Custom, Excise & Service Tax Tribunal
Itaas India Pvt Ltd vs Ce & Cgst Noida on 14 March, 2024
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
ALLAHABAD
REGIONAL BENCH - COURT NO.I
Service Tax Appeal No.70356 of 2019
(Arising out of Order-in-Appeal No.NOI-EXCUS-001-APP-1707-17-18 dated
19/02/2018 passed by Commissioner (Appeals) Central Goods & Services
Tax, Noida)
M/s ITAAS India Pvt. Ltd., .....Appellant
(3rd Floor, Building No.9, Seaview Developer Ltd.,
Plot No.20 & 21,
Section 135, Noida-201301)
VERSUS
Commissioner of Central Excise &
Service Tax, Noida ....Respondent
(C-56/42, Sector-62, Noida-201309)
APPEARANCE:
Shri Srihari VK, Authorised Representative
Shri Bhavana Shiva Kumar, Authorised Representative for the
Appellant
Shri A.K. Choudhary, Authorised Representative for the Respondent
CORAM: HON'BLE MR. P.K. CHOUDHARY, MEMBER (JUDICIAL)
HON'BLE MR. SANJIV SRIVASTAVA, MEMBER (TECHNICAL)
FINAL ORDER NO.70290/2024
DATE OF HEARING : 14 March, 2024
DATE OF DECISION : 14 March, 2024
SANJIV SRIVASTAVA:
This appeal is directed against Order-in-Appeal No. NOI-
EXCUS-001-APP-1707-17-18 dated 19.02.2018 of the
Commissioner (Appeals) Central Goods & Service Tax, Noida. By
the impugned order, Order in Original No 17/D-
IV/ST/NOIDA/2016-17 dated 06.12.2016, holding as follows has
been upheld.
Order
2 Service Tax Appeal No.70356 of 2019
(a) I confirm the demand of service tax amounting to Rs
46,041/- (Rupees Forty six thousand and forty only) to
M/s Itaas India Pvt. Ltd.; 4th Floor, Tower C Logix
Techno Park, Plot No 5, Sector 127, Noida under the
proviso to Section 73 (1) of the Finance Act, 1994 not
paid by the party during 2013-14.
(b) I order the charging of interest on the service tax
amounting to rs 46,041 under Section 75 of the Finance
Act, 1994, at the applicable rates.
(c) I impose a penalty of Rs 46,041/- (Rupees Forty six
thousand and forty only) to M/s Itaas India Pvt. Ltd.;
4th Floor, Tower C Logix Techno Park, Plot No 5, Sector
127, Noida under Section 78 (1) of the Finance Act,
1994. However, the party is given an option to pay 25%
penalty within 30 days from the receipt of this order as
per provisions contained under Section 78 (1) (ii) of the
I confirm the demand of service tax amounting to Rs
46,041/- (Rupees Forty six thousand and forty only) to
M/s Itaas India Pvt. Ltd.; 4th Floor, Tower C Logix
Techno Park, Plot No 5, Sector 127, Noida under the
proviso to Section 73 (1) of the Finance Act, 1994 along
with due service tax and interest.
The aforesaid amounts should be paid forthwith."
2.1 Appellant is having Centralized Service Tax Registration
No. AABC17719JSD002 and are providing taxable services under
the category of 'Information Technology Software service,
Security/ Detective agency service, Manpower Recruitment
service, Rent-a-cab operator services' etc.
2.2 During the course of audit it was observed that during the
period January 2013 to March2014 they had recovered an
amount of Rs. 3,72,499/- from their employees who left the
services without complying with the conditions of the notice
period, as 'Notice Pay Staff' but did not discharged the service
tax liability to the tune of Rs. 46,041/ on the said consideration.
3 Service Tax Appeal No.70356 of 2019
2.3 As revenue was of the view that this service was a
'declared service' under Section 65B (22) read with Clause (e) of
Section 66E of the Finance Act, 1994, A show cause notice dated
24.02.2016 was issued, asking them 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 H E Cess
and S H E Cess) worked out to Rs. 46,041/-, at
appropriate rate should not be demanded and
recovered from them under provisions of Section
73(1) of the Finance Act, 1994
(ii) Interest at appropriate rate as applicable on the
above mentioned amount of service tax liability
should not be demanded and recovered from them
for the delay in making thw service tax payment,
under Section 75 of the Finance Act, 1994;
(iii) Penalty should not be imposed upon them under
Section 78 of the Finance Act, 1994 in respect of the
amount demanded under sl No (i) and (ii) above for
suppressing the value of taxable service provided by
them before the department with intent top evade
payment of Service Tax.
2.4 The show cause notice was adjudicated by the original
authority as per order in original referred in para 1 above.
2.5 Aggrieved appellant filed appeal before the First Appellate
authority who dismissed the appeal as per the impugned order.
2.6 Aggrieved appellant has preferred this appeal.
3.1 We have heard the learned Authorised Representatives
appearing for the appellant and Shri A.K. Choudhary, Authorized
Representative appearing for the revenue.
3.2 Learned counsel on behalf of appellant submits that the
issue is no longer res-integra. Board has clarified the issue in the
favour of the appellants as per Circular No 214/1/2023-ST and
Circular No 178/10/2022-GST.
4 Service Tax Appeal No.70356 of 2019
3.3 Learned authorized representative re-iterates the findings
recorded in the impugned order.
4.1 We have considered the impugned order along with the
submissions made in the appeal and during the course of
arguments.
4.2 Impugned order records the following findings:
"I find that the Section 65B (44) of the Finance Act, 1994,
which was applicable with effect from 01.07,2012, prescribes
that:
.....;
I find that the Section 66B (22) of the Finance Act, 1994,
which was applicable with effect from 01.07.2012, prescribes
that:
„(22)‟ declared service‟ means any activity carried out by a
person for another person for consideration and declared as
such under section 66E;‟
Further, I find that the clause (e) of the Section 66E of the
Finance Act, 1994, which was applicable with effect from
01.07.2012, prescribes that: „(e) agreeing to the obligation to
refrain from an act, or to tolerate an act or a situation, or to
do an act;‟
The employer-employee relationships have always been in a
constant state of Evolution. As the nature of such relationships
evolve and change so does the nature of disputes that arise as
a result of diverging interests which the employer and
employees seek to protect in their interaction with each other
and the society in general. Hence an agreement is thus
created and entered into between them having a broad ambit
and includes within their scope all areas of the employer-
employee relationship and is not merely restricted to
contractual issues and/or workplace discrimination. Also a
mechanism is put into place to govern the agreement between
the employer and the employee while putting forward the
interests of each and also ensuring a protection mechanism to
5 Service Tax Appeal No.70356 of 2019
fall back on in case of breach of such duty by one of the
parties, including when the employee decides to move on from
the employment.
An employee is required to intimate the company with a
formal resignation well in advance and serve a „notice period‟
of at least one to three months before quiting his employment.
Thus, the resignation tendered by the employee amounts to a
notice and the period served post such a notification is a
mandatory serving of a notice period. This period is necessary
so the company is able to find someone with at least equal
ability to replace the employee who is leaving and in case the
employee does not serve the mandated notice period, the
employer can recover a „short notice period recovery as per
the company‟s policy or the terms of employment/agreement.
Further, the Section 65B (44) of the Finance Act, 1994,
provides the legal basis for levy of service tax, the term
„service‟ means „any activity carried out by a person for
another for a consideration, and includes a declared service‟.
And Section 66E of the Finance Act, 1994, states that
„agreeing to the obligation to refrain from an act, or to tolerate
an act or a situation, or to do an act‟ shall be a declared
service‟. Here it must be emphasized that the declared service
is „agreeing to the obligation to refrain from an act, or to
tolerate an act or a situation, or to do an act‟, not „to refrain
from an act, or to tolerate an act or a situation, or to do an
act‟.
I find that while this is a declared service, the terms used
therein have astounding similarity with section 2 of the Indian
Contract Act, 1972 defining „consideration‟
And section 2 of the Contract Act defines consideration as
under:
2. Interpretation-clause.
6 Service Tax Appeal No.70356 of 2019
In this Act the following words and expressions are used in the
following senses, unless a contrary intention appears from the
context:-
(a) When one person signifies to another his willingness to
do or to abstain from doing anything, with a view to
obtaining the assent of that other to such act or
abstinence, he is said to make a proposal;
(b) When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be
accepted. A proposal, when accepted, becomes a
promise;
(c) The person making the proposal is called the „promisor‟
and the person accepting the proposal is called the
„promisee‟;
(d) When, at the desire of the promisor, the 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;
(e) Every promise and every set of promises, forming the
consideration for each other, is an agreement;
(f) Promises which form the consideration or part of the
consideration for each other are called reciprocal
promises;
(g) An agreement not enforceable by law is said to be void,
(h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option
of one or more of the parties thereto, but not at the
option of the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable.
While in terms of section 2 of the Contract Act, the above is
consideration being given by a promisee to a promisor in lieu
of promise, conversely if the same is done for consideration, it
becomes a declared service in terms of section 66E(e) of the
7 Service Tax Appeal No.70356 of 2019
Finance Act. Nonetheless, every promise in an agreement is
consideration for each other i.e. for the promisor and
promisee.
Further, the rule 3 of the Point of Taxation Rules, 2011 reads
as
„RULE 3. Determination of point of taxation. - For the purposes
of these rules, unless otherwise provided, point of taxation‟
shall be,
(a) the time when the invoice for the service provided or
agreed to be provided is issued:
Provided that where the invoice is not issued within the time
period specified in rule 4A of the Service Tax Rules, 1994,
the point of taxation shall be date of such completion of
provision of the service
(b) in a case, where the person providing the service,
receives a payment before the time specified in clause (a),
the time, when he receives such payment, to the extent of
such payment.
Provided that ....
Explanation .- For the purpose of this rule, wherever any
advance by whatever name known, is received by the
service provider towards the provision of taxable service,
the point of taxation shall be the date of receipt of each
such advance.
Therefore, the point of taxation in this case, as per the
language of clause (e), shall be when the provision of service
is completed i.e. the moment the person „agrees‟ to the
obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act, because as per section 66B of the
Finance Act service tax is levied on value of services provided
or „agreed to be provided‟ and here the service of „agreeing to
the obligation‟ has been „agreed to be provided‟
A declared service has been stated to mean the „tolerating‟ of
any act among other Things. Since a service is any activity for
8 Service Tax Appeal No.70356 of 2019
a consideration and includes a declared service, such
tolerating can be a service if it is in exchange of some
consideration. According to the definition given by the Act,
„tolerating‟ an act signifies the foregoing of a benefit by the
receiver in exchange for a consideration that compensates the
act that is being tolerated. Agreeing to the obligation to refrain
from an act, or to tolerate an act or a situation, or to do an act
is a constituted declared service. When read with the definition
of service the activities like agreeing to the obligation to
refrain from an act, agreeing to the obligation to tolerate an
act or situation and agreeing to the obligation to do an act
would be service, provided such activities are carried out by
person for another for a consideration.
When an employer tolerates the early termination of an
employment agreement, it is with the extraction of the short
notice period recovery. This is the consideration for the
declared service by the employer to the employee. An
employee may have any number of reasons for not serving
the notice period. However, if the policy of the employer or
the employment agreement mentions so, the consequences
will have to be met and employer collects a compensation
from the resigning employee for tolerating‟ the early
termination of the employment agreement without serving the
notice period in pursuance of the wordings of the provision on
declared service
The condition to pay an amount as notice pay in lieu of the
notice period, for the employer to agree to let go an
employee, normally forms a part of the agreement/ terms and
condition of the employment. This would mean that the
employee while accepting the offer of the employment, has
not only understood the intent on the part of the employer in
prescribing this exit condition, but has also accepted it. In
other words the employee has understood and accepted the
condition that in the contingency of his inability to provide the
prescribed notice period, he can exercise the option of paying
9 Service Tax Appeal No.70356 of 2019
the notice pay as the consideration for the employer to agree
to the obligation of letting him go, which the employer is
bound to do as it is part of the terms and conditions already
agreed to and settled between them.
Further this aspect is also clarified at Para 2.9.1 of Education
Guide wherein it is stated that „Only services that are provided
by the employee to the employer in the course of employment
are outside the ambit of services‟ and in view of the aforesaid
discussion, it can be stated that an employer will be liable to
pay service tax on the amounts recovered as „notice pay
recovery‟ from employees. Further, a Modus Operandi Circular
issued by DGCEI in this regard enlighten that „An employer
forfeiting the security amount or caution money, received from
the employee at the time of appointment, in lieu of the notice
period also amounts to tolerating an act or situation.
Therefore, I observe, that this transaction of the employer
agreeing to the obligation of tolerating an act i.e, quitting
without any advance notice, on the part of the employee, for
payment of a notice pay /sum i.e, the consideration will be
covered under declared service under section 66E (e) of the
Finance Act,1994.
The recovery extracted by the employer for the notice period
not served by the employee upon termination of services is to
tolerate and thus is a „declared service` and the employer is
liable towards service tax towards the recovery received from
the employee.
The appellant has challenged application of extended period,
interest and penal provisions. It is noted that in the self
assessment procedure it is incumbent upon the appellant to
ensure that they pay due service tax correctly and timely, but
the appellant failed to do the same and has not been reflected
in their ST-3 returns and such failure obfuscated any
verification for the purpose of determining the correct and
timely payment of due service tax. The appellant has tried to
present its claim as a fait accompli rather than a claim based
10 Service Tax Appeal No.70356 of 2019
on verifiable cogent prescribed records and it was only during
audit of books of account of the appellant, such non-payment
was detected by the department. On detailed consideration of
material available on record, I find that the appellant did
indulge in suppression of facts. In the given circumstances, I
hold that penal provisions of Section 78 of the act are duly
satisfied in the case in hand.
Therefore, I don‟t find any force in the argument of the
appellant. I also find that the appellant has not presented any
credible defense for not paying due service tax as discussed
above and hold that the appellant has failed to demonstrate
any infirmity in the impugned order to justify any interference.
The charge of interest is a normal consequence once the
amount is held as payable on due dates.
Considering the above facts and contradiction, it is concluded
that the appellant could not make any strong assertion against
the action confirmed under the impugned order."
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 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.
11 Service Tax Appeal No.70356 of 2019
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.
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
12 Service Tax Appeal No.70356 of 2019
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 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,
13 Service Tax Appeal No.70356 of 2019
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 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
14 Service Tax Appeal No.70356 of 2019
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 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;
15 Service Tax Appeal No.70356 of 2019
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;
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
16 Service Tax Appeal No.70356 of 2019
tolerate an act or a situation, or to do an act in para 5 (e) of
Schedule II of CGST Act is strikingly 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 party) to the first
party for such (a) refraining or (b) tolerating or (c)
doing. Such contractual arrangement must be an
17 Service Tax Appeal No.70356 of 2019
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; 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
18 Service Tax Appeal No.70356 of 2019
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 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 19 Service Tax Appeal No.70356 of 2019 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.
5.1 Appeal is allowed.
(Operative part of the order pronounced in open court) (P.K. CHOUDHARY) MEMBER (JUDICIAL) (SANJIV SRIVASTAVA) MEMBER (TECHNICAL) akp