Custom, Excise & Service Tax Tribunal
Mec Shot Blasting Equipments Pvt Ltd vs Commissioner, Cgst-Jodhpur on 18 July, 2022
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. - IV
Service Tax Appeal No. 51056 of 2022 [SM]
[Arising out of Order-in-Appeal No. 117 (CRM)/ST/JDR/2019 dated 11.02.2019
passed by the Commissioner of Central Excise & Central Goods and Service Tax
(Appeals), Jodhpur]
M/s. Mec Shot Blasting Equipments Pvt. Ltd. ...Appellant
E-279, MIA, Basni Phase-II,
Jodhpur,
Rajasthan-342005
VERSUS
Commissioner of C.G.ST, Jodhpur ...Respondent
G-105, New Industrial Area, Opp. Diesel Shed, Basni, Jodhpur, Rajasthan - 342001 APPEARANCE:
Mr. O.P. Agarwal, C.A. for the Appellant Mr. Divey Kumar Sethi, Authorised Representative for the Respondent Coram: HON'BLE DR. RACHNA GUPTA, MEMBER (JUDICIAL) DATE OF HEARING/DECISION: 18.07.2022 FINAL ORDER No. 50734 / 2022 DR. RACHNA GUPTA Present appeal has been filed to assail the Order-in-Appeal No. 117/2019 dated 11.02.2019, wherein, demand for an amount of Rs.64,96,178/- has been confirmed holding it to be (an amount against declared service) by the appellant on account of forfeiture for not lifting the ordered goods in terms of purchase order. 2
Service Tax Appeal No. 51056 of 2022 [SM]
2. The facts in brief for the impugned adjudication are as follows:
2.1 M/s. Mec Shot Blasting Equipments pvt. Ltd., the appellant, is engaged in Manufacturing of shot blasting machines. The appellant is also registered under service tax but for the service tax liability under Reverse Charge Mechanism. During the course of audit of the appellant's record, the department observed that the appellant on cancellation of an order of supply, has retained the amount of advance i.e. Rs.64,96,178/- as was paid by the buyer against the purchase order for the supply of said goods under the head of "Remission & Cessation" during the period from Oct' 2012 to Mar' 2015. The said amount is observed to have been paid against a situation of agreeing to the obligation to refrain from an act / to tolerate an act or a situation i.e. an amount against a declared service as defined under Section 66E (e) of the Finance Act, 1994.
With these observations that a Show Cause Notice No. 6433 dated 03.10.2016 were served upon the appellant, claiming the service tax liability of the appellant against the aforesaid amount to the tune of Rs.8,02,927/-. The same was accordingly proposed to be recovered along with the interest and the penalty. The said proposal was initially confirmed vide Order-in-Original No. 06/2017 dated 09.05.2017. The appeal against the said order has been dismissed by Commissioner (Appeals). Being aggrieved against the said order, the appellant is before this Tribunal.
3. I have heard Mr. O.P. Agarwal, learned Counsel for the appellant and Mr. Divey Kumar Sethi, learned DR for the department.
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4. It is submitted on behalf of the learned Counsel for the appellant that the Adjudicating Authority below has wrongly held the cancellation of the contract between the appellant and his buyer as a reason for invoking Section 66E (e) of the Finance Act, 1994 defining declared services. The amount in question is wrongly held to be the consideration against providing a declared service by the appellant to such buyer. It is submitted that there was no element of service involved between the appellant and his buyer. The amount of Rs.64,96,178/- was received as an advance payment against the supply of goods by the appellant as per the terms and condition of the purchase order. When the buyer failed to take the delivery of the goods that the appellant has forfeited the aforesaid deposited advance as per the terms and conditions of the purchase order. It is submitted that since no element of service is involved in the entire transaction, the same has wrongly been alleged to be the declared service, amount has wrongly been claimed as service tax liability. Learned Counsel has relied upon the decisions of this Tribunal in the case of M/s. Lemon Tree Hotel vs. Commissioner, GST, CE & Customs, Indore reported as 2020 (34) G.S.T.L. 220 (Tri.-Del.), M/s. South Eastern Coalfields Ltd. Vs. Commr. of C.Ex. & S.T, Raipur reported as 2021 (55) G.S.T.L. 549 (Tri.-Del.) and M/s. Ruchi Roya Industries Ltd. Vs. Commr. of Cus., CGST & C.Ex., Indore 2022 (56) G.S.T.L. 303 (Tri.-Del.) to impress upon that even in a case of a contract/agreement between the service providers for providing any particular service the forfeiture of advance, if any paid, as a consequence of non-compliance of the contract of providing service, the retention thereof is denied to be the amount received against 4 Service Tax Appeal No. 51056 of 2022 [SM] the declared service. The order under challenge is accordingly, prayed to be set aside and appeal is prayed to allowed.
5. While rebutting the submissions learned DR has mentioned that irrespective the agreement between the appellant and his buyer was a purchase order, but there still was an element of services tax. The moment the buyer has failed to take the delivery of goods from the appellant consequent to the said failure, there is no option with the appellant except to tolerate the said failure. It is this toleration that has been defined as declared service under Section 66E (e) of the Finance Act, 1994. Hence, Commissioner (Appeals) has committed no error while holding the said tolerance as an act of providing declared service. The forfeiture of the advance payment being received by the appellant is rightly held as the consideration for providing said declared service by the appellant to his buyer. The appeal is accordingly, prayed to be dismissed.
6. After hearing the rival contentions and perusing the entire records as well as the decisions relied upon by the learned Counsel for the appellant, I observe and hold as follows:
6.1 The moot controversy to be adjudicated is:
whether while forfeiting the amount of advance deposit, the appellant has provided declared service as contemplated under Section 66E (e) of Finance Act, 1994 to his buyer as has become taxable w.e.f. 01.07.2012.5
Service Tax Appeal No. 51056 of 2022 [SM] 6.2 For the purpose, it is foremost relevant to look into the definition of "Service". Section 65 B (44) of the Finance Act, 1994 defines service to mean any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
(a) an activity which constitute merely,-
(i) a transfer of title is 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 of tribunal established under any law for the time being in force."
7. Since Commissioner (Appeals) has invoked the definition of declared services same is observed to have been defined under Section 66 E, the relevant clause (e) reads as follows:
The following shall constitute declared services, namely:-
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,"
8. The plain reading of both these provisions reflects that for an act to constitute service there must be some service activity carried out by a person for another person that too for consideration. Such transactions include declared service i.e. agreeing to the obligation to refrain from an act, or to tolerate an act or situation or to do an 6 Service Tax Appeal No. 51056 of 2022 [SM] act. The amount of consideration received for providing taxable service i.e. those services which are not mentioned in negative list of Section 66 D is being made liable, under Section 66 of Finance Act, 1994 to service tax at the rate specified therein. Section 67 of Finance Act, 1994 which deals with the valuation of taxable service.
According to this Section 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 patly 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. The Larger Bench of this Tribunal also in the case of M/s. Bhayana Builders Pvt. Ltd. Vs. Commissioner of Service Tax reported as 2013 (32) S.T.R 49 (Tri.-LB) has held 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 and should be in relation to a service provided by the provider of said service to the recipient. Hon'ble Apex Court reiterated the said view in the case of Union of India Vs. Intercontinental Consultants and Technocrats Pvt. Ltd. reported as 2018 (10) 7 Service Tax Appeal No. 51056 of 2022 [SM] G.S.T.L. 401 (S.C) has held that service tax is with reference to the value of such service which are actually rendered and such value is the basis for the purpose of calculating the service tax payable there upon.
9. For a declare service to be taxable there has 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.
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).
The Supreme Court in Food Corporation of India V. Surana Commercial Co. and others [(2003) 8 SCC 636] 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:
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Service Tax Appeal No. 51056 of 2022 [SM] "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 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."
10. Reverting back to the facts of the present case it is observed that appellant is the manufacturer of specific machines. He was approached by a buyer for manufacturing a customized machine for him. Vide the purchase order the buyer agreed to make an advance payment accepting the terms and conditions of the purchase order including the condition of said advance to be forfeited in case of failure on part of the buyer to receive the manufactured goods. For this advanced deposit to become a consideration received by the appellant against a declared service being provided by him, it is necessary that there has to be some concurrence/assumption of an obligation to refrain from an act or to tolerate the same on the part of the appellant. But in the present case it was an agreement between the parties that in case any term of the purchase order gets breached which may cause some damage or loss to the appellant, the advance deposit made by the buyer to the appellant shall be forfeited by the appellant owing to 9 Service Tax Appeal No. 51056 of 2022 [SM] the said breach. 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 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. The said fact is sufficient to hold that the advance payment when forfeited by the appellant, it actually was an amount of liquidated damages paid by the buyer to the appellant as per the agreed terms and conditions between the two i.e. an amount for not tolerating the breach of contract.
11. This situation is actually covered under Section 74 of the Contract Act. Section 74 declares "the law as to liability upon breach of contract where compensation is, by agreement of parties, pre-determind, 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 claim relief as a plaintiff. The section does not confer a special benfit upon any party; it merely declares the law that notwithstanding any term in the contract for predetermining damages or providing for forfeiture of any property by way of penalty, the court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated.
The Hon'ble 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, 10 Service Tax Appeal No. 51056 of 2022 [SM] 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 mad the contract 'to be likely to result from the breach'. The Supreme Court also found the there was no evidence that any loss was suffered by the plaintiff in consequences of the default by the defendant, the Court, therefore, held that plaintiff would be entitled to retain only such amount that was received as earnest.
12. Larger Bench of this decision in M/s. South Eastern Coalfields Ltd. (supra) has dealt with the impugned issue with the clarity. It has been held that any amount received from the buyer in advance when forfeited for non-compliance of the contract, the same shall not be the consideration for tolerating an act and as such shall not be leviable to service tax under Section 66 E (e) of Finance Act, 1994 as declared services. Particularly, when contract nowhere provided obligation on assesse to refrain from an act or tolerate an act. Otherwise also when it was an agreed term and condition that in case of failure or non-compliance of any condition of contract the amount deposited shall be liable to be forfeited, the forfeiture thereof is actually an act in furtherance of the aforesaid terms and conditions, cannot be called as the tolerance on account of non-compliance of any condition of contract by the other party. To my opinion it is rather the other way round, had that amount not been forfeited, in that situation, the act of appellant may be an act of tolerance.
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13. The present case, apparently and admittedly is a case of supply of goods. The element of service being provided was never a fact of the present case. Retaining the amount of advance deposit by the appellant is nothing but acting in furtherance of the contract by him with his buyer. This Bench in M/s. Ruchi Soya Industries Ltd. (supra) has already held that a contract may provide for penal clause for breach of terms of contract but that will amount to distinction between 'the condition to contract' and 'consideration for a contract' and to ascertain either of the situation, the agreement as a whole has to be read together with the intention and the purpose thereof. The Machine Availability clause in the present case, to my opinion when read with the entire agreement, there is an apparent intent that the terms of agreement shall not be violated and that the service provider shall not compromise with the quality of service else the commercial interest of the appellant shall remain safeguarded in the form of compensation to be paid by M/s. SGSL. Hence, it cannot, by any stretch of imagination, be stated that the recovery of sum by invoking the said clause is the reason behind the execution of agreement for an accrued consideration.
14. In view of the entire above discussion, I hold that the concept of declared services,in the impugned facts and circumstances, has wrongly been invoked by the department. The appellant therefore cannot be fasten with any liability to pay the tax. Service recipient cannot be fastened with any liability to pay tax. I also rely upon the decision of Hon'ble Apex Court in the case of Association of leasing and Financial Service Companies V. Union of India 12 Service Tax Appeal No. 51056 of 2022 [SM] reported on 2010 (20) S.T.R. 417 (S.C.) wherein it has been held that when no service has been rendered, service tax cannot be levied.
15. Coming to the issue of invoking the extended period of limitation, it is observed that the period of demand herein is 2012- 2013. Show cause notice has been issued in the Year 2016. The Commissioner (Appeals) has justified the invocation of extended period of limitation, on the ground of alleged suppression by the appellant about taxable value of service tax of Rs.64,96,178 retained by the appellant on account of forfeiture of not lifting the ordered goods. I am of the opinion that the present case was purely a case of supply of goods. The above discussion has already held, Commissioner (Appeals) to be wrong while holding the retention of the advance deposit as a consideration for providing the declared service. It has already been held that there was no service tax liability upon the appellant. There arises no question of mentioning the same while self assessing the liability. Otherwise also, mere failure to declare can never amount to be an act of suppression. Hon'ble Apex Count in M/s. Pahwa Chemicals (P) Ltd. Vs. CCE 2005 (189) E.L.T. 257 (SC) has held that there has to be some positive act on part of the party which must establish the willful mis-declaration or willful suppression on part of the said party. In the present case the entire show cause notice is silent about any such act on part of the appellant which may amount to suppression of a fact. The element of intent on the part of the appellant to evade the tax liability is miserably missing. Based on the facts herein, the above discussion has already held 13 Service Tax Appeal No. 51056 of 2022 [SM] that, in fact, here is no service tax liability on the appellant. Resultantly, I hold that extended period of limitation has wrongly been invoked by the appellant.
16. Seen from the both angles, the order of Commissioner (Appeals) is not sustainable. The same is hereby set aside. Consequent thereto, the appeal stands allowed.
[Dictated and pronounced in the open Court] (DR. RACHNA GUPTA) MEMBER (JUDICIAL) HK