The Delhi bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that sale cancellation agreement is not an act of rendering the declared service and no service tax is payable.
The bench of Dr.Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) has observed that unless payment has been made for an independent activity of tolerating an act under an independent arrangement entered into for such activity or tolerating an act, such payment will not constitute ‘consideration’ and such activities will not constitute ‘supply’.
Table of Contents
Background – Sale Cancellation Agreement
The appellants/assessee are registered as provider/recipient of taxable service, namely, manpower supply service, works contract service etc. During the audit of the appellants record for the financial year 2012-13, 2013-14 & 2014-15 the Jurisdictional Range Officer observed that the appellant has received an amount as a claimed income from agreement cancellation.
Department formed an opinion that the amount received is the consideration due to cancellation of an agreement hence towards a declared service as per section 66 (E) (e) of Finance Act 1994 and thus is taxable in terms of Section 65 (B) (22).
Based on this observation that a Show Cause Notice No.226/2015 dated 05.07.2016 was served upon the appellant proposing the demand of service tax amounting to Rs.16267861 on the aforesaid amount of Rs.13,16,17,000/- received by the appellant.
Proportionate interest and the appropriate penalties were also proposed against the appellant. Said proposal was confirmed vide Order-in-Original No.49/2018 dated 28.03.2018.
The appeal against the said order has been rejected vide the order under challenge.
Arguments
The assessee contended that due to unforeseen circumstances all the sale contracts were cancelled by the sellers before the due date of the payments forcing the appellant to recover damages for the breach of contract from the sellers, as per the contract itself. To avoid the litigation, the quantum of damages got mutually agreed upon and the respective sale cancellation agreements were entered into.
The assessee argued that it is in leu of those agreements that the amount in question has been received by the appellant and isdeclared in the accounts under the head “claim income from agreement cancellation”. It is submitted that the damages for contractual breach cannot be called as “consideration” for rendering taxable “declared service”.
The department contended that the appellant has received the compensation for cancelling the Land Sale Agreement, which itself determines that the act constitutes a taxable service under section 66 (E) (e) of the Finance Act, 1994.
The department submitted that the act of cancellation involves agreeing to an act or tolerating an act or a situation which is called as declared service and the same is taxable.
Issue Raised
Whether the appellant is providing the declared service contemplated under section 66 (E) (e) of Finance Act which became taxable w.e.f. 1st July, 2002?
Conclusion
The tribunal noted that when a contract has been broken, the party who suffers by such breach is entitled to receive, form the party who has broken the contract, compensation for any loss or damage caused to him, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. The compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.
The tribunal allowed the appeal filed by the assessee.
Case Details
Case Title: M/s. Vandana Ispat Limited Versus Commissioner of CGST & Central Excise-Raipur
Case No.: Service Tax Appeal No. 50026 Of 2019
Date: 08/11/2024
Counsel For Appellant: Krishna Mohan Menon & Ms. Parul Sachdeva
Counsel For Respondent: S.K. Ray
