Custom, Excise & Service Tax Tribunal
Cgst & Central Excise Surat vs Gujarat Industries Power Company on 6 May, 2025
Customs, Excise & Service Tax Appellate Tribunal
West Zonal Bench at Ahmedabad
REGIONAL BENCH-COURT NO. 3
Service Tax Appeal No. 11021 of 2019 - DB
(ST/CROSS/10567/2019)
(Arising out of OIO-SUR-EXCUS-000-COM-023-18-19 dated 04.03.2019 passed by the Pr.
Commissioner Central Excise, Customs and Service Tax-SURAT-I)
COMMISSIONER OF CGST & CENTRAL EXCISE, SURAT ........Appellant
Central Goods & Service Tax and Central Excise Commissionerate,
Surat Commissionerate, Near Central Excise Building,
Opp. Gandhi Baug, Chowk Bazaar, Surat-395001
VERSUS
Gujarat Industries Power Company Ltd. ......Respondent
(Surat Lignite Power Plant)
Po Nani Naroli, Tal Mangrol
SURAT, GUJARAT
WITH
Service Tax Appeal No. 11184 of 2019 - DB
(Arising out of OIO-VAD-EXCUS-001-COM-36-18-19 dated 28.03.2019 passed by the Pr.
Commissioner, Central Excise, Customs and Service Tax-VADODARA-I)
Gujarat Industries Power Company Ltd ........Appellant
Po Petrochemical
VADODARA, GUJARAT-391346
VERSUS
Commissioner of C.E. & S.T.-Vadodara-I ......Respondent
1ST FLOOR...CENTRAL EXCISE BUILDING,
RACE COURSE CIRCLE,
VADODARA, GUJARAT-390007
APPEARANCE:
Shri Mihir G Rayka, Additional Commissioner (AR) appeared for the Department-
Revenue
Shri Rahul Gajera, Advocate appeared for the Assessee M/s. Gujarat Industries
Power Company Limited.
CORAM:
HON'BLE MEMBER (JUDICIAL), MR. SOMESH ARORA
HON'BLE MEMBER (TECHNICAL), MR. SATENDRA VIKRAM SINGH
Final Order No. 10319-10320/2025
DATE OF HEARING: 11.04.2025
DATE OF DECISION: 06.05.2025
SATENDRA VIKRAM SINGH
1.1 The facts of the case are that investigation was initiated by DGGI,
Surat Zonal unit against M/s. Gujarat Industries Power Company Limited
(Surat Lignite Power Plant), Surat and M/s. Gujarat Industries Power Company
2 ST/11021,11184/2019-DB
Limited, Vadodara (hereinafter referred to as Party No.1 and 2 respectively).
It revealed that both the parties were collecting penal charges towards
liquidated damages/ penalties from various contractors/ suppliers etc. and
showing the same as their income, but were not paying service tax on such
amount w.e.f. 01.07.2012. They conducted investigation by recording
statements of Shri Pankajkumar J. Sheth AGM (Finance) of the Party No.1.
After scrutiny of the documents and going through the sample copies of the
work orders/ agreements/ letter of intents (LOI) of various contractors/
vendors, they ascertained that an amount of Rs.40,43,92,244/- (in the case
of Party No.1) has escaped payment of service tax during the period from
01.07.2012 to June 2017. The revenue issued a show cause notice dated
28.03.2018 proposing demand of service tax of Rs.4,99,97,827/- from the
Party No.1 along with the applicable interest. It also proposed invocation of
Sections 76, 77 and 78 of the Finance Act, 1994 for imposition of penalty on
the Party. A sperate penalty under Section 78 A of the Finance Act, 1994 was
proposed on Shri Pankajkumar J. Sheth AGM (Finance).
1.2 The revenue also initiated investigation against Party No.2 (i.e. M/s.
Gujarat Industries Power Company Limited, Vadodara) on the same issue.
After conducting the investigation, by way of recording the statement of Shri
Piyush C Shah, Officer (Finance), the department issued a show cause notice
dated 31.05.2018 proposing to recover service tax of Rs.4,28,32,174/- for the
period from 01.07.2012 to 30.06.2017. The show cause notice also proposes
recovery of interest and penalty from Party No.2 under Section 76,77 and 78
of the Finance Act, 1994. Separate penalty was proposed on Shri Piyush C
Shah, Officer (Finance) of Party No.2 under Section 78 A of the Finance Act,
1994.
1.3 The SCN against Party No.1 was decided by the Principal Commissioner,
Surat vide Order No. SUR-EXCUS-000-COM-023-18-19 dated 04.03.2019
wherein, he dropped the demand as well as penalty against Party No.1 and
3 ST/11021,11184/2019-DB
also dropped the proposal of penalty on Shri Pankajkumar J. Sheth. Against
this impugned order, the department filed appeal bearing No. ST/11021/2019
before this Tribunal.
1.4 The second show cause notice dated 31.05.2018 was decided by the
Principal Commissioner, CGST, Vadodara-I vide Order No.VAD-EXCUS-001-
COM-36-18-19 dated 28.03.2019, wherein, the learned Adjudicating Authority
classified the service rendered by Party No.2 under Section 66 E (e) of the
Finance Act, 1994 and confirmed Service Tax demand of Rs.4,28,32,174/-
upon the party along with interest. She also confirmed penalty on the party
under Sections 77 and 78 of the Finance Act, 1994 but did not impose any
penalty on Shri Piyush C Shah, Officer (Finance). Against this order, M/s.
GIPCL, Vadodara (Party No.2) filed appeal bearing No.ST/11184/2019 before
the Tribunal.
2.1 The grounds taken by the department are as follows:-
a) Liquidated damages/ penalty charges are the charges which are decided
during making of a contract, for the injured party to collect as
compensation upon a specific breach of contract/agreement such as
delay and/ or deficiency in supply of goods/services etc.
b) M/s GIPCL, purchase material/goods and services from
suppliers/contractors by entering into supply/work contracts/ letter of
intents with them. Only after acceptance of the terms & conditions laid
down in the contracts, supplier can supply the goods and contractors
can execute the work. As an illustration, para 5.2 of the SCN dated
28.03.2018 mentions that "In case the project is not commissioned and
completed within the stipulated time period from the date of issuance of
LOI and the delay is not due to force majeure or due to owner's default
then the contractor has to pay the owner compensation for delay @ rate
of 0.5%(half percent) of total contract value per week of delay subject
to maximum of 10%(ten percent) of the contract value(value of Land,
4 ST/11021,11184/2019-DB
equipment supply, erection and commissioning i.e. without value of
O&M). The decision of the Owner/Engineer-in-charge in regard to the
amount to be recovered from the Contactor will be final and binding on
the Contractor. M/s. LSML is liable to pay compensation over and above
Liquidated damages for shortfall in Performance,
Guarantee/Warrantee/Defects etc., as per terms of RFP."
c) Such contractual obligation mandates/authorizes M/s GIPCL to
terminate the service/ the order for supply of goods, if the said
suppliers/ contractors commit breach of the terms and conditions
contained therein. In cases where the said suppliers/contractors willfully
defaulted in terms of making the supply of goods or execution of the
work within the time frame and/or within the quality parameters
prescribed on the Supply/ work order, M/s GIPCL is authorized to recover
an amount which they labelled as 'liquidated damages/penalties
charges' which they collected at the applicable pre-determined rates,
from time to time, in terms of the contractual obligations in the
agreement/ contract agreed upon by the said suppliers/contractors.
Thus, the suppliers/ contractors were fully aware, ab-initio, that in case
of default, they would be charged an amount by way of 'liquidated
damages/ penalties charges' for the said default.
d) M/s GIPCL recovered such charges by imposing Penalty on the total
amount of bill value issued by those suppliers/Contractors as per the
terms of Supply/Work Orders. Therefore, in all such cases, M/s GIPCL
tolerated the act of willful default of such supplier/ contractor and
received compensation by way of liquidated damages/ penalties charges
recovered' towards their act of such tolerance forbearance, vis-à-vis, the
said default in supply of goods/ execution of work at the rates agreed
and concurred with the Contractors/suppliers. Thus it is a confirmed fact
that there was 'consensus ad idem' i.e. a meeting of the minds, between
5 ST/11021,11184/2019-DB
M/s. GIPCL and Contractors/suppliers, resulting in a contract by way of
an agreement between them wherein they agreed.
e) The adjudicating authority has admitted these facts in his findings in as
much as, he has interalia, observed that - "The defence material
presenting sample copies of contracts demonstrates that liquidated
damages & penalties are prescribed therein for delay in performance or
short performance or deficient performance. The show cause notice also
supports this factual position. I find and note that the given liquidated
damages & penalties are for deficiency in services provided by
contractors."
f) In terms of the relevant statutory provisions of Section 66E of the
Finance Act, 1994, the following has been stipulated:
'Section 66 E. The following shall constitute declared services, namely:-
......................
......................
......................
e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act....
g) It can be seen 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' and liable to service tax. In terms of this entry, the following activities if carried out by a person for another for consideration would be treated as provision of service-
i) Agreeing to the obligation to refrain from an act: It means any act which binds a person, of not to do or not doing a particular manner.
ii) Agreeing to the obligation to tolerate an act or a situation. It means to accept an act or a particular situation which is imposed by a condition or circumstance in a legally enforceable contract, agreement or any other document.
6 ST/11021,11184/2019-DB
iii) Agreeing to the obligation to do an act: It means to perform or to do something as necessarily mandated in an agreement, contract, or any other document which is required under any law for the time being in force.
h) In the present case, the Party No.1 has entered into agreements/contracts with various Vendors/Service Providers with a time clause stipulating that the activity under the agreement/contract has to be completed within a specified time frame and failing the schedule would attract penalty In pursuance to these agreements/contacts, the Noticee have deducted certain portion from payments of various Vendors/Service Providers who failed to act as per time-clause/terms of agreements/contracts, thereby the Party tolerated the act of vendor in lieu of penalty, thus provided services under the category of 'Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act which is a declared service under Section 66E(e) of the Finance Act, 1994 and liable to service tax at prescribed rates under Section 66B of the Finance Act, 1994, as amended.
i) Having accepted the main allegations against Party No.1 that "the given liquidated damages & penalties are for deficiency in services provided by contractors", the adjudicating authority has committed gross error in holding that the said liquidated damages & penalties are not consideration for a taxable service answering the description of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" as given in section 66E(e) of the Act."
and dropped the allegations/charges brought against the Party No.1 including demand of service tax of Rs.4,99,97,827/- and penalty against them.
7 ST/11021,11184/2019-DB 2.2 In view of the above grounds, revenue has prayed that the liquidated damages and penalties collected by M/s. Gujarat Industries Power Company Limited, Surat should be treated as declared service under Section 66 E (e) of the Finance Act, 1994 and service tax demand of Rs.4,99,97,827/- be confirmed against M/s. GIPCL, Surat along with consequential interest and penalties.
3.1 M/s. GIPCL, Vadodara (i.e. Party No.2) filed the appeal No. 11184 of 2019 against the order of the Pr. Commissioner mentioning that two different orders are passed by two different Adjudicating Authorities of the department on the same issue. In one case, department has confirmed the demand of service tax while in an other case involving same issue, the demand has been dropped by the learned Adjudicating Authority. The liquidated damages are not consideration for tolerating an act of not performing the contractual obligation by the service provider. Rather, these are compensation for the losses occurred due to delayed execution of the project. The contract with the vendors is for execution of the project, and not for breach of contract.
3.2 They cited the decision of CESTAT, Delhi in the case of M/s. South Eastern Coalfield Ltd vs. CCE, Raipur-2020 (12) TMI 912 in their support. They also referred to the decision dt. 06.09.2012 of Hon'ble Supreme Court, in the case of BALCO Vs. Kaiser Aluminium Technical Services Inc. observing that "
the terms of the contract will have to be understood in the way parties wanted and intended them to be. The Court can not interpret the contract between two parties like interpreting a statute. He also mentioned that it is not only merely tolerating or agreeing to tolerate an act or situation but agreeing to the obligation to tolerate an act or situation which is liable to facts under Section 66 E (e ). They never agreed to tolerate the delayed or non-
performance of contract by their vendors.
3.3 The views expressed by Principal Commissioner, CGST, Surat in his order dated 04.03.2019 have been upheld by this Tribunal in the cases of Lende 8 ST/11021,11184/2019-DB Engineering India Private Limited V. CCE & ST, Vadodara 2024 (10) TMI 1544
- CESTAT AHD, Gujarat State Electricity Corporation Limited V. CCE & ST, Surat 2024 (11) TMI 473 - CESTAT AHD and South Eastern Coalfields Ltd - 2020 (12(TMI)912 - CESTAT Del.
3.4 The learned Advocate also mentioned that the extended period of limitation cannot be invoked in the present case as there was no deliberate and wilful suppression on their part with an intention to evade the payment of tax. It is settled law that when the dispute is regarding interpretation of law and there are conflicting decisions, neither any extended period is invocable, nor penalty is imposable. He cited the decision of the Hon'ble Supreme Court in the case of Continental Foundation Joint Venture vs. Commissioner 2007 (216) ELT 177 (SC).
4.1 Opening the arguments, learned AR mentioned that the documents produced during investigation and deposition of Shri Piyush C. Shah of M/s.
GIPCL, Vadodara reveals that liquidated damages/ penalties were collected as per terms of the contract from the contractors/ suppliers of the company.
These were related to short/ late delivery by the supplier of the goods and services, belated execution of the service contracts etc. Such income was shown under the head "Other Income" in their books of account. Learned AR mentioned that after final settlement, liquidated damages/ penalties so deducted from the supplier/ contractors are recognized as income and therefore, at that time, liability to pay service tax arises on them. Quoting the statutory provisions, he mentioned that the said activity of M/s. GIPCL fall under 67 E (e) of the Finance Act, 1994. He also justified invocation of extended period and penalties upon the Party No.2 mentioning that M/s.
GIPCL, Vadodara failed to file service tax returns declaring true income as the income from liquidator damages/ penalties were neither declared in the returns nor service tax was paid on such income.
9 ST/11021,11184/2019-DB 4.2 The learned AR also referred to Indian Contract Act, 1872 and mentioned that liquidated damages is compensation for loss or damage caused by breach of contract. When a contract is broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damages caused to him. Explanation to Section 73 of the Indian Contract Act, 1872 says that in estimating the loss or damage arising from a breach of contract, the means which existed of remedying the inconvenience caused by the non-performance of the contract must be taken into account. That certain activities have been declared to be service under Section 66 E of the Finance Act, 1994 which include under clause
(e) an activity of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation within the ambit of the term service." Therefore, amount claimed by M/s. GIPCL, Vadodara and M/s. GIPCL, Surat as liquidated damages or forfeited or consideration for tolerating an act of not performing the contractual obligation by the service provider is liable to service tax.
4.3 The word "Tolerate" is defined as;
"a to suffer' as per Black's Law Dictionary b. to allow to be done or exist' as per Chambers Dictionary c. 'allow the existence or occurrence of anything' as per Law Lexicon Dictionary."
4.4 He therefore, justified confirmation of service tax demand and penalty against M/s. GIPCL, Vadodara. On the same ground, he pressed that the prayer of the department in the case of M/s. GIPCL, Surat may be allowed in the interest of justice.
5. On the other hand, Learned Advocate on behalf of M/s. GIPCL, mentioned that what the company has recovered liquidated damages from their Contractors/ Vendors due to non-fulfilment / delayed fulfilment of work order/service. Such income cannot be said to be out of any service, and therefore, the demand of service tax by Revenue on this income in respect of 10 ST/11021,11184/2019-DB both the companies is not correct. He also highlighted the decision taken by the Pr. Commissioner, Customs and Central Excise, Surat, wherein, he had dropped the demand on the same issue. He also quoted various case laws in his support and prayed for dismissing the department's appeal and setting aside the order passed by the Pr. Commissioner Customs and Central Excise, Vadodara, confirming service tax demand against them involving the same issue.
6.1 We have gone through the records and heard the rival submission. In one case, appeal has been filed by the department against dropping of service tax demand by the learned Pr. Commissioner, Surat whereas, the other appeal has been filed by the party against demand confirmed by another Adjudicating Authority (i.e. Pr. Commissioner, Vadodara), though both involving the same issue. We find that issue of service tax on liquidated damages is no more res-
integra as Tribunal, in various cases have held that service tax demand on liquidated charges is not sustainable.
6.2 In a recent decision dated 06.11.2024 by this Tribunal in the case of Gujarat State Electricity Corporation Limited vs. Commissioner of Central Excise and Service Tax-Surat-II reported at 2024 (11) TMI 473 CESTAT- Ahmedabad, it has been clearly held that service tax is not leviable on penalty collected for not completing the contract within the stipulated time period. The bench has also considered the decision, given by CESTAT, Delhi in the case of M/s. South Eastern Coalfield Ltd vs. Commissioner of Central Excise and Service Tax reported at Raipur-2020 (12) TMI 912. The relevant portion of the judgement para 12 to 44, are reproduced as below :-
"4. On careful consideration of the submission made by both the sides, we find that issues to be decided in the present appeal are as under:-
(1) Whether the penalty recovered from the contractors for not completing the work/ contract within a stipulated time is liable to service tax as a declared service under Section 66 E (e).
....................................
We find that as regard the first issue the revenue has contended that the same falls under a declared service under Section 66 E (e) of Finance Act, 1994 which reads as under:-
"(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;"
11 ST/11021,11184/2019-DB As per the plain reading of the above declared service under sub Clause (e), the activity of not completing the contract within the stipulated time period as provided under contract does not fall under the aforesaid entry. Further, it is a penalty which is imposed on the contractor for not completing the work within the stipulated time period. Therefore, such penalty is not the consideration towards any service. Accordingly, the same does not fall under the declared service as provided under Section 66 E (e) of Finance Act, 1994. This issue is no longer res-integra in the light of the decision cited by the appellant in the case of South Eastren Coalfields Ltd wherein, the principal bench of the Tribunal, New Delhi has disposed of a bunch of appeals by passing following order:-
12."Declared services" has been defined sub-section(e) of Section 66E, as follows :
Declared services "66E.
The following shall constitute declared services, namely :-
xx xx xx
(e) agreeing to the obligation to refrain from anact, 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 :-
"67.(1) Subject to the provisions of this 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;
12 ST/11021,11184/2019-DB
(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 -
xx xx xx
(b) xx xx xx
(c) xx" xx xx
(Emphasis supplied)
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 13 ST/11021,11184/2019-DB 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."
(Emphasis supplied)
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 :
"2.2Consideration 2.2.1 The phrase "consideration" has not been defined in the Act. 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
(Emphasis supplied)
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 :-
"2(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."
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 14 ST/11021,11184/2019-DB 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, the provisions of Section 66E(e) have to be analyzed. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under Section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the :
(i) consideration for agreeing to the obligation to refrain from an act; or
(ii) consideration for agreeing to tolerate an act or a situation; or
(iii) consideration to do an act.
26. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a 'declared service' under Section 66E(e) read with Section 65B(44) and would be taxable under Section 68 at the rate specified in Section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in Section 66E(e).
27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by 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. 15 ST/11021,11184/2019-DB
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.
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."
(Emphasis supplied)
32. In the present case, 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'. 16 ST/11021,11184/2019-DB
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 :
"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.
27. Since the deposit does not constitute the consideration for the 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.
28. In that regard, it should be noted that the contracting parties 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.
29. Thus the parties may make contractual provision - applicable in 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)."
(Emphasis supplied)
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 :
17 ST/11021,11184/2019-DB "3. So far as the first issue is concerned, the 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).
4. Ld. Commissioner (Appeals) in confirming the 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.
5. Having considered the rival contentions, I 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."
(Emphasis supplied)
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 18 ST/11021,11184/2019-DB
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 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."
(Emphasis supplied)
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 19 ST/11021,11184/2019-DB defendant committed a default in performing the agreement and the sum of Rs. 25,000/- paid by the defendant stood forfeited.
40. It is in this context and in the context of Section 74 of the Contract Act, that the Supreme Court observed :
"20. Section 74 declares the law as toliability 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 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."
In view of the above judgment, it is clear that penalty towards non fulfillment of the condition of the contract will not fall under Section 66 E (e) of Finance Act, 1994, therefore the service tax under the said declared service cannot be recovered. Accordingly, service tax demand on this ground is set aside."
7.1 There is no reason with us to disagree with the above findings.
Accordingly, we hold that the liquidated damages/ penalty collected by M/s.
Gujarat Industries Power Company Limited from their Vendors/ Suppliers does not come under the purview of declared service as defined under Section 66 E ( e) of the Finance Act, 1994 and service tax is not leviable on this amount.
Accordingly, the appeal filed by the M/s. Gujarat Industries Power Company 20 ST/11021,11184/2019-DB Limited, Vadodara is allowed. For the same reasons, the appeal filed by the department against the order of the learned Principal Commissioner in the case of Gujarat Industries Power Company Limited, Surat is dismissed. Cross objection also stands disposed of.
(Pronounced in the open court on 06.05.2025) (SOMESH ARORA) MEMBER ( JUDICIAL ) (SATENDRA VIKRAM SINGH) MEMBER ( TECHNICAL ) Bharvi