Custom, Excise & Service Tax Tribunal
Crompton Greaves Ltd. vs Mumbai-Iii on 10 October, 2022
CUSTOMS, EXCISE & SERVICE TAX APPELLATE
TRIBUNAL, MUMBAI
REGIONAL BENCH
Excise Appeal No. 1541 of 2012
(Arising out of Order-in-Appeal No. BC/165/Mum-III/2012-13 dated
26.07.2012 passed by the Commissioner of Central Excise (Appeals),
Mumbai-III)
M/s. Crompton Greaves Ltd. Appellant
1st Floor, CG House,
Dr. Annie Besant Road, Worli,
Mumbai 400 030.
Vs.
Commissioner of Central Excise, Mumbai-III Respondent
3rd & 4th Floor, Vardaan Centre, MIDC, Wagle Industrial Estate, Thane (W), Mumbai 400 604.
Appearance:
Shri Aditya Chitale, Advocate, for the Appellant Shri P.K. Acharya, Superintendent, Authorised Representative for the Respondent CORAM:
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL) HON'BLE DR. SUVENDU KUMAR PATI, MEMBER (JUDICIAL) Date of Hearing: 10.10.2022 Date of Decision: 10.10.2022 FINAL ORDER NO. A/85932/2022 PER: SANJIV SRIVASTAVA This appeal is directed against Order-in-Appeal No. BC/165/Mum-III/2012-13 dated 26.07.2012 passed by the Commissioner of Central Excise (Appeals), Mumbai-III. By the impugned order, the Commissioner (Appeals) has rejected the appeal filed by the appellant against Order-in-Original No. 462/Adj/KDN/RM/11-12 dated 31.03.2012 of the Assistant Commissioner of Central Excise, Kanjur Division, Mumbai-III, by which the Assistant Commissioner has held as follows:-
"ORDER
1. I hereby determine and demand Rs. 12,110/- (Rs. Twelve Thousand One Hundred Ten Only) from the assessee M/s 2 E/1541/2012 Crompton Greaves Limited, Stamping Division, under the then section 11A of the Central Excise Act, 1944 read with the then proviso to section 114(1) of the Central Excise Act, 1944 and order for recovery of the same from M/s Crompton Greaves Limited, Stamping Division.
2. M/s Crompton Greaves Limited, Stamping Division, is also ordered to pay interest on the duty confirmed in terms of the then section 11AB of the Central Excise Act, 1944.
3. I also impose penalty of Rs. 12,110/- (Rs. Twelve Thousand One Hundred Ten Only) on the assessee M/s Crompton Greaves Limited, Stamping Division, in terms of the provisions of Rule 25 of Central Excise Rules, 2002 read with section 11AC of the Central Excise Act, 1944."
2.1 Appellants are holders of central excise registration for manufacture of excisable goods falling under Chapters 72, 82, 84 & 85 of the first Schedule to the Central Excise Tariff Act.
2.2 During the course of audit of the records of the appellant, it was observed that the appellant had sold scrap of stamping by auction and as per the terms and conditions the bidder was required to lift the agreed quantity of scrap within a specified period on the auctioned value. The person bidding was required to deposit certain amounts as earnest money for participating in the bid process and it was provided that if the successful bidder failed to lift the entire quantity and the amount proportionate to the quantity of the scrap not lifted will be deducted from the security deposit given by the bidder.
2.3 The deduction from the security money made by the appellant from the money deposited by the bidder as earnest money is sought to be added to the bid value for determining the transaction value for payment of central excise duty.
2.4 A show cause notice dated 07.09.2011 was issued to the appellant seeking to demand and recover an amount of Rs.12,110/- being amount of duty on the additional consideration to the extent of forfeiture of security deposit 3 E/1541/2012 made. Further, the notice also demanded interest under Section 11AB and proposed penalty under Rule 25(l) read with Section 11AC of the Central Excise Act, 1944.
2.5 This show cause notice was adjudicated as per the order- in-original referred in para 1 above and upheld by the Commissioner (Appeals) by the impugned order.
3.1 We have heard Shri Aditya Chitale, Advocate, for the appellant and Shri P.K. Acharya, Superintendent, Authorised Representative, for the Revenue.
3.2 Arguing for the appellant, learned counsel submits that:-
There are no conditions in the agreement as alleged in the show cause notice.
Earnest money deposit was taken by the appellant to protect themselves in the event of breach of contract and not as a part of auction price.
Show cause notice has not been issued in cases where EMD is returned.
The auction conditions are in favour of the appellant. EMD is liable to be returned to the purchaser after removal of the scrap sold to him and cannot be adjusted against deliveries. Forfeiture of EMD is in case of non-payment and non-lifting of sold scrap and the forfeited EMD is an income on which income tax is paid. Once the full payment of the auction sale is made by the purchaser, full payment of excise duty is made simultaneously by the appellant.
In the event of no sale, then no excise duty is leviable, but only the EMD stands forfeited.
Penalty and interest are not attracted in the case. Accordingly he prays for setting aside the impugned order.
3.3 Arguing for the Revenue, learned AR reiterates the findings recorded in the impugned order and relies upon the decision of the Hon'ble Supreme Court in the case of TVS Motors Co. Ltd. [2016 (331) ELT 3(SC)] and the decision of the Tribunal in the 4 E/1541/2012 case of Victory Electricals Ltd. [2013 (298) ELT 534 (Tri.-LB)] in support of his case.
4.1 We have considered the impugned order along with the submissions made in appeal and during the course of argument.
4.2 For confirming the demand against the appellant, along with interest and penalty, Commissioner (Appeals) has in the impugned order observed as follows:-
"6. The term transaction value has come into effect from 1.7.2000. The definition of transaction value reads as under:
d) "transaction value" means the price actually paid or payable for the goods, when sold, and includes in addition to the amount charged as price, any amount that the buyer is liable to pay to, or on behalf of, the assessee, by reason of, or in connection with the sale, whether payable at the time of the sale or at any other time, including, but not limited to, any amount charged for, or to make provision for, advertising or publicity, marketing and selling organization expenses, storage, outward handling, servicing, warranty, commission or any other matter; but does not include the amount of duty of excise, sales tax and other taxes, if any, actually paid or actually payable on such goods.
7. It emanates from the above definition that the price would form part of the assessable value, the amount paid at the time of purchase and also any amount that the buyer is liable to pay in connection with that sale, whether payable at the time of sale or at any other time. The said definition has an over encompassing meaning wherein all the amount that are payable in connection with the sale has to be included in the Assessable Value. The appellants are earning the said deduction from the security deposit out of the sale of the said scrap. It is a fact that the defaulter is paying more amount to the appellants in connection with the sale only. The Larger Bench of Tribunal In the case of Supreme Petrochem Ltd. 2009 (240) ELT. 38 has held that, 'transaction value obtained by adding any amount that buyer is liable to pay to the price charged by reason of or in connection with sale - Transaction value depends on terms of 5 E/1541/2012 contract of sale of goods between seller and buyer - Transaction value includes any amount charged for outward handling of goods by reason of or in connection with sale.
8. As regards penalty and interest, these kind of transactions can be known by the Department only when the assessee's records are audited. It is incumbent upon the appellants to inform these kind of additional considerations to the Department. The appellants have not shown any evidence that they have ever brought the said issue to the notice of the department. Hence, the provisions of Section 11AC were correctly invoked by the Adjudicating Authority. Where duty is recoverable under Section 11A of the said Act, interest is recoverable under Section 11AB of the said Act.
Accordingly, the appeal by the appellants is rejected and the impugned order sustains."
4.3 The definition of 'transaction value' has been defined as reproduced by the Commissioner (Appeals) in para 6 of the order. It clearly states that whatever the amounts paid or payable as the condition of the sale of the goods shall be part of the assessable value. Earnest money deposit and deductions made therefrom cannot be termed as an amount charged for the sale of the impugned goods, more-so-ever when it was against an auction sale.
4.4 Learned AR has referred to the decision of Hon'ble Supreme Court in the case of TVS Motors Co. Ltd. [2016 (331) ELT 4 (SC)] wherein in para 11 it has been observed as follows:-
"11. The expression 'any amount that the buyer is liable to pay to' is of significance. This expression shows that, apart from the price of the goods, the buyer should also be liable to pay an additional amount to the manufacturer/seller. In other words, the sale of the goods would not be made unless the buyer is also to pay an additional amount to the manufacturer, apart from the price of the goods. This is also supported by use of expression 'by reason or' or 'in connection with the sale' of the goods. The expression 'in connection with the sale of the goods' would only 6 E/1541/2012 mean that but for the payment of the additional amount, the sale of the goods would not take place. When we keep in mind the aforesaid legal position, we find no error in the view taken by the Tribunal giving benefit to the assessee. Both the sides were in unison in accepting the position that no major change had been incorporated w.e.f. 1-7-2000 with emphasis on the 'different transaction value' from the 'assessable value', the essence of valuation principles had not undergone major change and the decisions delivered by this Court with regard to unamended provision on the principle of valuation were still applicable in determining the transaction value under the new provisions of Section 4 of the Act red with Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000. In fact, the Order-in-Original in M/s. TVS Motors Company Ltd. or in other cases itself proceeds on that basis."
4.5 Further in paras 14 to 18, Hon'ble Supreme Court has observed as follows:-
"14. We would like to point out here that the aforesaid circular was in respect of the statutory provision that prevailed prior to 2000. There was statutory amendment carried out in the year 2000 and new valuation procedures were made effective from 1- 7-2000 which led to issuance of another circular dated 1-7-2002 by the Board. Various clarifications were issued in the circular. We are concerned with point of doubt No. 7 contained in that circular and the explanation thereto which makes the following reading :
7 What Since these services are provided about the free by the dealer on behalf of the cost of assessee, the cost towards this is after sales included in the dealer's margin (or service reimbursed to him). This is one of charges the considerations for sale of the and pre- goods (motor vehicles, consumer delivery items etc.) to the dealer and will inspection therefore be governed by Rule 6 of (PDI) the Valuation Rules on the same 7 E/1541/2012 charges, grounds as indicated in respect of incurred Advertisement and Publicity by the charges. That is, in such cases the dealer after sales service charges and PDI during the charges will be included in the warranty assessable value.
period?
15. The aforesaid clarification, if that was to be acted upon, may go in favour of the Department. However, it is pertinent to point out that this very clarification as given by the Board was challenged in the High Court of Bombay and in the judgment rendered by the Bombay High Court in the case of Tata Motors Ltd. v. Union of India - 2012 (286) E.L.T. 161 (Bom.), the same was struck down by making following pertinent observations :
41. In our view, the only question which fell for consideration of this Court was whether Clause 7 of Circular dated 1st July, 2002 is in excess of the provisions of Section 4(1)(a) and 4(3)(d) of said Act as amended by Section 94 of the Finance Act of 2000.
In our view, the answer to this question will decide the issues as between the petitioners and the respondents. In our view, it is not necessary for us to record our views on the correctness of the judgment delivered by the larger bench in the case of Maruti Suzuki (Supra). Similarly, in our view, it is not necessary to express any view on the order-in-original dated 5th December, 2011.
42. We have considered the provisions of Section 4(1)(a) as amended as well as the provisions of Section 4 as they stood prior to the amendment which came into effect from 1st July, 2000. We are in agreement with the submission advanced by learned Senior Counsel Mr. Sridharan that the provisions of Section 4 as amended are not materially different from the provisions of Section 4 as were prevailing prior to 1st July, 2000. By the amendment, a new term has been introduced by name "transaction value" and the said term transaction value has been specifically defined in Section 4(3)(d) of the said Act. The present Section 4(1)(a) r/w definition of term transaction value gives more clarity and all doubts as to how the assessable value 8 E/1541/2012 is to be arrived at are removed. It is also noted that the various items incorporated in the term transaction value as defined in Section 4(3)(d) of said Act as forming part of value of Excisable goods are in fact the expenses/deductions specifically disallowed by the Supreme Court in Bombay Tyre International Ltd. reported in 1983 (14) E.L.T. 1896 (S.C.). If one closely observes the definition of the term transaction value, it uses the terminology 'servicing'. It appears that the respondents are taking the benefit of this term 'servicing' for the purpose of adding to the assessable value, the expenses incurred by the dealer towards PDI and free said services by resorting to Clause 7 of Circular dated 1st July, 2002 and Circular dated 12th December, 2002.
43. Turning to point in question, it is noticed that the definition of the transaction value in Section 4(3)(d) of the said Act is extensive and ropes in the price of the goods and other amounts charged by the assessee by the reason of sale or in connection with sale. A close reading of Section 4(3)(d) of the said Act would indicate that the term transaction value comprises of price actually paid or payable by the buyer and includes additional amount that the buyer is liable to pay or on behalf of the assessee by reason of sale or in connection of sale whether payable at the time of sale or at any other time including the amount charged for or to make provision for certain items such as advertising etc. One such item is servicing. In view of the definition of the term transaction value, it would be necessary for this Court to apply the definition of the term "transaction value" to the facts of this case and decide the matter. It is admitted by the petitioners that after a car is sold to a dealer on the terms and conditions entered into mentioned in the dealer's agreement, a dealer is required to carry out Pre Delivery Inspection as well as said services in regard to a car which is sold to a customer. From the record it is seen that a dealer is required to pay an amount to the petitioners towards the cost of the car and a dealer cannot charge more than the amount specified by the petitioners. The difference between the price so fixed by the petitioners and the price paid by the dealer constitutes what is called as dealer's margin. A dealer has to 9 E/1541/2012 spend money to conduct PDI as well as render said services. We are inclined to accept the stand of the petitioners that the dealer is required to perform PDI as well as said services as a part of the dealer's responsibility cast on him as per the dealership agreement. The contention of the petitioners that the petitioners do not charge the dealer for the expenses incurred by the dealer towards PDI and said services is required to be accepted. From the record it is clear that the case of the petitioners so far as the amount incurred by the dealer towards PDI and said services does not form any of the clauses viz. (a) Any amount charged for (b) Amount charged to make provision for (c) Any amount that the buyer is liable to pay to the assessee (d) Any amount that the buyer is liable to pay on behalf of the assessee. The record indicates that once a car is sold by the petitioners to the dealer at a price, the dealer is not required to pay any further amount to the petitioners on account of PDI and free after sales services/after sales services. It is clear that when the petitioners are selling the car to a dealer, price is the sole consideration and the petitioners and the dealer are not related to each other. Having complied with these requirements set out in Section 4(1)(a) of the said Act, the assessable value of the Cars will have to be treated as the one which will be the transaction value. The transaction value will have to be arrived at by taking into consideration the definition of the term transaction value appearing in Section 4(3)(d) of the said Act. The record clearly goes to show that apart from the price which is paid by the dealer to the petitioners, no amount is recovered by the petitioners from the dealer or the customer. As such, the stand of the respondents that the expenses incurred towards PDI as well as said services have to be included in the assessable value cannot be accepted. This is being observed on the ground that there is no material to show that the expenses for the pre- delivery inspection as well as after sales services are paid by the dealer to the petitioners. The dealer renders PDI and said services as a routine and legitimate activity as a dealer. It is also clear from the record and on the basis of the typical dealership agreement entered into with the dealer by the petitioners that a dealer renders PDI as well as said services on account of dealership. It is pertinent to note that the respondents have in 10 E/1541/2012 affidavit in reply dated 29th June, 2012 admitted that the dealer carries out free PDI and after sales services at their end. It is admitted that labour cost towards PDI and said services is borne out of retailing profit. The contention of the respondents that the expenses incurred for PDI and said services must be included in the transaction value and is required to be included in the assessable value of the car is required to be negatived on the ground that the petitioners do not charge the dealer any amount equivalent to the cost incurred towards PDI and free after sales services.
44. It has been the contention of the respondents that the petitioners provide warranty in regard to the car which is sold by the dealer to the customer. According to the respondents the customer can avail of the benefit of this warranty, provided PDI is carried out in respect of the car and the customer avails of the benefit of said services. According to the respondents the warranty given by the petitioners is linked with expenses incurred towards PDI and said services and that is how the expenses incurred for PDI and said services become a part of the transaction value. We are not inclined to accept this contention. It is true that the Owner's Manual specifically indicates that if the PDI and said services are not availed of, then the customer would not be able to claim the benefit of the warranty. This will go to show that the petitioners undertake responsibilities so far as the warranty aspect is concerned provided the customer takes the benefit of PDI and said services. It has no bearing on the assessable value as it is abundantly clear that to perform PDI as well as render said services is on the dealer's obligation on account of dealership agreement and not on any other count. Once it is held that the PDI and said services are not provided by the dealer on behalf of the petitioners, it cannot be treated as consideration for sale. It also cannot be treated as a deferred consideration. The respondents while issuing Circular dated 1st July, 2002 have wrongly referred to the Rule 6 of the said Rules and have wrongly linked the expenses incurred for PDI and said services with expenses for advertisement or publicity. It is required to be noted that the provisions of the said Rules will not be applicable to the facts of this case as the transaction between 11 E/1541/2012 the petitioners and the dealer does not fall within the ambit of Section 4(1)(b) of the said Act. The transaction of sale of a car between the petitioners and the dealer is governed by the provisions of Section 4(1)(a) of said Act as the petitioners as assessee and the dealer as a buyer of the car are not related to each other and price is the sole consideration for the sale. In our view, reference to the Rule 6 of the Valuation Rules in Clause 7 of Circular dated 1st July, 2002 is totally misconceived. The reference made by learned Senior Counsel Mr. Sridharan to the case of Mr. A.K. Roy and Anr. v. Voltas Ltd. reported in 1977 (1) E.L.T. (J-177) SC is apt. We have perused the said judgment and applying the said judgment to the facts of the present case, the respondents would be able to demand Excise duty on the amount which is charged by the petitioners to the dealer. It is to be noted that as per the record, once the car is sold by the petitioners to the dealer for a particular consideration, no other amount is payable by the dealer to the petitioners. It is required to be mentioned that the petitioners are not reimbursing any amount to the dealer towards expenses incurred for the PDI and said services and the petitioners are paying Excise duty on the entire amount for which the petitioners sale the car to the dealer. In the present case, even if it is taken that the petitioners are giving trade discount to the dealer, the petitioners are paying the Excise amount on the whole amount and not the amount which is arrived at after giving the trade discount. Learned Senior Counsel Mr. Sridharan's submission in terms of judgment in the case of Atic Industries Ltd. v. H.H. Dave, Assistant Controller of Central Excise and Ors. reported in 1978 (2) E.L.T. (J444) S.C. that the price which is relevant for the purpose of Excise duty was the price when the good first entered in the stream of trade is required to be accepted. In the present case, when the petitioners sell the car to the dealer, the goods enter the stream of trade for the first time and, therefore, the amount at which the car is sold to the dealer would be the assessable value on which the Excise duty would be payable. In the present case, the expenses incurred by the dealer for PDI and said services has nothing to do with the term "servicing" mentioned in the transaction value and as such, the said expenses cannot be added to assessable value.
12 E/1541/2012
45. On consideration of the Clause 7 of Circular dated 1st July, 2000, it is apparent that the respondents have brought into existence a deeming provision that is to say the respondents have treated all the manufacturers of cars on one platform and by fiction taken a decision to add the expenses incurred towards PDI and said services in the assessable value. It will have to be mentioned that in all cases where the expenses incurred towards PDI and said services are solely borne by the dealer and the manufacturer like petitioners have nothing to do with the said expenses then adding those expenses in the assessable value would be contrary to the provisions of Section 4(1)(a) r/w Section 4(3)(d) of the said Act. Looking to the facts and circumstances of this case, the respondents have not been able to place on record any material to show that the amount incurred towards PDI and said services can fall within the definition of the transaction value."
We agree with the enunciation of legal position stated by the High Court.
16. We have also to keep in mind these cases pertain to the period post 2000. It is also to be borne in mind that the clarification very categorically proceeded on the basis that the services were provided free by the dealer 'on behalf of the assessee' and the same was 'during the warranty period'. The clarification given, keeping in mind the aforesaid two features, makes all the difference inasmuch in these cases, we find that the services which are provided by the dealers are on their behalf and not on behalf of the assessees. The facts disclosed that the amount which was reimbursed by the assessee to their dealers pertaining to free service was being claimed as abatement in relation to the normal transaction value. It was one of the contention of these assessees that free service charges is a post sale activities and all post sale activities continued to be excludable in determining transaction value.
17. On the other hand, we would like to refer to Circular dated 12-5-2000 which was issued contemporaneously with the amendment in Section 4. It expressly states that amount should 13 E/1541/2012 be recovered from the buyer by the assessee-manufacturer and makes the following reading in this behalf :
"2.2 Definition of 'transaction value' has also been modified to make it more transparent. Any amount paid by the buyer himself or on his behalf to the assessee by reason of, or in connection with the sale, would form part of the transaction value. Any amount that is charged or recovered from the buyer on account of factors like advertising or publicity, marketing and selling organization expenses, storage and outward handling etc. will also be part of the transaction value. In fact, most of the charges that are recovered on account of the specific activities by advertising or publicity, etc. mentioned in the definition of transaction value are includable in the computation of 'value' under the existing section.
4. As such, the definition of transaction value does not seem to be divergently wider in content and scope from the interpretation of 'value' under existing Section 4. The definition of 'transaction value' should help set at rest any doubt regarding amounts that are charged or recovered from the buyer in respect of specific kind of operations done by the assessees. In essence, whatever is recovered from the buyer by reason of, or in connection with the sale, whether payable at the time of sale or at any other time is included in the transaction value.
(emphasis supplied)"
18. This very position is reiterated by the Board in its circular Letter F. No. 354/81/2000-TRU, dated 30-6-2000 which gives clause by clause explanation of the Section. Relevant extract from the same is reproduced herewith as under:
"6. ...It may also be noted that where the assessee charges an amount as price for his goods, the amount so charged and paid or payable for the goods will form the assessable value. If, however, in addition to the amount charged as price from the buyer, the assessee also recovers any other amount by reason of sale or in connection with sale, then such amount shall also form part of the transaction value for valuation and assessment purposes. Thus if assessee splits up his pricing system and 14 E/1541/2012 charges a price for the goods and separately charges for packaging, the packaging charges will also form part of assessable value as it is a charge in connection with production and sale of the goods recovered from the buyer ...
7. It would be seen from the definition of 'transaction value' that any amount which is paid or payable by the buyer to or on behalf of the assessee, on account of the factum of sale of goods, then such amount cannot be claimed to be not part of the transaction value. In other words, if, for example, an assessee recovers advertising charges or publicity charges from his buyers, either at the time of sale of goods or even subsequently, the assessee cannot claim that such charges are not includable in the transaction value. The law recognizes such payment to be part of the transaction value that is assessable value for those particular transactions."
4.6 From the above observations made in subsequent paragraphs, it is quite evident that the reliance placed by the Revenue on para 11 is totally misplaced.
4.7 Further the Larger Bench decision in the case of Victory Electricals Ltd. [2013 (298) ELT 534 (Tri.-LB)] relied upon by learned AR goes contrary to the case made out. The Bench has in paras 16 to 20 observed as follows:-
"16. Section 4 read with the definition of "transaction value" in Section 4(3)(d) enables levy of duty on the transaction value paid or payable for the goods. The value payable in a case where liquidated damages is applied would therefore be the consequent value and this would constitute the "transaction value".
17. Except the decision of United Telecom (supra) followed in HFCL (supra) which are clearly and apparently after due consideration of provisions of the amended Section 4 read with definition of "transaction value" in Section 4(3)(d), other decisions adverted to above were either on the basis of provisions of Section 4 prior to its amendment by Finance Act, 2000 or without analysis of provisions of the amended Section 4 15 E/1541/2012 and the distinct concepts of "penalty" and "liquidated damages", pointed out in United Telecom Ltd.
18. The decision in Electron Energy Equipments Ltd. (supra), which is in conflict with the decision in United Telecom Ltd. (noticed by the referral order), is subsequent to amendment of Section 4 vide the Finance Act, 2000. However, this decision did not proceed on any analysis of the amended provisions of Section 4 or due consideration of the definition of "transaction value" in Section 4(3)(d). It proceeded merely on the premise that deduction of penalty/liquidated damages in terms of provisions of the agreement between the parties, from the agreed price on account of delay in delivery, would not entitle deductions for the purpose of ascertaining the transaction value.
19. In our considered view, post the amendment of Section 4 and the statutory definition of 'transaction value' in sub-section (3)(d) thereof, of the Act, the eventual value payable after factoring in any liquidated damages contractually stipulated for delayed supply would be the transaction value and this value would be the value relevant for levy of duty.
20. On the aforesaid analysis, we answer the reference by holding that wherever the assessee, as per the terms of the contract and on account of delay in delivery of manufactured goods is liable to pay a lesser amount than the generically agreed price as a result of a clause (in the agreement), stipulating variation in the price, on account of liability to "liquidated damages", irrespective of whether the clause is titled "penalty" or "liquidated damages", the resultant price would be the "transaction value"; and such value shall be liable to levy of excise duty, at the applicable rate."
4.8 In South Eastern Coalfields Ltd. [2021 (55) GSTL 549 (Tri.-Del.)], the Tribunal in paras 38 to 43 has observed as follows:-
"38. The decision of the Supreme Court in Fateh Chand does not help the Department. The facts indicate that the Delhi Improvement Trust had granted lease hold rights for ninety 16 E/1541/2012 years to Dr. M.M. Joshi in respect of a property. The relevant clauses of the agreement are :-
(i) The plaintiff has agreed to sell the building to the defendant for Rs. 1,12,500/-.
(ii) Rs. 1000, being earnest money deposit, was to be paid to the plaintiff at the time of the execution of the agreement.
(iii) The plaintiff had to deliver actual possession to the defendant on March 30, 1949 and the defendant had to give Rs.
24,000/- out of the sale price.
(iv) The defendant had to get the sale deed registered by July 1, 1949. If, for any reason, the defendant failed to get the sale deed registered by the stipulated date, then the sum of Rs. 25,000/- (Rs. 1000 received as earnest money deposit and the subsequent Rs. 24,000/- out of the sale price) would be forfeited and the agreement cancelled.
39. The plaintiff received the agreed sum on March 25, 1949 and possession was delivered, but the sale of the property was not completed before the expiry of the stipulated period. The plaintiff, therefore, sought a decree for possession of land and building and a decree of Rs. 6500/- as compensation for use and occupation of the building. It was alleged that the agreement stood cancelled because the defendant committed a default in performing the agreement and the sum of Rs. 25,000/- paid by the defendant stood forfeited.
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 17 E/1541/2012 property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated."
41. The Supreme Court also noticed that Section 74 of the Contract Act merely dispenses with the proof of "actual loss or damages". It does not justify the award of compensation, when in consequence of the breach no legal injury at all has resulted, because compensation for breach of contract can be awarded to make good the loss or damage which actually arose or which the parties knew when they made the contract 'to be likely to result from the breach'. The Supreme Court also found that there was no evidence that any loss was suffered by the plaintiff in consequences of the default by the defendant, save as to the loss suffered by being kept out of possession of the property. The Supreme Court, therefore, held that plaintiff would be entitled to retain only an amount of Rs. 1000/- that was received as earnest, out of amount of Rs. 25,000/-.
42. The conclusion drawn by the Learned Authorized Representatives of the Department from the aforesaid decision of the Supreme Court that compensation received is 'synonymous' with 'tolerating' or that the Supreme Court acknowledged that in a breach of contract, one party tolerates an act or situation is not correct.
43. It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards "consideration" for "tolerating an act" leviable to service tax under Section 66E(e) of the Finance Act."
4.9 In Steel Authority of India Ltd. [2021 (55) GSTL 34 (Tri.- Chennai)], the Tribunal has in paras 16 to 18 held as under:-
"16. In this connection it would be appropriate to reproduce the relevant portions of the decision of the Tribunal in South Eastern Coalfields and they are as follows :
18 E/1541/2012 "25. It is in the light of what has been stated above that the provisions of section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the :
(i) consideration for 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 19 E/1541/2012 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 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.
29. The situation would have been different if the party purchasing coal had an option to purchase coal from 'A' or from 'B' and if in such a situation 'A' and 'B' enter into an agreement that 'A' would not supply coal to the appellant provided 'B' paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under section 66E (e).
30. The activities, therefore, that are contemplated under section 66E(e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity."
17. This decision of the Tribunal in South Eastern Coalfields was followed by the Tribunal in M.P. Poorva Kshetra Vidyut Vitran.
20 E/1541/2012
18. In view of the aforesaid decisions of the Tribunal, it is not possible to sustain the view taken by the Commissioner that since the task was not completed within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax under Section 66E(e) of the Finance Act."
5.1 In view of above, we do not find any merits in the impugned order and set aside the same.
5.2 Appeal is allowed.
(Order pronounced in the open court) (Sanjiv Srivastava) Member (Technical) (Dr. Suvendu Kumar Pati) Member (Judicial) tvu