Custom, Excise & Service Tax Tribunal
Hariyana Ship Demolition Pvt Ltd vs Bhavnagar on 7 November, 2024
Customs, Excise & Service Tax Appellate Tribunal
West Zonal Bench At Ahmedabad
REGIONAL BENCH- COURT NO. 1
Service Tax Appeal No. 12892 of 2019-DB
(Arising out of OIO No. BHV-EXCUS-000-APP-227-2019 Dated-26.09.2019passed by
Principal Commissioner (Appeals)-Rajkot)
Hariyana Ship Demolition Pvt Ltd. ........Appellant
Plot No. V-4, Sosiya, SBY Alang,
Dist. Bhavnagar, Gujarat
VERSUS
C.C.E & S.T.-Bhavnagar ........Respondent
Plot No. 6776/B-1, Siddhi Sadan
Narayan Upadhyay Marg
Bhavnagar-364001
APPEARANCE:
Ms. Dimple Gohil,Advocateappeared for the Appellant
Sh. Himanshu P. Shrimali, Superintendent (Authorized Representative) for the
Respondent
CORAM: HON'BLE MR. RAMESH NAIR (JUDICIAL)
HON'BLE MR. RAJU, MEMBER (TECHNICAL)
FINAL ORDER NO._12618__/2024
DATE OF HEARING:07.10.2024
DATE OF DECISION:07.11.2024
RAMESH NAIR
The issue involved in the present case is that whether interest
charged by the appellant to their customer against the sale of the goods
for delayed payment can be classified as declared service under Section
66E(e) of the Finance Act as "agreeing to the obligation to tolerate
an Act" and consequential liable to service tax or otherwise.
2. Ms. Dimple Gohil, learned counsel appearing on behalf of the
appellant, at the outset, submits that the issue is no longer res integra
as in numerous judgments this issue has been considered. She placed
reliance on the following judgments:
a) South Eastern Coalfields Ltd. 2021 (55) GSTL 549 (Tri. Del.)
b) Repco Home Finance Pvt. Ltd. 2020 (42) GSTL 104 (Tri. Del.)
c) K.N. Food Industries Pvt. Ltd. 2020 (38) GSTL 60 (Tri.-All.)
d) M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. 2021 (46) GSTL 509
(T.Del.)
e) Steel Authority of India Ltd. 2021 (55) GSTL 34 (Tri. Chennai)
f) Ruchi Soya Industries Ltd. 2022 (56) GSTL 303 (Tri. Del.)
g) Lemon Tree Hotel [2020 (34) GSTL 200 (Tri. Del.)]
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h) Tirupati Balaji Furnaces Pvt Ltd. 2022-TIOL-77-CESTAT-DEL
i) MNH Shakti Ltd. 2021-TIOL-732-CESTAT-Kol
j) Bajaj Finance Ltd. 2023 (8) TMI 473-CESTAT-Mumbai
k) Mangalam Cement Limited 2024 (9) TMI 407-CESTAT Del
3. Shri Himanshu P. Shrimali, Learned Superintendent (Authorised
Representative) appearing on behalf of the Revenue reiterates the
findings of the impugned order.
4. We have carefully considered the submission made by both the
sides and perused the records. We find that from the facts of the
present case appellant are a manufacturer of excisable goods and
selling the same on principal to principal basis to their customers. As
per normal commercial trend in the trading market the supplier of
goods provides credit period for making the payment against sale of
the goods and after the said credit period if there is a delay, usually
there is a condition for charging interest for late payment of the sale
proceeds. In our view this interest is nothing but in connection with
sale of the goods and the same is chargeable on the amount of sale
which is retained by the customers. Therefore, this entire transaction
cannot be by any stretch of imagination categorized as service in terms
of declared service under Section 66E(e) of Finance Act 1994. This
issue is no longer res integra and in various judgments on the identical
consideration this Tribunal and courts have held that the same cannot
be taxed under the category agreeing to the tolerate an Act in terms of
Section 66E(e) of Finance Act, 1994. However the very relevant
judgments to the fact of the present case are reproduced below:
Bajaj Finance Ltd. 2023 (8) TMI 473-Cestat-Mum
"6. We find that the issue for consideration before us is to determine whether service
tax is liable to be paid in respect of penal interest and bouncing charges, more fully
described below,
(i) penal interest or delayed payment charges in case of late payment of EMI or delay
in payment of periodical installments of loan/advance repayments, and
(ii) bouncing charges i.e., charges recovered for bouncing of repayment instruments
such as dishonour of cheque/ECS or any other electronic or clearing mandate given by
the customers/borrowers.
and which were collected by the appellants during the disputed period i.e., from July,
2012 to March, 2016, and whether the appellants are providing a declared service in
terms of Section 66E(e) of the Finance Act, 1994 read with Section 174 (2) CGST Act,
2017.
7. On perusal of the records of the case, it transpires that during an audit conducted
on the records of the appellants, the agreements entered by the appellants with their
customers/borrowers were examined and the audit wing of the department had
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identified non-payment of service tax, both (i) on penal interest/penal charges
collected in case of default/delay in payment of EMI and (ii) on charges recovered for
bouncing/dishonour of the repayment instruments, cheque, ECS or other electronic or
clearing mandate, in respect of loans and advances given to their
customers/borrowers. The Department has interpreted that, as per Section 66B which
was introduced with effect from 01.07.2012, read with Section 65B(44) of the Finance
Act, 1994, 'any activity carried on' by 'a person for another for consideration', will be
levied to service tax, unless otherwise excluded or covered by the negative list of
services. On the basis of various clauses in the agreement entered into by the
appellants with their customers/borrowers, the Department alleged that
recovery/earning of an extra/surplus (i.e., penal interest/penalty) being other than the
loan amount and the principal interest is nothing but a compensation received by the
appellants on account of delay in payment of EMI by the customer. As these charges
are not in the nature of principal interest and are to be appropriately treated as
consideration for a declared service of 'tolerating an act' of non-payment/delay in
payment of EMI by the customers/borrowers, as per clauses made in the loan
agreement entered into by the appellants in providing loans and advances, show
cause proceedings were initiated vide SCN dated 15.12.2018. The learned
Commissioner had examined certain clauses providing for 'Remedies in case of
default', 'terms of loan' and 'definitions/abbreviations' in the various agreements such
general Loan agreement, Auto-Loan agreement and personal loan & cross sell
agreement and had given a finding that the agreements do not support the
contention that these charges are interest on delayed payments; and that the
intention of both the parties is to avoid litigation by paying a pre-determined sum to
the lender on breach of contract by the borrower. Thus, he concluded that these
penal charges and bounce charges paid by the borrower for default in payment of
EMI/dishonour of payment instrument is a consideration and such a
default/delay/non-payment/dishonour of payment instrument is tolerated by the
appellants on payment of an amount as agreed upon in the agreement and it is a
declared service of 'agreeing to tolerate an act or a situation' under section 66 E(e) of
the Finance Act, 1994. Accordingly, he ordered that penal Charges and bounce
charges paid by borrowers is a consideration for service rendered by the appellants
and service tax is thus payable on such consideration by confirming the adjudged
demands. The decision taken by the learned Commissioner in the impugned order
dated 07.09.2018 is as follows:
"Para 21. In view of the above discussions and findings, I pass the following
order -
ORDER
a) I hold that activity of M/s Bajaj Finance Limited of tolerating the act of 'default and non-payment and late payment in payment of EMI by the Borrowers & Customers and dishonor of payment instrument given by the Borrowers and Customers towards repayment of loan installments' is considered as 'Declared service' of 'agreeing to tolerate an act or situation' in terms of Section 66(E)(e) of the Finance Act, 1994 read with Section 65B(22) of the Act and thereby "Service" in terms of Section 65B(44) of the Finance Act, 1994 and 'taxable service' in terms of Section 65(51) of the Finance Act, 1994 and penal and bounce charges paid by the Borrowers and Customers in lieu is the consideration for the services rendered as above;
b) I confirm the Show Cause Notice No. Show Cause Notice SCN No.07/R-I/DN-V/GST- I/AUDIT-I/COMMR/2017-18 issued F. No. V (ST)15-17/Commr/Audit-I/17-18 dated 15.01.2018 and determine the demand of Service Tax amounting to Rs.53,87,14,050/- [Rupees Fifth three crores eighty seven lakhs fourteen thousand and fifty only], not paid by M/s Bajaj Finance Limited on the peal and bounce charges received from the Customers and Borrowers during the period from 01.07.2012 to March 2016, under the provisions of Section 73(2) of the Finance Act, 1994.
c) I confirm the demand of interest on the amount of Service tax confirmed as detailed in Sr. No.(b) above, as the applicable rates, and order recovery of the same from M/s Bajaj Finance Limited, under the provisions of Section 75 of Finance Act, 1994.
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d) I also impose a penalty of Rs.53,87,14,050/- [Rupees Fifth three crores eighty seven lakhs fourteen thousand and fifty only], on M/s Bajaj Finance Limited, Pune, under the provisions of Section 78(1) of the Finance Act, 1994.
e) However, I give an option to M/s Bajaj Finance Limited, under clause (ii) of first proviso and also second proviso to Section 78(1) of the Finance Act, 1994, as amended, to pay 25% of the service tax determined and confirmed at Sr. No. (b) above as penalty, provided M/s Bajaj Finance Limited pays the entire amount of Service Tax, as determined /confirmed in Sr. No.(b) above, along with interest payable thereon as ordered in Sr. No. (c) above as well as the reduced 25% penalty, within 30 days of the date of communication of this order.
f) I impose penalty of Rs.10,000/- (Rupees Ten Thousand only) on M/s Bajaj Finance Limited, Pune, under the provisions of Section77(1)(e) of the Finance Act, 1994 for their failure to issue and account for invoices, in respect of Penal and Bounce charges recovered in their books of account in the manner prescribed as per Rule 4A of the Service Tax Rules, 1994 as discussed in Para 19.3 supra.
g) I refrain from imposing Penalty under the provisions of Section 77(1)(a) of the Finance Act, 1994 for the reasons discussed in Para 19.2 supra."
8. In order to examine the issues before us, we would like refer to certain words, phrases that have been explained under section 65Bibid,for the purpose of interpretation under the service tax statue i.e., Finance Act, 1994. The relevant words and legal provisions referred in the case before us are extracted below:
"65B. Interpretations. -- In this Chapter, unless the context otherwise requires, --
(22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E;
xx xx xx xx xx (30) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized;
xx xx xx xx xx (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include--
(a) an activity which constitutes merely, --
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force xx xx xx xx xx (51) "taxable service" means any service on which service tax is leviable under section 66B;
5|Page ST/12892/2019-DB 66B. Charge of service tax on and after Finance Act, 2012. -- There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen percent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
66D. Negative list of services. --The negative list shall comprise of the following services, namely: --
(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere--
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii) transport of goods or passengers; or
(iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities;
(b) services by the Reserve Bank of India;
(c) services by a foreign diplomatic mission located in India;
(d) services relating to agriculture or agricultural produce by way of--
(i) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing;
(ii) supply of farm labour;
(iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market;
(iv) renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;
(v) loading, unloading, packing, storage or warehousing of agricultural produce;
(vi) agricultural extension services;
(vii) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce;
(e) trading of goods;
(f) any process amounting to manufacture or production of goods;
(g) selling of space or time slots for advertisements other than advertisements broadcast by radio or television;
(h) service by way of access to a road or a bridge on payment of toll charges;
(i) betting, gambling or lottery;
(j) admission to entertainment events or access to amusement facilities;
(k) transmission or distribution of electricity by an electricity transmission or distribution utility;
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(l) services by way of--
(i) pre-school education and education up to higher secondary school or equivalent;
(ii) education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;
(iii) education as a part of an approved vocational education course;
(m) services by way of renting of residential dwelling for use as residence;
(n) services by way of--
(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;
(ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers;
(o) service of transportation of passengers, with or without accompanied belongings, by--
(i) a stage carriage;
(ii) railways in a class other than--
(A) first class; or (B) an air conditioned coach;
(iii) metro, monorail or tramway;
(iv) inland waterways;
(v) public transport, other than predominantly for tourism purpose, in a vessel between places located in India; and
(vi) metered cabs, radio taxis or auto rickshaws;
(p) services by way of transportation of goods--
(i) by road except the services of--
(A) a goods transportation agency; or (B) a courier agency;
(ii) by an aircraft or a vessel from a place outside India up to the customs station of clearance in India; or
(iii) by inland waterways;
(q) funeral, burial, crematorium or mortuary services including transportation of the deceased.
66E. Declared services. -- The following shall constitute declared services, namely: --
(a) renting of immovable property xx xx xx xx xx
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;"
9. From the perusal of the case records it transpires that the appellants are engaged in the business of financing including lending of loans and advances. As a consideration for lending/financing, the appellants charge interest from their customers/ borrowers at a particular rate, for the period for which such loan is taken. The principal and
7|Page ST/12892/2019-DB interest amount on such loan is repaid by customers/borrowers by way of EMI over a period of loan tenure. Accordingly, while computing the EMI, the appellants charges pro-rata interest payable on each due date, on the underlying assumption that the customers/borrowers would not default in payment of the EMI on the due dates. However, in case of any default, the appellants charge them an additional interest in the form of penal interest for the number of days of default. In any case of loan arrangement for lending money, the agreement between the parties i.e., lender and borrower provide for repayment of outstanding loan amount and the interest thereon in the form of Equated Monthly Installments, payable on a pre-determined date, over the entire loan tenure/repayment period. Considering the nature of the principal interest on the loan due over the entire loan tenure, collected in the form of EMI comprising of principal amount plus interest, in our considered opinion this principal interest could be treated as consideration for the usage or retention of money lent by the appellants to their customers/borrowers as per the agreement and EMIs in force. In a case where the borrower is unable to repay a particular EMI on the due date, penal interest is charged on the period of delay or additional time taken for repayment of EMI, beyond the due date. Therefore, in our considered opinion such penal interest also represents the consideration for usage or retention of money lent beyond the agreed time for payment in the form of due date of EMI. In other words, both the principal interest and the penal interest represent the time value of money. While the former indicates the interest in the form of cost for agreed periodical repayments in the form of EMI period/due dates, the later represent the cost for period of delay or additional time taken for repayment of EMI, beyond the due date. Thus, we find that both the principal interest and penal interest is covered under the scope of the term "interest" under Section 65B(30) ibid.
10.1. In the context of the above issues under dispute, we note that the banking and monetary policy framework are being designed by the Reserve Bank of India (RBI) in exercise of the powers vested with it under the Reserve Bank of India Act, 1934 and various policy circulars in this regard are being issued from time to time by RBI. Accordingly, all banks/ banking company dealing with banking business are required to charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time. The Master Circular issued by RBI in this regard vide RBI/2010-11/72 DBOD.No.Dir.BC.9 /13.03.00/2010-11 dated 01.07.2010 deals, inter- alia, with the issue of penal interest, as follows:
"2. Guidelines 2.1. General 2.1.1. Banks should charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time.
xx xx xx xx xx 2.5. Levying of penal rates of interest Banks are permitted to formulate a transparent policy for charging penal interest with the approval of their Board of Directors. However, in the case of loans to borrowers under priority sector, no penal interest should be charged for loans up to Rs.25,000. Penal interest can be levied for reasons such as default in repayment, non submission of financial statements, etc. However, the policy on penal interest should be governed by well-accepted principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customer."
Thus, we find that the guidelines of RBI which provide for charging interest on loans and advances also provide for levy of penal interest for default in repayment or non- submission of instruments of repayment of loan in time. The appellants being a Non- Banking Financial Institution governed by the regulatory frame work of RBI had
8|Page ST/12892/2019-DB followed the guidelines and hence there is no extra consideration that flows in such payments made on account of penal interest/delayed payment charges.
10.2. We further find that clause (iv) to sub-rule 2 to Rule 6 of the Service Tax (Determination of Value) Rules, 2006, notified vide Notification No.24/ 2012 - S.T. dated 06.06.2012, inter alia, provide that the value of any taxable service does not include, '(iv) interest on delayed payment of any consideration for the provision of services or sale of property, whether movable or immovable'. Thus, in our considered opinion the above entry clearly provide the Government had excluded the interest on delayed payment from the scope of payment of service tax.
11.1. In the impugned order, the learned Commissioner had held that penal charges and bounce charges are in the nature of consideration for having agreed to tolerate an act or a situation and thus it is a declared service of 'agreeing to tolerate an act or a situation' under section 66 E(e) of the Finance Act, 1994.
11.2 We find that the issue regarding charging of penal interest in respect of delay in payment of EMI, had been examined by the Ministry of Finance in the context of applicability of GST and it was clarified vide CBIC Circular No. 102/21/2019-GST dated 28.06.2019, that the transaction of levy of additional/penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act", as this levy of additional/penal interest satisfies the definition of 'interest' as contained in Notification No.12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, it was clarified that 'penal interest' charged on a transaction would not be subject to GST. The said circular is extracted below:
"Circular No. 102/21/2019-GST F. No. CBEC- 20/16/04/2018 - GST Government of India Ministry of Finance Department of Revenue Central Board of Indirect Taxes and Customs GST Policy Wing **** New Delhi, Dated the 28th June, 2019 To, The Principal Chief Commissioners / Chief Commissioners / Principal Commissioners / Commissioners of Central Tax (All) The Principal Director Generals / Director Generals (All) Madam/Sir, Subject: Clarification regarding applicability of GST on additional / penal interest - reg.
Various representations have been received from the trade and industry regarding applicability of GST on delayed payment charges in case of late payment of Equated Monthly Installments (EMI). An EMI is a fixed amount paid by a borrower to a lender at a specified date every calendar month. EMIs are used to pay off both interest and principal every month, so that over a specified period, the loan is fully paid off along with interest. In cases where the EMI is not paid at the scheduled time, there is a levy of additional / penal interest on account of delay in payment of EMI.
2. Doubts have been raised regarding the applicability of GST on additional / penal interest on the overdue loan i.e. whether it would be exempt from GST in terms of Sl. No. 27 of notification No. 12/2017- Central Tax (Rate) dated 28th June 2017 or such penal interest would be treated as consideration for liquidated damages [amounting to a separate taxable supply of services under GST covered under entry 5(e) of Schedule II of the Central Goods and Services Tax Act, 2017 (hereinafter referred to
9|Page ST/12892/2019-DB as the CGST Act) i.e. "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act"]. In order to ensure uniformity in the implementation of the provisions of the law, the Board, in exercise of its powers conferred by section 168 (1) of the CGST Act, hereby issues the following clarification.
3. Generally, following two transaction options involving EMI are prevalent in the trade:-
Case - 1: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. However, X gives Y an option to pay in installments, Rs 11,000/- every month before 10th day of the following month, over next four months (Rs 11,000/- *4 = Rs. 44,000/-). Further, as per the contract, if there is any delay in payment by Y beyond the scheduled date, Y would be liable to pay additional / penal interest amounting to Rs. 500/- per month for the delay. In some instances, X is charging Y Rs. 40,000/- for the mobile and is separately issuing another invoice for providing the services of extending loans to Y, the consideration for which is the interest of 2.5% per month and an additional / penal interest amounting to Rs. 500/- per month for each delay in payment.
Case - 2: X sells a mobile phone to Y. The cost of mobile phone is Rs 40,000/-. Y has the option to avail a loan at interest of 2.5% per month for purchasing the mobile from M/s ABC Ltd. The terms of the loan from M/s ABC Ltd. allows Y a period of four months to repay the loan and an additional / penal interest @ 1.25% per month for any delay in payment.
4. As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the value of supply shall include "interest or late fee or penalty for delayed payment of any consideration for any supply". Further in terms of Sl. No. 27 of notification No. 12/2017- Central Tax (Rate) dated the 28.06.2017 "services by way of (a) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services)"is exempted. Further, as per clause 2 (zk) of the notification No. 12/2017-
Central Tax (Rate) dated the 28th June, 2017, "'interest' means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;".
5. Accordingly, based on the above provisions, the applicability of GST in both cases listed in para 3 above would be as follows:
Case 1: As per the provisions of sub-clause (d) of sub-section (2) of section 15 of the CGST Act, the amount of penal interest is to be included in the value of supply. The transaction between X and Y is for supply of taxable goods i.e. mobile phone. Accordingly, the penal interest would be taxable as it would be included in the value of the mobile, irrespective of the manner of invoicing.
Case 2: The additional / penal interest is charged for a transaction between Y and M/s ABC Ltd., and the same is getting covered under Sl. No. 27 of notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. Accordingly, in this case the 'penal interest' charged thereon on a transaction between Y and M/s ABC Ltd. would not be subject to GST, as the same would not be covered under notification No. 12/2017-Central Tax (Rate) dated 28.06.2017. The value of supply of mobile by X to Y would be Rs. 40,000/- for the purpose of levy of GST.
6. It is further clarified that the transaction of levy of additional / penal interest does not fall within the ambit of entry 5(e) of Schedule II of the CGST Act i.e. "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act", as this levy of additional / 10 | P a g e ST/12892/2019-DB penal interest satisfies the definition of "interest" as contained in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017. It is further clarified that any service fee/charge or any other charges that are levied by M/s ABC Ltd. in respect of the transaction related to extending deposits, loans or advances does not qualify to be interest as defined in notification No. 12/2017- Central Tax (Rate) dated 28.06.2017, and accordingly will not be exempt.
7. It is requested that suitable trade notices may be issued to publicize the contents of this circular.
8. Difficulty, if any, in the implementation of this circular may be brought to the notice of the Board immediately. Hindi version follows."
12. We also find that the issue of penal charges in respect of delay in payment amounting to declared service as contemplated by the department under section 66E(e) of the Finance Act, on which service became taxable w.e.f. July 1, 2012, has already been decided by Principal Bench of this Tribunal in the case of M/s. South Eastern Coalfields Ltd. Vs. Commissioner of Central Excise and Service Tax in Final Order No. 51651/2020 dated 22.12.2020. In this case, the Tribunal had held that 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. Hence, it was held by the Tribunal that it is not possible to sustain the view 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. The relevant paragraphs in the above order of the Tribunal are extracted below:
"24. What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders 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 Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. 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.
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 11 | P a g e ST/12892/2019-DB 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 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.
xx xx xx xx xx
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.
44. The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed."
The aforesaid order of the Principal Bench of the Tribunal was appealed by the department before the Hon'ble Supreme Court in Civil Appeal No.2372/2021 and the Hon'ble Apex Court dismissed the same as withdrawn. The said Order dated 11.9.2023 is extracted below:
12 | P a g e ST/12892/2019-DB
13. We also find that the question regarding taxability of an activity or transaction as the supply of service of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act was examined by the CBEC and they had issued certain guidelines to the field formations clarifying the legal position for determining whether tax on an activity can be imposed, in its Circular No.178/10/2022-Service Tax dated 03.08.2022. The relevant portion of the above circular dealing with 'cheque dishonor fine/penalty' is extracted below:
"Cheque dishonor fine/ penalty 7.3 No supplier wants a cheque given to him to be dishonoured. It entails extra administrative cost to him and disruption of his routine activities and cash flow. The promise made by any supplier of goods or services is to make supply against payment within an agreed time (including the agreed permissible time with late payment) through a valid instrument. There is never an implied or express offer or willingness on part of the supplier that he would tolerate deposit of an invalid, fake or unworthy instrument of payment against consideration in the form of cheque dishonour fine or penalty. The fine or penalty that the supplier or a banker imposes, for dishonour of a cheque, is a penalty imposed not for tolerating the act or situation but a fine, or penalty imposed for not tolerating, penalizing and thereby deterring and discouraging such an act or situation. Therefore, cheque dishonor fine or penalty is not a consideration for any service and not taxable."
14. We further find that the issue of liability of service tax on the declared service of "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 was clarified by the CBEC in its Circular No.214/1/2023- Service Tax dated 28.02.2023, in the context of the orders passed by this Tribunal in various cases. Accordingly, it was clarified that there should be a flow of consideration for this activity of tolerating an act or a situation. It was also decided by the Board not to pursue the Civil Appeals filed before the Apex Court in those cases, where the Tribunal had ordered for setting aside the orders of lower authorities for confirming the service tax demands under Section 66E(e). The relevant paragraph of the said circular is extracted below:
"3. 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 is similar in GST. "Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" has been specifically declared to be a supply of service in para 5 (e) of Schedule II of the CGST Act, 2017.
4. As can be seen, the said expression has three limbs: - i) Agreeing to the obligation to refrain from an act, ii) Agreeing to the obligation to tolerate an act or a situation, iii) Agreeing to the obligation to do an act. Service of agreeing to the obligation to refrain from an act or to tolerate an act or a 13 | P a g e ST/12892/2019-DB 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. 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 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 whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022-GST dated 3rd August, 2022, may also be referred to in this regard.
7. Difficulty experienced, if any, in implementing the circular should be brought to the notice of the Board. Hindi version will follow."
15. We also note that demand of service tax in respect of the amount collected on account of bouncing of cheques, the issue has already been decided by the Principal Bench of this Tribunal in the case of M/s. Rohan Motors Ltd. Vs. Commissioner of Central Excise, Dehradun in Final Order No. 51620/2020 dated 05.10.2020 reported in 2021 (45) G.S.T.L. 315 (Tri. - Del.) holding that these charges are penal in nature and thus are not towards consideration for any service.
"19. The demand of service tax in respect of the amount collected on account of bouncing of cheques and cancellation of orders is also not sustainable. These amount are penal in nature and not towards consideration for any service. In this connection reliance can be placed on the decisions of the Tribunal in Jaipur Jewellery Show v. C.C.E & S.T., Jaipur - 2016 (12) TMI 344 - CESTAT New Delhi = 2017 (49) S.T.R. 313 (Tribunal) and K.N. Food Industries (P.) Ltd. v. Commissioner of CGST & Central Excise, Kanpur - 2019-TIOL-3651- CESTAT-ALL = 2020 (38) G.S.T.L. 60 (Tri. - All.).
xx xx xx xx xx
21. The Learned Authorized Representative of the Department has, however, placed reliance upon a ruling dated March, 2019 of the Appellate Authority for Advance Ruling Maharashtra to contend that the amount collected towards bouncing of cheque charges amounts to supply of service, but Learned Counsel for the appellant has pointed out that the said order was rectified subsequently by the Appellate Authority for Advance Ruling Maharashtra in its order dated December 12, 2019 [2020 (41) G.S.T.L. 651 (App. A.A.R. GST - Mah.)] and it was held.
14 | P a g e ST/12892/2019-DB "We hereby hold that the additional/Penal interest recovered by the Applicant from their customers against the delayed payment of monthly instalments of the load extended to such customers, would be exempt from GST in terms of Sl. 27 of the Notification No. 12/2017-C.T. (Rate), dated 28-6- 2017."
22. Thus, for all the reasons stated above, it is not possible to sustain the impugned order dated June 18, 2015 passed by Commissioner. It is, accordingly, set aside and the appeal is allowed."
16. In view of the above discussions and findings recorded in the preceding paragraphs, as well as on the basis of decisions of the Tribunal and higher judicial forum, we are of the considered view that the impugned order holding that penal interest and bouncing charges received by the appellants as "consideration" for "tolerating an act", and are leviable to service tax under section 66E(e) of the Finance Act, 1994, cannot be sustained.
17. In view of the above, the appeals filed by the appellants are allowed by setting aside the impugned order dated 24th August, 2018."
In the case of South Eastern Coalfields Ltd. 2021 (55) GSTL 549 (Tri. Del.) following has been observed:
10.The issue that is involved is whether the appellant is providing a "declared service" contemplated under Section 66E(e) of the Finance Act, which service became taxable w.e.f. July 1, 2012. The period of dispute in the present appeal is from July, 2012 to March, 2016.
11.Section 65B(44) of the Finance Act defines "service" to mean any activity carried out by a person for another for consideration, and includes a declared service, but does not include what is mentioned in "(a), (b) and (c)".
The relevant portion of the definition of "service" is reproduced below :
"Section 65B(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include -
(a) an activity which constitutes merely, -
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution;
or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force."
12."Declared services" has been defined in Section 66E and sub-section(e) of Section 66E, which is involved in this appeal, is as follows :
Declared services "66E.
The following shall constitute declared services, namely :-
15 | P a g e ST/12892/2019-DB xx xx xx agreeing to the obligation to refrain from an (e) 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 short-
lifted/unlifted 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 the contract by the other party.
15.Section 65B(44) defines „service‟ to mean any activity carried out by a person for another person for consideration, and includes a declared service. Under Section 66E(e), a declared service shall constitute agreeing to the obligation to refrain from an act, or to tolerate an act or situation, or to do an act. Section 66B provides that service tax shall be levied at the rate of 12 per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory 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.
16.Section 67 of the Finance Act deals with valuation of taxable service for charging service tax. It is reproduced below :-
Subject to the provisions of this 67.(1) Chapter, where service tax is chargeable on any taxable service with reference to its value, then such value shall, -
(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;
(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;
(iii)in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.
xx xx xx
Explanation. - For the purposes of this section, -
(a) "consideration" includes -
16 | P a g e ST/12892/2019-DB
xx xx xx
(b) xx xx xx
(c) xx" xx xx
(Emphasissupplied)
17.Section 68 provides that every person providing taxable service to any person shall pay service tax at the rate specified in Section 66B in such manner and within such period as may be prescribed.
18.It is, thus, clear that where service tax is chargeable on any taxable service with reference to its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of sub-section (1) of Section 67. What needs to be noted is that each of these refer to "where the provision of service is for a consideration", whether it be in the form of money, or not wholly or partly consisting of money, or where it is not ascertainable. In either of the cases, there has to be a "consideration" for the provision of such service.
Explanation to sub-section (1) of Section 67 clearly provides that only an amount that is payable for the taxable service will be considered as "consideration". This apart, what is important to note is that the term "consideration" is couched in an "inclusive" definition.
19.A Larger Bench of the Tribunal in Bhayana Builders (P) Ltd. v. Commissioner of Service Tax [2013 (32) S.T.R. 49 (Tri. - LB)] observed that implicit in the legal architecture is the concept that any consideration, whether monetary or otherwise, should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the latter. In the said decision, the Larger Bench made reference to the concept of "consideration", as was expounded in the decision pertaining to Australian GST Rules, wherein a categorical distinction was made between "conditions" to a contract and "consideration for the contract". It has been prescribed under the said GST Rules that certain "conditions" contained in the contract cannot be seen in the light of "consideration" for the contract and merely because the service recipient has to fulfil such conditions would not mean that this value would form part of the value of the taxable services that are provided.
20.The Supreme Court in Commissioner of Service Tax v. M/s. Bhayana Builders [2018 (2) TMI 1325 = 2018 (10) G.S.T.L. 118 (S.C.)], while deciding the appeal filed by the Department against the aforesaid decision of the Tribunal, also explained the scope of Section 67 of the Act. The Supreme Court observed that any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The observations are :
"The amount charged should be for "for such service provided" : Section 67 clearly indicates that the gross amount charged by the service provider has to be for the service provided. Therefore, it is not any amount charged which can become the basis of value on which service tax becomes payable but the amount charged has to be necessarily a consideration for the service provided which is taxable under the Act. By using the words "for such service provided" the Act has provided for a nexus between the amount charged and the service provided. Therefore, any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable under Section 67. The cost of free supply of goods provided by the service recipient to the service provider is neither an amount "charged" by the service provider nor can it be regarded as a consideration for the service provided by the service provider. In fact, it has no nexus whatsoever with the taxable services for which value is sought to be determined."
17 | P a g e ST/12892/2019-DB (Emphasissupplied)
21.The aforesaid view was reiterated by the Supreme Court in Union of India v. Intercontinental Consultants and Technocrats [2018 (10) G.S.T.L. 401 (S.C.)] and it was observed that since service tax is with reference to the value of service, as a necessary corollary, it is the value of the services which are actually rendered, the value whereof is to be ascertained for the purpose of calculating the service tax payable thereupon.
22.In this connection it would also be pertinent to refer to TRU Circular dated 20 June, 2012 issued by the Central Board of Excise and Customs as an Education Guide when the Negative List based taxation regime was introduced from July, 2012 to clarify various aspects of the levy of service tax. The Board dealt with "consideration" in paragraph 2.2 of this Circular and pointed out that since the definition was inclusive, it will not be out of place to refer to the definition of "consideration" as given in Section 2(d) of the Indian Contract Act, 1872. The relevant portion of the aforesaid Circular is reproduced below :
Consideration "2.2 The phrase "consideration" has not been defined in the Act. 2.2.1 What is, therefore, the meaning of "consideration"?
As per Explanation (a) to section 67 of the Act "consideration" includes any amount that is payable for the taxable services provided or to be provided.
Since this definition is inclusive it will not be out of place to refer to the definition of "consideration" as given in section 2(d) of the Indian Contract Act, 1872 as follows -
xx xx xx
(Emphasissupplied)
23.It would, therefore, be appropriate to examine the definition of
"consideration" in Section 2(d) of the Contract Act, as the Contract Act deals with all kinds of contracts and pre-dates the Finance Act. The definition of "consideration" is as follows :-
When, at the desire of the promisor, the "2(d) 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."
24.What follows from the aforesaid decisions of the Supreme Court in Bhayana Builders and Intercontinental Consultants, and the decision of the Larger Bench of the Tribunal in Bhayana Builders 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 Finance Act. Any amount charged which has no nexus with the taxable service and is not a consideration for the service provided does not become part of the value which is taxable. 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.
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 18 | P a g e ST/12892/2019-DB 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 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. 19 | P a g e ST/12892/2019-DB
31.In this connection, it will be useful to refer to a decision of the Supreme Court in Food Corporation of India v. Surana Commercial Co. and Others [(2003) 8 SCC 636]. The Supreme Court pointed out that if a party promises to abstain from doing something, it can be regarded as a consideration, but such abstinence has to be specifically mentioned in the agreement. The relevant portion of the judgment is reproduced below :
"Under the main agreement, a party had contracted for the conversion of whole arhar grain into dal. Subsequently, by another supplemental agreement, the party agreed to upgrade the dal. It was held that as soon as the first agreement was complied with and dal was delivered, the contract came to an end and the supplemental agreement, which was made subsequently, was a separate and independent agreement. In this agreement, there was no consideration to be given to the promisor and thus that agreement could not be enforced in law. It was claimed that in the supplemental agreement consideration was that the bank guarantees were not to be encashed, but it was found that there was no mention of such a consideration in the supplemental agreement. Although if a party promised to abstain from doing something, it could be regarded as consideration for the contract, but in the present case there was no such case of abstinence and there was no consideration for supplemental contract."
(Emphasissupplied)
32.In the present ca se, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate 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‟.
33.It would be apt to refer to a judgment of the European Court of Justice (First Chamber) in Case C-277/2005, in Societe Thermale d'Eugenic-les-Bains v. Ministere de I'Economie, des Finances et de I'Industrie as it deals with the issue whether an obligation to refrain from an act or to tolerate an act or situation would result in supply of services when a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service. Under Article 2(1) of the Sixth Directive, „the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such‟ is subjected to VAT. Article 6(1) of the Sixth Directive provides that "supply of services" shall mean any transaction which does not constitute a supply of goods within the meaning of Article 5 and that such transactions may include inter alia an obligation to refrain from an act or to tolerate an act or situation. Under Article 11(A)(1)(a) of the Sixth Directive, the taxable amount in respect of supplies of services is to be „everything which constituted the consideration which has been or is to be obtained by the supplier from the customer or a third party for such supplies‟.
34.The question referred for preliminary hearing, in essence, in the aforesaid decision was whether a sum paid as a deposit by a client to a hotelier, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, can be regarded as consideration for the supply of a reservation service, which is subject to VAT, or as a fixed compensation for cancellation, which is not subject to VAT. The Court found that there has to be a direct link between the service rendered and the consideration received. The sum paid must constitute a genuine consideration for an identifiable service supplied in the context of a legal relationship for which performance is reciprocal. It is in this context that Court observed :
20 | P a g e ST/12892/2019-DB "26.Since the obligation to make a reservation arises from the contract for accommodation itself and not from the payment of a deposit, there is no direct connection between the service rendered and the consideration received (Apple and Pear Development Council, paragraphs 11 and 12;
Tolsma, paragraph 13; and Kennemer Golf, paragraph 39). The fact that the amount of the deposit is applied towards the price of the reserved room, if the client takes up occupancy, confirms that the deposit cannot constitute the consideration for the supply of an independent and identifiable service.
Since the deposit does not constitute the consideration for the 27. supply of an independent and identifiable service, it must be examined, in order to reply to the referring Court, whether the deposit constitutes a cancellation charge paid as compensation for the loss suffered as a result of the client‟s cancellation.
In that regard, it should be noted that the contracting parties 28. are at liberty - subject to the mandatory rules of public policy - to define the terms of their legal relationship, including the consequences of a cancellation or breach of their obligations. Instead of defining their obligations in detail, they may nevertheless refer to the various instruments of civil law.
Thus the parties may make contractual provision - applicable in 29. the event of non-performance - for compensation or a penalty for delay, for the lodging of security or a deposit. Although such mechanisms are all intended to strengthen the contractual obligations of the parties and although some of their functions are identical, they each have their own particular characteristics.
xx xx xx
32.Whereas, in situations where performance of the contract follows its normal course, the deposit is applied towards the price of the services supplied by the hotelier and is therefore subject to VAT, the retention of the deposit at issue in the main proceedings is, by contrast, triggered by the client's exercise of the cancellation option made available to him and serves to compensate the hotelier following the cancellation. Such compensation does not constitute the fee for a service and forms no part of the taxable amount for VAT purposes (see, to that effect, as regards interest applied on account of late payment, Case 222/81 BAZ Bausystem [1982] ECR 2527, paragraphs 8 to 11)."
(Emphasissupplied)
35.Reference can also be made to a decision of the Tribunal in Lemon Tree Hotel. The issue that arose for consideration was whether forfeiture of the amount received by a hotel from a customer on cancellation of the booking would be leviable to service tax under Section 66E(e). The Tribunal held that the retention of the amount on cancellation would not attract service tax under Section 66E(e) and the relevant portion of the decision is reproduced below :
So far as the first issue is concerned, the "3. appellant, in the course of their business of running a hotel, offers advance booking to its customers, on payment of rent or deposit. Sometimes in the event of cancellation or of no show i.e. if the guest does not come for stay, the appellants retain the full or part of the amount towards cancellation charges. It is admitted that the appellant have paid service tax under Accommodation Services as and when they receive advance, availing the permissible abated value. It is the case of the Revenue that upon cancellation by the customers, the gross amount received by the appellant qualifies the receipt under Section 66E(e).
21 | P a g e ST/12892/2019-DB Ld. Commissioner (Appeals) in confirming the 4. demand under this head has observed that retention of such cancellation charges is not against the provisions of intended services but for not availing the said services by the customers, which the appellant has tolerated.
Having considered the rival contentions, I 5. find that the aforementioned observation of the Commissioner (Appeals) are erroneous and have no legs to stand. Admittedly, the customers pay an amount to the appellant in order to avail the hotel accommodation services, and not for agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and chargeable on full value and not on abated value. The amount retained by the appellant is for, as they have kept their services available for the accommodation, and if in any case, the customers could not avail the same, thus, under the terms of the contract, they are entitled to retain the whole amount or part of it. Accordingly, I hold that the retention amount (on cancellation made) by the appellant does not undergo a change after receipt. Accordingly, I hold that no service tax is attracted under the provisions of Section 66E(e) of the Finance Act. Accordingly, this ground is allowed in favour of the appellant."
(Emphasissupplied)
36.A Division Bench of the Tribunal in K.N. Food Industries examined the provisions of Section 66E(e) in the context of an assessee manufacturing for and on behalf of M/s. Parley and clearing the same upon payment of central excise duty. In a situation when the capacity of the assessee was not fully utilized by M/s. Parley, ex gratia charges were claimed so as to compensate the assessee from financial damage or injury. The Department invoked the provisions of Section 66E(e) to levy tax on the amount so received. The Tribunal held that the ex gratia charges were for making good the damages due to the breach of the terms of the contract and did not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be towards payment for any services. The relevant portion of the decision is reproduced below :
"4. xxx xxx xxx We find that appellant is admittedly manufacturing confectioneries for and on behalf of the M/s. Parle and is clearing the same upon payment of Central Excise duty on the basis of MRP declared by M/s. Parle. It is only in situation when the appellant‟s capacity, as a manufacturer, is not being fully utilized by M/s. Parle, their claim of ex gratia charges arises so as to compensate them from the financial damage/injury. As such, ex gratia amount is not fixed and is mutually decided between the two, based upon the terms and conditions of the agreement and is in the nature of compensation in case of low/less utilization of the production capacity of the assessee.
xxx xxx xxx 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 Sub-clause proceeds to state various active and passive actions or reactions which are declared to be a service namely; to refrain from an act, or to tolerate an act or a situation, or to do an act. As such for invocation of the said clause, there has to be first a concurrence to assume an obligation to refrain from an act or tolerate an act etc. which are clearly absent in the present case. In the instant case, if the delivery of project gets delayed, or any other terms of the contract gests breached, which were expected to cause some damage or loss to the appellant, the contract 22 | P a g e ST/12892/2019-DB itself provides for compensation to make good the possible damages owning to delay, or breach, as the case may be, by way of payment of liquidated damages by the contractor to the appellant. As such, the contracts provide for an eventuality which was uncertain and also corresponding consequence or remedy if that eventuality occurs. As such the present ex gratia charges made by the M/s. Parle to the appellant were towards making good the damages, losses or injuries arising from "unintended" events and does not emanate from any obligation on the part of any of the parties to tolerate an act or a situation and cannot be considered to be the payments for any services."
(Emphasissupplied)
37.Much reliance has been placed by the Learned Authorized Representative of the Department on the decision of the Supreme Court in Fateh Chand. The submission is that the word "suffering" is synonymous to "tolerating" and the Supreme Court in Fateh Chand held that a reasonable compensation for breach of contract has to be proportionate to the actual injury suffered. Thus, according to the Learned Authorized Representative of the Department it has been acknowledged by the Supreme Court that in a case of breach of contract, one party tolerates an act or situation.
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 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 :
Section 74 declares the law as to "20. 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 23 | P a g e ST/12892/2019-DB 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.
44.The impugned order dated December 18, 2018 passed by the Commissioner, therefore, cannot be sustained and is set aside. The appeal is, accordingly, allowed."
4.1 From the above judgments including the Apex Court, judgment in South Eastern Coalfields Ltd., it is settled that penal interest charged for delayed payment cannot be liable to service tax under Section 66E(e) of Finance Act, 1994. Following the ratio of the above judgment in the present case also, the interest charged on the delayed payment of the sale proceed is not liable to service tax. Accordingly, we set aside the impugned order and allow the appeal with consequential relief.
(Order pronounced in the open court on _07.11.2024_) (RAMESH NAIR) MEMBER (JUDICIAL) (RAJU) MEMBER (TECHNICAL) Neha