Custom, Excise & Service Tax Tribunal
Exl Service Com India Pvt Ltd vs Ce & Cgst Noida on 27 August, 2024
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
ALLAHABAD
REGIONAL BENCH - COURT NO.I
Service Tax Appeal No.71052 of 2018
(Arising out of Order-in-Appeal No.40/Commr/Mrt/2018 dated 07/05/2018
passed by Commissioner (Appeals) Central Goods & Services Tax, Meerut)
M/s EXL Services.com (India) Pvt. Ltd., .....Appellant
(Ground-Eight Floor, Oxygen Complex,
Tower B A Achivs SEZ, Plot No.7,
Sector-144, Noida-201301)
VERSUS
Commissioner of Central Excise &
Service Tax, Meerut ....Respondent
(Mangal Pandey Nagar, Meerut-250004)
APPEARANCE:
Shri Atul Gupta, Advocate for the Appellant
Smt Chitra Srivastava, Authorised Representative for the Respondent
CORAM: HON'BLE MR. P.K. CHOUDHARY, MEMBER (JUDICIAL)
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL)
FINAL ORDER NO.70836/2024
DATE OF HEARING : 27 August, 2024
DATE OF DECISION : 27 August, 2024
SANJIV SRIVASTAVA:
This appeal is directed against order in appeal No
40/Commissioner/ Meerut/2018 dated 07.5.2018 of the
Commissioner Central Goods and Service Tax Meerut (assigned
certain appeals in terms of Notification No 26/2017- CE(NT)
dated 17.10.2017 vide Order No 16/2017-ST dated 24.11.2017
as amended vide corrigendum dated 24.01.2018). By the
impugned order in original No 30/Div-IV/ST/NOIDA/2016-17
dated 23.02.2017 holding as follows has been upheld-
ORDER
Service Tax Appeal No.71052 of 2018 2
(a) I confirm the demand of service tax amounting to Rs.
34,92,176/- (Rupees Thirty-four Lakh ninety two thousand one hundred and seventy six only) to M/s EXL Service SEZ BPO Solutions Pvt. Ltd: Ground Floor to Eight Floor, Oxygen Complex, Tower-B Aachvis SEZ. Plot No.-7, Sector-144, Noida, under proviso to Section 73(1) of-the Finance Act. 1994 on Notice Pay Recovery
(b) I confirm the demand.of service tax amounting to. Rs.
2,43,901/- (Rupees-Two lakh forty three thousand nine hundred and one only) to M/s EXL Service SEZ BPO Solutions Pvt. Ltd: Ground Floor to Eight Floor, Oxygen Complex, Tower-B Aachvis SEZ. Plot No.-7, Sector- 144, Noida, under proviso to Section 73(1) of-the Finance Act. 1994 on Professional Fees. As the party has deposited whole service tax amounting to Rs 2,43,901/-; the same is appropriated against the demand confirmed against professional fees.
(c) l order the charging of interest on the service tax amount of Rs. 34,92,176/ and service tax amount of Rs. 2,43,901/- under Section 75 of the Finance Act, 1994, at the applicable rates. As the party has deposited interest of Rs. 41,884/- the same is appropriated against the interest occurred on service tax amount of Rs. 2,43,901/-.
(d) I impose penalty of Rs. 34,92,176/- and penalty of Rs.
2,43,901/- to M/s EXL Service SEZ BPO Solutions Pvt. Ltd: Ground Floor to Eight Floor, Oxygen Complex, Tower-B Aachvis SEZ. Plot No.-7, Sector-144, Noida, under Section 78(1) of-the Finance Act, 1994. However, the party is given an option to. pay 25% penalty within 30 davs from the receipt of this order as per provisions contained under Section 78(1)(ii) of the Finance Act, 1994 alongwith due service tax and interest.
The aforesaid amounts should be paid forthwith.
Service Tax Appeal No.71052 of 2018 3 2.1 The 'appellant' is engaged in providing Business Auxiliary Service, Online Information & Data Access Service, Franchisee scrvice etc. They arc paying service tax on services covered under RCM and also availing CENVAT credit on input services.
2.2 During the audit of the appellant's records for the period from July,2012 to March,2015, it was observed from Financial Accounts & Ledgers pertaining to the period w.e.f. 01.07.2012 to 31.03.2015, that they had received an income on account of notice period pay recovery from its employees. During the said period the party had recovered an amount of Rs. 2,82,53,855/- which appeared to attract Service Tax @12.36% adv. amounting to Rs. 34,92,176/-
2.3. It was also observed the party had reimbursed an amount of Rs. 19,73,309/- during the Financial Year 2013-14 & 2014-15 to their holding company i.e. M/S EXL Service Holding Inc. in foreign currency under the head of "Professional Fees". The said payment of "Professional Fees" appeared to be liable to service tax @12.36% adv. amounting to Rs 2,43,901/ - under reverse charge mechanism.
2.4 A show cause notice dated 31.05.2016 was issued to them asking to show cause as to why:-
(i) Services rendered by them should not be considered as taxable services as discussed in the forgoing paras and the total Service Tax (including E.Cess & S,H.E. Cess) worked out to Bs.34,92,176/-( thirty Four Lacs Ninety Two Thousand One hundred Seventy Six Onlý) should not be demanded and recovered from them under proviso to provisions of Sec. 73(1) of Finance Act, 1994 along with interest at appropriate rate under Section 75 of the said Act.
(ii) Service tax inclusive Cess amounting to Rs.2,43,901/-(Rs. Two Lacs Forty Three Thousands Nine hundred one only) should-not be demanded and recovered from them under provisions of Sec.
Service Tax Appeal No.71052 of 2018 4 73(1) of Finance Act, 1994 and why the service tax amounting to Rs.2,43,901/- already deposited by them in this regard should not be appropriated.
(iii) Interest in respect of Si. No. (ii) above should not be demanded and recovered from them under Section 75 of the Finance Act, 1994 and why the amount of interest to the tune of Rs.41,884/- (Rs. Forty One Thousand Eight Hundred Eighty Four only) already deposited by them towards interest should not be appropriated.
(iv) Penalty should not be imposed upon them under Section 78 of the Finance Act, 1944 in respect of SI. No. (i) & (ii) above for suppressing the value of taxable service provided by them from the Department with intent to evade payment of Service Tax.
2.5 The show cause notice was adjudicated as per the order in original referred in para 1 above.
2.6 Aggrieved appellant filed the appeal before First Appellate Authority which has been dismissed as per the impugned order.
2.7 Hence this appeal.
3.1 We have heard Shri Atul Gupta, Advocate for the appellant and Ms Chitra Srivastava, Authorized Representative for the revenue.
3.2 Arguing for the appellant learned counsel submits that:
The appellant is not liable to pay service tax in respect of notice pay recovered in view of the following decisions and circulars issued by the CBI:
o GE & D India Ltd. [2020 (35) G.S.T.L. 89] o Rajasthan Rajya Vidhyut Prasaran Nigam Ltd.[2022 (1) TMI 909] o M/s Balaji Medical & Diagnostic Research Centre [2023 (12) TMI 748] o Intas Pharmaceuticals, [2021 (6) TMI 906] Service Tax Appeal No.71052 of 2018 5 o XL Health Corporation India Pvt.Ltd.[2022 (5) TMI 427] o State Street Syntel Services Pvt Ltd [2021 (3) TMI 615] o Circular No.178/10/2022-GST dated 03.08.2022 Service tax is not leviable on the reimbursement of the expenses paid by the appellant. Audit undertaken by EY LLP was in the nature of a statutory audit which is mandated for any listed company in US, including EXL Inc. Agreement relating to the limitation of scope, wherein it has been clearly stated that the auditor i.e. EY LLP is not obligated to certify that the Subsidiaries accounts & procedures are compliant with their local laws. EY LLP would be auditing the subsidiaries to the extent required under the American SSAE 16 auditing standards. Thus, from the above, it is submitted, that the audit of the Appellant's accounts happened entirely to ensure that its parent company, i.e., EXL Inc., could comply with US laws.
Thus, it is evident that the Appellant was never the intended recipient of services. In fact, the Appellant never desired for any auditing services to be rendered to it. Therefore, the reimbursement of allocated cost cannot be termed as 'consideration' in terms of Section 65B(44) of the Act.
In terms of Section 65B(44), service is understood to be an activity carried out by one person "for another', in lieu of a consideration. In the instant case, the activity of audit was undertaken by EY LLP for EXL Inc. and not for the Appellant. This is apparent from the submissions made hereinabove to provide hat the audit was to ensure EXL Inc.'s compliance with US accounting standards. Being a subsidiary of EXL Inc., the accounts of the Appellant were also audited, albeit in a flexible manner Further the Appellant never requested, directed or desired for EY LLP to undertake any audit of its accounts. Reliance is placed upon the decisions as follow Service Tax Appeal No.71052 of 2018 6 o Paul Merchants Limited [2013 (29) STR 257 (Tribunal-Delhi)] o Aker Solutions India Sdn. Bhd. [2022 (64) G.S.T.L. 240 (Tri. - Hyd)] o Flemingo Travel Retail Ltd. [2022 (64) G.S.T.L. 564 (Tri.- Mumbai)] The value of the professional charges' paid to EXL Inc. are reimbursement of the costs incurred by the EXL Inc. for the global audit to the extent it relates to the accounts of the Appellant and therefore, would not be subject to service tax. Reliance placed on following decisions o Intercontinental Consultants and Technocrats Private Limited [2013 (29) STR 9 (Del)], affirmed by Hon'ble Supreme Court as reported at [2018 (3) TMI 357 - Supreme Court], o Historic Resorts Hotel Private Ltd [2018 (9) GSTL 422 (Tri. Del)] o Fortune Park Hotels Limited [2017 (49) STR 567 (Tribunal- Delhi)] o Amit Sales [2017 (47) STR 156 (Tribunal-Delhi)] this demand is revenue neutral for the fact that even if the Appellant is required to pay service tax on auditing services, the service tax paid would be admissible as CENVAT Credit to the Appellant.
The extended period of limitation cannot be invoked in the present case.
No penalty and interest is imposable 3.3 Authorized representative re-iterated the findings recorded in the impugned order.
4.1 We have considered the impugned order along with the submissions made in appeal and during the course of arguments.
4.2 Impugned order has recorded the findings as follows:
―8. I have carefully gone through the case file, grounds of appeals, records of personal hearing and all other materials Service Tax Appeal No.71052 of 2018 7 available on record, I find that there are following two issues before me for decision-
(i) Whether the amount recovered from the employees leaving service before the notice period is liable to service tax under Section 66E (e) of the Finance Act, 1994
(ii) Whether the professional Fee paid in foreign currency is liable to service tax under reverse charge mechanism in terms of Rule 2(d) (i) (G) of Service Tax Rules, 1994
9. As regards the taxability of amount received as 'notice pay' from' the employees quitting their employment, I observe that under Section 66E (e) of the Finance Act'1994 the following activity has been declared as service:
"(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;‖
10. Above expression covers various situations where the service provider agrees to certain activities / omissions on the part of the other person which are obligatory for that other person. Obviously such deemed services will be liable for service tax when the service provider agrees to the non-
performance by the other person for a consideration. The condition to pay an amount as notice pay in lieu of notice period, for the employer to agree to let go an employee, normally forms part of the terms and conditions of employment. The employee has agreed that in case of his inability to provide the prescribed notice period which is obligatory under the condition of employment, he can exercise the option of paying the notice pay as consideration to the employer for agreeing to let him go before the notice period is over. In the instant case the amount of Rs. 2,82,53,855/- has been recovered by the appellant as per agreements between them as employer and their employees. The employees on payment of such Service Tax Appeal No.71052 of 2018 8 consideration were allowed to go' without completing notice period. In other words the appellant has agreed to the obligation to refrain from giving notice period and has recovered the said amount as consideration for such agreement. This situation is squarely covered under the definition of declared services' under Section 66E(e) of the Finance Act,1994.
11. The appellant has contended that the amount so recovered was damages and not consideration. I observe that it is not the nomenclature but the nature of amount recovered which will decide whether the amount involved is in the nature of consideration the for service provided. I accordingly observe that the appellant is required to pay service tax on the consideration received for such services which are covered under section 66E(e) of the Finance Act'1994
12. As regards the second issue of payment of ‗Professional Fee' in foreign currency , I observe that the appellant has paid Rs. 6,67,528/- and Rs. 13,05,781/- in 2013-14 and 2014-15 respectively to their holding company i.e. M/s EXL Service Holding Inc in foreign currency under the head of "Professional Fees". The appellant has stated that their parent company i.e. EXL Service Holdings Inc incurred the cost of audit services received from M/s Ernst & Young LLT as per the terms of the agreement between EXL Holding and EY LLP for audit by their records as well as those of their subsidiaries and they have paid their share of expenditure / cost of audit to their holding Company. Thus they have availed the services of foreign auditors and has paid their share of fee which was initially paid by their holding company and later reimbursed to them
13. Notification No. 30/2012-ST dated 20.6.2012 provides that in respect of any taxable service provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable Service Tax Appeal No.71052 of 2018 9 territory, the recipient of the service shall pay 100% of service tax.
14. Further under Rule 2(d) (i) (G) of Service Tax Rules,1994 in such cases the recipient has been made the person liable to pay service tax and Rule 3 of Place of Provision of Service Rules,2012 provides that the place of provision of a service shall be the location of the recipient of service.
15. The appellant has cited the case of M/s Maa Sharda Wine Traders Vs. Union of India [2009(15) STR-3 (MP)] in their favour but I find that the facts of the said case are different and have no applicability in the present case. Moreover in the said case no final decision has been passed instead an interim order has been passed for listing the matter before proper bench. Hence the same is also not relevant at this stage
16. The party had not declared the facts of recovery of amount from their employees on account of notice pay and payment of professional fee in theirST-3 returns. These facts came to notice of department only during the audit of their records of accounts etc. Hence the contention of the appellant these facts were declared to the department is not acceptable and the extended period under Section 73(1) of the Finance Act'1994 is rightly applicable to the instant case.
4.3 Impugned order has listed two issues for consideration. In respect of the issue listed at (i) we find the issue is no longer res-integra and have been decided in favour of the appellant. We have in case of ITAAS India Pvt. Ltd. [Final Order No 70290/2024 dated 14.03.2024 in Service Tax Appeal No 70356 of 2019] observed as follows:
4.3 The only issue for consideration in the present case is whether the act of allowing the employee to resign abruptly without any notice period by the employer against a consideration received, is an act of covered by Section Service Tax Appeal No.71052 of 2018 10 66B (22) read with Section 66 E (e) of the Finance Act, 1994 for the purpose of levy of service tax. The issue has been debated much and has been agitated before the appellate forums, including CESTAT. Taking note of the decisions rendered, Board finally clarified the issue.
4.4 Clarifying the issue Board has issued Circular No 214/1/2023-ST dated 28.02.2023 stating as follows:
"Subject: Leviability of Service Tax on the declared service "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 - reg.
An issue has arisen on the levy of service tax on liquidated damages arising out of breach of contract, forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period and similar other issues arising out of clause
(e) of section 66E of the Finance Act, 1994.
Reference has also been invited to Circular No. 178/10/2022-GST dated 3rd August, 2022 regarding applicability of GST on liquidated damages, compensation and penalty arising out of breach of contract or other provisions of law, and its applicability to service tax related issues.
2. It may be seen that "Agreeing to the obligation to refrain from an act, or to tolerate an actor a situation, or to do an act" is a Declared Service as per clause (e) of section 66E of the Finance Act, 1994. A service conceived in an agreement where one person agrees to an obligation to refrain from an act or to tolerate an act or to do an act, would be a 'declared service' under section 66E(e) read with section 65B(44) and would be leviable to service tax.
Service Tax Appeal No.71052 of 2018 11
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 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 Service Tax Appeal No.71052 of 2018 12 549(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 dated08-08- 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 cases hall 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.
4.5 Board has vide Circular No 178/10/2022-GST dated 3rd August 2022 specifically in respect of these services clarified as follows:-
"Subject: GST applicability on liquidated damages, compensation and penalty arising out Service Tax Appeal No.71052 of 2018 13 of breach of contract or other provisions of law
-reg.
In certain cases/instances, questions have been raised 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. Applicability of GST on payments in the nature of liquidated damage, compensation, penalty, cancellation charges, late payment surcharge etc. arising out of breach of contract or otherwise and scope of the entry at para 5 (e) of Schedule II of Central Goods and Services Tax Act, 2017 (hereinafter referred to as, ―CGST Act‖) in this context has been examined in the following paragraphs.
2. ―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 CGST Act if the same constitutes a ―supply‖ within the meaning of the Act. The said expression has following three limbs: -
a. Agreeing to the obligation to refrain from an act- Example of activities that would be covered by this part of the expression would include non-compete agreements, where one party agrees not to compete with the other party in a product, service or geographical area against a consideration paid by the other party. Another example of such activities would be a builder refraining from constructing more than a certain number of floors, even though permitted to do so by the municipal authorities, against a compensation paid by the neighbouring housing project, which wants to protect its sunlight, or an industrial unit refraining from manufacturing Service Tax Appeal No.71052 of 2018 14 activity during certain hours against an agreed compensation paid by a neighbouring school, which wants to avoid noise during those hours. b. Agreeing to the obligation to tolerate an act or a situation-This would include activities such a shopkeeper allowing a hawker to operate from the common pavement in front of his shop against a monthly payment by the hawker, or an RWA tolerating the use of loud speakers for early morning prayers by a school located in the colony subject to the school paying an agreed sum to the RWA as compensation.
c. Agreeing to the obligation to do an act-This would include the case where an industrial unit agrees to install equipment for zero emission/discharge at the behest of the RWA of a neighbouring residential complex against a consideration paid by such RWA, even though the emission/discharge from the industrial unit was within permissible limits and there was no legal obligation upon the individual unit to do so.
3. The description ―agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act‖ was intended to cover services such as described above. However, over the years doubts have persisted regarding various transactions being classified under the said description.
3.1. Some of the important examples of such cases are Service Tax/GST demands on-
i. Liquidated damages paid for breach of contract; ii. Compensation given to previous allottees of coal blocks for cancellation of their licenses pursuant to Supreme Court Order;
iii. Cheque dishonour fine/penalty charged by a power distribution company from the customers;
Service Tax Appeal No.71052 of 2018 15 iv. Penalty paid by a mining company to State Government for unaccounted stock of river bed material;
v. Bond amount recovered from an employee leaving the employment before the agreed period;
vi. Late payment charges collected by any service provider for late payment of bills;
vii. Fixed charges collected by a power generating company from State Electricity Boards (SEBs) or by SEBs/DISCOMs from individual customer for supply of electricity;
viii. Cancellation charges recovered by railways for cancellation of tickets, etc. In some of these cases, tax authorities have initiated investigation and in some advance ruling authorities have upheld taxability.
4.In Service Tax law, ‗Service' was defined as any activity carried out by a person for another for consideration. As discussed in service tax education guide, the concept ‗activity for a consideration' involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration. An activity done without such a relationship i.e., without the express or implied contractual reciprocity of a consideration would not be an ‗activity for consideration'. The element of contractual relationship, where one supplies goods or services at the desire or another, is an essential element of supply.
5. 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 in para 5 (e) of Schedule II of CGST Act is strikingly Service Tax Appeal No.71052 of 2018 16 similar to the definition of contract in the Contract Act, 1872. The Contract Act defines ‗Contract' as a set of promises, forming consideration for each other. ‗Promise' has been defined as willingness of the ‗promisor' to do or to abstain from doing anything. ‗Consideration' has been defined in the Contract Act as what the ‗promisee' does or abstains from doing for the promises made to him.
a. 6. This goes to show that the service of agreeing to the obligation to refrain from an act or to tolerate an act or a 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. 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.6.1A perusal of the entry at serial 5(e) of Schedule II would reveal that it comprises the aforementioned three different sets of activities viz.
(a) the obligation to refrain from an act, (b) obligation to tolerate an act or a situation and (c) obligation to do an act. All the three activities must be under an ―agreement‖ or a ―contract‖ (whether express or implied) to fall within the ambit of the said entry. In other words, one of the parties to such agreement/contract (the first party) must be under a contractual obligation to either (a) refrain from an act, or (b) to tolerate an act or a situation or (c) to do an act. Further some ―consideration‖ must flowin return from the other party to this contract/agreement (the second Service Tax Appeal No.71052 of 2018 17 party) to the first party for such (a) refraining or (b) tolerating or (c) doing. Such contractual arrangement must be an independent arrangement in its own right. Such arrangement or agreement can take the form of an independent stand- alone contract or may form part of another contract. Thus, a person (the first person) can be said to be making a supply by way of refraining from doing something or tolerating some act or situation to another person (the second person) if the first person was under an obligation to do so and then performed accordingly. Agreement to do or refrain from an act should not be presumed to exist
7. There has to be an express or implied agreement; oral or written, to do or abstain from doing something against payment of consideration for doing or abstaining from such act, for a taxable supply to exist. An agreement to do an act or abstain from doing an act or to tolerate an act or a situation cannot be imagined or presumed to exist just because there is a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts;
Service Tax Appeal No.71052 of 2018 18 such amounts are for preventing breach of contract or non-performance and are thus mere ‗events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract: (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d) for doing something leading to the dishonour of a cheque. As has already been stated, unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity of tolerating an act, , such payments will not constitute ‗consideration' and hence such activities will not constitute ―supply‖ within the meaning of the Act. Taxability of these transactions is discussed in greater detail in the following paragraphs.
.......
Forfeiture of salary or payment of bond amount in the event of the employee leaving the employment before the minimum agreed period 7.5 An employer carries out an elaborate selection process and incurs expenditure in recruiting an employee, invests in his training and makes him a part of the organization, privy to its processes and business secrets in the expectation that the recruited employee would work for the organization for a certain minimum period. Premature leaving of the employment results in disruption of work and an undesirable situation. The provisions for forfeiture of salary or recovery of bond amount in the event of the employee leaving the employment before the minimum agreed period are incorporated in the employment contract to discourage non-serious candidates from taking up Service Tax Appeal No.71052 of 2018 19 employment. The said amounts are recovered by the employer not as a consideration for tolerating the act of such premature quitting of employment but as penalties for dissuading the non-serious employees from taking up employment and to discourage and deter such a situation. Further, the employee does not get anything in return from the employer against payment of such amounts. Therefore, such amounts recovered by the employer are not taxable as consideration for the service of agreeing to tolerate an act or a situation.‖ 4.6 As the issue has been clarified by the Board stating that no service tax will levied on these services, we do not find any merits in the impugned order.
4.4 In respect of issue at (ii) we find that appellant has paid certain amounts towards professional fees to their holding company abroad. Undisputedly service received by them qualify as services as defined by Section 65 B (44) of the Finance Act, 1994:
―service‖ means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include--
....‖ From the perusal, of the above definition there is no mention of the activity being undertaken for fulfillment of legal obligation. The above definition only provides that an activity should have been carried out by one person for another against a consideration. In the present case appellants accounts were audited by EY LLP for a consideration which was initially paid by their holding company and subsequently reimbursed by them to their holding company. The decisions referred to by the appellant in this regards are not applicable as with effect from 01.07.2012, the scheme of taxation has been changed and the service tax is leviable on the all the services which are not covered by the negative list or exempted. Appellant has not pointed to anything Service Tax Appeal No.71052 of 2018 20 by which it can be held that these service received by them were covered under negative list or were exempted from them as per any exemption notification.
4.5 The amounts so paid by the appellant towards the "Professional Fees" cannot be said to be reimbursable expenses as the "reimbursable expenses" by their definition are expenses incurred by the service provider qua any service provided in course of provision of services. The holding company of the appellant has not provided any services to the appellant and incurred these expenses qua the provision of service provided by them. At the best the holding company can be termed as intermediary in course of provision of the said services, through whom the appellant made the payment of the consideration towards professional services received. The decision of Hon'ble Delhi High Court and Hon'ble Supreme Court in the case of Intercontinental Consultants and Technocrats Private Limited do not support the submission made by the appellant and are distinguishable. We also find the other decisions referred in this regard to be distinguishable.
4.6 We find that appellant had discharged the service tax liability along with the interest which has been appropriated by the order in original. As entire tax liability along with the interest has been discharged by the appellant in respect of this amount even before the issue of show cause notice there is no justification for imposition of penalty under Section 78 of the Finance Act, 1994.
4.7 Appellant have claimed that this demand of service tax is revenue neutral as this amount would be available as CENVAT credit to them. We have no objection with the said submission, we are sure that they would have discharged this tax liability and would have taken the credit of the same. As such this argument seems to be taken without verification of fact that whether credit has been taken and hence we do not propose to further discuss the same.
Service Tax Appeal No.71052 of 2018 21 4.8 In their appeal by referring to following decisions appellant has submitted that as the entire amount of service tax due alongwith the interest in respect of professional fees has been paid prior to issuance of Show Cause Notice, the show cause notice itself is bad in law. We agree with the said submission that show cause notice should not have been issued and taking note of the payments made the issue should have been closed.
Hall Offshore Limited [2018 (3) TMI CESTAT Delhi] Kundil Alloys Private Limited [208 (7) TMI 783-CESTAT Mumbai] Krishna HT [2018 (5) TMI 1462 CESTAT Bangalore] Bhoruka Aluminium Limited [2017 (51) STR 418 Tribunal Bangalore] Galaxy Construction Private Ltd. [2017 (48) STR 37 (Bom)] Adecco Flexione Workforce Solutions Ltd. [2012 (26) STR 3 (Kar)] 4.9 Summarizing our findings-
Demand made in respect of amount recovered as "Leave Pay" is set aside.
Demand made in respect of professional fees is upheld. Penalties imposed under Section 78 are set aside.
5.1 Appeal is allowed as indicated in para 4.9 above.
(Operative part of the order pronounced in open court) (P.K. CHOUDHARY) MEMBER (JUDICIAL) (SANJIV SRIVASTAVA) MEMBER (TECHNICAL) akp