co-operative Dairy Federation : Appellant
Limited
Saras Sankul, J.L.N. Marg, jaipur, Rajasthan
Vs
The Principal Commissioner, CGST : Respondent
And Central Excise, Commissionerate,
New Central Revenue Building, Statute Circle
C-Scheme, Jaipur
APPEARANCE:
Ms. J. Kainaat, Advocate the Appellant
Shri S. K. Meena, Authorized Representative for the Respondent
CORAM :
HON'BLE MS. BINU TAMTA, MEMBER (JUDICIAL)
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL)
FINALORDER No. 51093/2025
Date of Hearing:22.07.2025
Date of Decision:22.07.2025
SANJIV SRIVASTAVA
This appeal is directed against the Order-in-Appeal No.
174(SM)ST/JPR/2020 dated 06.05.2020. By the impugned order,
theOrder-in-Original No. 03/DEM-CE/2019 dated 25.04.2019, holding
as follows, has been upheld:-
"1. I confirm the demand of service tax of Rs. 632989/-
against M/s Rajasthan Cooperative Dairy Federation Ltd., 1,
Saras Sankul, J.L.N. Marg, Malviya Nagar, Jaipur-302017
under Section 73(2) and order to recover under proviso to
Section 73(1) of the Finance Act, 1994 along with interest
under Section 75 of the Finance Act, 1994.
2. I impose the Penalty of Rs 632989/- equal to demand
confirmed upon him under Section 78 of the Finance Act,
1994 for suppression the facts and contravention of statutory
provisions with intent to evade payment of Service Tax.
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However if the Service Tax so determined and interest is paid
within a period of thirty days from the date of receipt of the
Order in Original, the penalty payable shall be twenty five
percent of said Service Tax amounting to Rs. 632989/- and
reduced amount of penalty is also paid within the said period
of 30 days."
2.1 The appellant is state level Co-operative organization owned by
its member (Distt. Milk Unions). It works to promote the production,
collection, processing, and sale of milk and milk products, to help
improve the income and development of farmers and those involved in
animal husbandry. They are having service tax registration for
providing taxable services under the category of „Business Support
Service‟, „Renting of Immovable Property Service‟ and „Manpower
Supply Service‟, and „Security Service‟ and „Legal Services‟.
2.2 During audit of records of the appellant, it was observed that
the appellants had shown income of Rs.74,38,283 under head of
indirect income for the year 2015-16, and as per the details of other
income provided by the appellants, they had shown an income of
'Earnest Money Forfeiture account Rs.43,47,051. However the
department was of the view that the said income falls under the scope
of 'Declared Service' which is defined under Section 66E(e) of the
Finance Act 1994.
2.3 A show cause notice dated 29.12.2017 was issued to the
appellant asking them to show cause as to why:-
"(i) Service Tax amounting to Rs.6,32,989/-(including
Education Cess, Secondary & Higher Education Cess and S.B.
Cess) should not be demanded and recovered under proviso
to Section 73(1) of the Finance Act, 1994;
(ii) Interest, as applicable, for failure to credit the Service
Tax of Rs.6,32,989/- to the account of the Central
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Government by due date(s), should not be demanded and
recovered from them under Section 75 of the Finance Act,
1994; and
(iii) Penalty should not be imposed upon them under Section
78 of the Finance Act, 1994"
2.4 Show cause notice was adjudicated as per the Order-in-original
referred in Para-1 above.
2.5 Aggrieved, the appellant filed appeal before the Commissioner
(Appeals) which has been dismissed as per the impugned order.
3.1 We have heard Ms. J. Kainaat, Advocate for the appellant and
Shri S. K. Meena, Authorized Representative for the Department.
3.2 Arguing for the appellant, Learned counsel submits that,-
the issue involved is no more res-integra and is covered by the
following decisions
o Pankaj Ispat Limited vs. Commissioner of Central Excise, Raipur
(C.G.) 2024 (8) TMI 263-CESTAT NEW DELHI
o Satpura Thermal Power Station vs. Commissioner of GST & C. Ex and
Customs, Bhopal 2024 (5) TMI 1114-CESTAT NEW DELHI
o Northern Coalfields Limited vs. Commissioner CGST, and Customs,
Jabalpur 2023 (3) CENTAX 211 (Tri.-Del.)
o Krishnapatnam Port Co. Limited vs. Commissioner of Central Excise
and Service Tax, Guntur 2023 (4) CENTAX 105 (Tri.-Hyd.)
o Dy. G. M. (Finance), Bharat Heavy Electricals Limited vs.
Commissioner of Customs & Central Excise, Bhopal 2023 (4) CENTAX
400 (Tri.-del.)
o Madhya Pradesh Poorva Kshetra Vidhut Vitran Co. Limited vs.
Commissioner of CGST & Central Excise, Jabalpur 2022 (67) GSTL 86
(Tri.-Del.)
o M. P. Poorva Kshetra Vidyut Vitran Co. Ltd. vs. Principal Commr. CGST
& Central Excise, Bhopal 2021 (46) GSTL 409 (Tri.-Del.)
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Service Tax Appeal No. 50892 Of 2020
o South Eastern Coalfields Limited vs. Commr. Of Central Excise &
Service Tax, Raipur 2021 (55) GSTL 549 (Tri.-Del.)
o Amit Metaliks Limited vs. Commissioner of CGST, Bolpur 2020 (41)
GSTL 325 (Tri.-Kolkata)
3.3 Learned Authorized Representative reiterates the findings
recorded in the impugned order.
4.1 We have considered the impugned order along with the
submissions made in the appeal and in the course of the arguments.
4.2 On merits of the issue, the impugned order observed as follows:-
"5. I have carefully gone through the facts of the case and
submissions made by the appellant in their appeal
memorandums as well as during the course of personal
hearing. The issue involved in the appeal is whether the
appellant is liable to pay service tax on 'Earnest Money
Forfeiture' amounts received during the period from
February, 2015 to March, 2016. It has been alleged that the
forfeited amount is a consideration for not executing the
contractual obligation by the service provider either partly or
fully therefore, the said amount forfeited is a consideration
for tolerating the act of not performing the contractual
obligation by the serviced provider, therefore, the amount
received on this account is a consideration towards providing
taxable declared service.
6. I find the appellant has contended that the 'Earnest Money
Forfeiture' is in the nature of a penalty to deter the
contractors making them adhere to the time frame
prescribed and the 'Earnest Money Forfeiture' is nothing but
a penalty imposed for non-compliance to RCDF tender
policies and that the 'Earnest Money Forfeiture' are not for
carrying out of an activity by the appellant for any other
person and in such a case, no Service Tax can be charged
under Section 66B of the Act. I find that the forfeited amount
is a consideration for not executing and non-compliance of
the contractual obligation imposed by the appellant (RCDF)
under their tender policies. Accordingly, I hold that forfeited
amount is consideration for tolerating the act of not
performing the contractual obligation, as such it very much
fall under the Declared service as defined under clause (e) of
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Section 66E of the Finance Act, 1994. Therefore, I hold that
the 'Earnest Money Forfeiture' amount being a consideration
for providing of taxable service, the appellant is required to
pay service tax on such considerations."
4.3 We find that the issue involved in the matter is with regard to
levy of service tax on forfeiture of earnest money deposit as indicated
in the table below,-
Name of the Party Amt of EMD forfeited Reason for forfeiture of
(Rs.) EMD
Tetra Pak (I) Pvt. Ltd. 22,000 Refused to accept the
rate approved for supply
of Ghee
Shri Raman Bihari Can 10,576 Poor Performance of
Packs (P) Ltd. Ghee tins supplied by
the party
Govindjee Diary Milk (P) 2,00,000 Party informed that they
Ltd. will not convert milk to
SMP at the negotiated
rates.
EMD of various parties 41,36,475 The EMD of various
lying in Books since April parties has been written
2007 to March, 2012 off
written off in books
4.4 Issue of levy of service tax on such charges have been
considered time and again by the Tribunal and in the decisions
referred by the counsel during the arguments. We find that the
Tribunal has taken the consistent view with regard to non-levy of
service tax on these charges. In the case of Bharat Heavy Electricals
Limited referred, relying on the earlier decisions following has been
observed:-
"6. Shri Z.U. Alvi, learned counsel appearing for the respondent has
submitted that this issue as to whether the amount collected towards
liquidated charges can be subjected to service tax under section 66E (e) of
the Finance Act has been decided by a Division Bench of the Tribunal in M/s
South Eastern Coal Fields Ltd. Vs. Commissioner of Central Excise And Service
Tax, Raipur which was subsequently followed by the Tribunal in M.P. Poorva
Kshetra Vidyut Vitran Co. Ltd. Vs. Principal Commissioner, CGST And Central
Excise, Bhopal.
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Service Tax Appeal No. 50892 Of 2020
7. Learned counsel for the respondent is justified in submitting that the issue
stands covered by the Division Bench judgement of the Tribunal in M/s South
Eastern Coal Fields Ltd. The Division Bench observed as follows:
"25. It is in the light of what has been stated above that the provisions of
Section 66E(e) have to be analyzed. Section 65B(44) defines service to mean
any activity carried out by a person for another for consideration andincludes
a declared service. One of the declared services contemplated under Section
66E is a service contemplated under clause (e) which service is agreeing to
the obligation to refrain from an act, or to tolerate an act or a situation, or to
do an act. There has, therefore, to be a flow of consideration from one person
to another when one person agrees to the obligation to refrain from an act, or
to tolerate an act, or a situation, or to do an act. In other words, the
agreement should not only specify the activity to be carried out by a person
for another person but should specify the :
(i) consideration for agreeing to the obligation to refrain from an
act; or
(ii) consideration for agreeing to tolerate an act or a situation; or
(iii) consideration to do an act.
26. Thus, a service conceived in an agreement where one person, for a
consideration, agrees to an 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). 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 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, since neither the appellant is carrying on any activity to
receive compensation nor can there be any intention of the other party to
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Service Tax Appeal No. 50892 Of 2020
breach or violate the contract and suffer a loss. The purpose of imposing
compensation or penalty is to ensure that the defaulting act is not undertaken
or repeated and the same cannot be said to be towards toleration of the
defaulting party. The expectation of the appellant is that the other party
complies with the terms of the contract and a penalty is imposed only if there
is non-compliance.
40. It is in this context and in the context of Section 74 of the Contract Act,
that the Supreme Court observed :
"20. Section 74 declares the law as to liability upon breach of contract where
compensation is by agreement of parties pre-determined, or where there is a
stipulation by way of penalty. But the application of the enactment is not
restricted to cases where the aggrieved party claims relief as a plaintiff. The
section does not confer a special benefit upon any party; it merely declares
the law that notwithstanding any term in the contract for predetermining
damages or providing for forfeiture of any property by way of penalty, the
court will award to the party aggrieved only reasonable compensation not
exceeding the amount named or penalty stipulated."
8. The aforesaid decision of the Tribunal in M/s South Eastern Coal Fields Ltd.
was followed by a Division Bench of the Tribunal in M.P. Poorva Kshetra
Vidyut Vitran Co. Ltd.
9. It, therefore, follows that the liquidated damages collected by the
respondent as penalty/late delivery charges cannot be subjected to service
tax under section 66E (e) of the Finance Act."
6.5 We also observe that Board Circular No. 178/10/2022-GST dated
03.08.2022 clarifies the issue as follows,-
"3.1. Some of the important examples of such cases are
Service Tax/GST demands on -
i. Liquidated damages paid for breach of contract;
ii. xxxx xxxxxx xxxxxx xxxx
iii. xxxx xxxxxx xxxxxx xxxx
iv xxxx xxxxxx xxxxxx xxxx
v xxxx xxxxxx xxxxxx xxxx
vi xxxx xxxxxx xxxxxx xxxx
vii. xxxx xxxxxx xxxxxx xxxx
viii. xxxx xxxxxx xxxxxx xxxx
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
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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
contractualreciprocity of a consideration would not be an
„activity for consideration‟. The element ofcontractual
relationship, where one supplies goods or services at the
desire of another, is an essential element of supply.
********
7.1 Breach or non-performance of contract by one party results in loss and damages to the other party. Therefore, the law provides in Section 73 of the Contract Act, 1972 that when a contract has been broken, the party which suffers by such breach is entitled to receive from the other party compensation for any loss or damage caused to him by such breach. The compensation is not by way of consideration for any other independent activity; it is just an event in the course of performance of that contract.
7.1.1 It is common for the parties entering into a contract, to specify in the contract itself, the compensation that would be payable in the event of the breach of the contract. Such compensation specified in a written contract for breach of non-performance of the contract or parties of the contract is referred to as liquidated damages. Black‟s Law Dictionary defines „Liquidated Damages‟ as cash compensation agreed to by a signed, written contract for breach of contract, payable to the aggrieved party.
7.1.2 Section 74 of the Contract Act, 1972 provides that when a contract is broken, if a sum has been named or a penalty stipulated in the contract as the amount or penalty to be paid in case of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. 7.1.3 It is argued that performance is the essence of a contract. Liquidated damages cannot be said to be a consideration received for tolerating the breach or non- performance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. Liquidated damages are a measure of loss and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do not restitute the aggrieved 9 Service Tax Appeal No. 50892 Of 2020 person. It is further argued that a contract is entered into for execution and not for its breach. The liquidated damages or penalty are not the desired outcome of the contract. By accepting the liquidated damages, the party aggrieved by breach of contract cannot be said to have permitted or tolerated the deviation or non-fulfilment of the promise by the other party. 7.1.4 In this background a reasonable view that can be taken with regard to taxability of liquidated damages is that where the amount paid as „liquidated damages‟ is an amount paid only to compensate for injury, loss or damage suffered by the aggrieved party due to breach of the contract and there is no agreement, express or implied, by the aggrieved party receiving the liquidated damages, to refrain from or tolerate an act or to do anything for the party paying the liquidated damages, in such cases liquidated damages are mere a flow of money from the party who causes breach of the contract to the party who suffers loss or damage due to such breach. Such payments do not constitute consideration for a supply and are not taxable.
7.1.5 Examples of such cases are damages resulting from damage to property, negligence, piracy, unauthorized use of trade name, copyright, etc. Other examples that may be covered here are the penalty stipulated in a contract for delayed construction of houses. It is a penalty paid by the builder to the buyers to compensate them for the loss that they suffer due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of „an agreement to sell‟ an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of Earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or bidders. Such payments being merely flow of money are not a consideration for any supply and are not taxable. The key in such cases is to consider whether the impugned payments constitute consideration for another independent contract envisaging tolerating an act or situation 10 Service Tax Appeal No. 50892 Of 2020 or refraining from doing any act or situation or simply doing an act. If the answer is yes, then it constitutes a „supply‟ within the meaning of the Act, otherwise it is not a "supply". 7.1.6 If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called; it must be remembered that a "consideration" cannot be considered de hors an agreement/contract between two persons wherein one person does something for another and that other pays the first in return. If the payment is merely an event in the course of the performance of the agreement and it does not represent the „object‟, as such, of the contract then it cannot be considered „consideration‟. For example, a contract may provide that payment by the recipient of goods or services shall be made before a certain date and failure to make payment by the due date shall attract late fee or penalty. A contract for transport of passengers may stipulate that the ticket amount shall be partly or wholly forfeited if the passenger does not show up. A contract for package tour may stipulate forfeiture of security deposit in the event of cancellation of tour by the customer. Similarly, a contract for lease of movable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of prepayment of loan and of making arrangements for the intended supply by the tour operator respectively. Therefore, such payments, even though they may be referred to as fine or penalty, are actually payments that amount to consideration for supply, and are subject to GST, in cases where such supply is taxable. Since these supplies are ancillary to the principal supply for which the contract is signed, they shall be eligible to be assessed as the principal supply, as discussed in detail in the later 11 Service Tax Appeal No. 50892 Of 2020 paragraphs. Naturally, such payments will not be taxable if the principal supply is exempt."
6.6 Though the Circular was issued with regard to GST law and the same reasoning have been adopted for service tax matters vide Circular No. 214/1/2023-ST dated 28.02.2023.
6.7 In view of the above circulars and the decisions, we don‟t find any merit in the impugned order.
6.8 Appeal is allowed.
(Dictated & pronounced in the open Court) (BINU TAMTA) MEMBER (JUDICIAL) (SANJIV SRIVASTAVA) MEMBER (TECHNICAL) G.Y.