Update No. 92nd on SERVICE TAX ON CANCELLATION CHARGES RECEIVED ON ACCOUNT OF SC DIRECTION dt. 15.11.2021

The levy of service tax on the cancellation charges/liquidated damages or compensation received has been subject matter of litigation since the time when declared services stated that the activity of tolerating is also a service liable to service tax. Since then, numerous decisions have been reported on the leviability of tax on such compensatory amount received. Recently, this issue was raised before the CESTAT, Kolkata in the case of M/s MNH SHAKTI LIMITED wherein the coal mines allotted to the appellant were cancelled and compensation was granted vide direction of the hon’ble Apex Court. The outcome of this decision is the subject matter of discussion of our present update. The appellant contended that the cancellation charges received by them was not by his choice but it was by virtue of order passed by Hon’ble Supreme Court. The receipt of compensation is a consequence of the operation of a statute and not the result of any agreement either as to render a service or to tolerate an act. Hence, no service tax is leviable on the compensation received by them. Reliance was also placed on various favourable judicial pronouncements on the issue as follows: - • South Eastern Coal Fields Ltd vs Commissioner of Central Excise Raipur decided by CESTAT Final order no. 51651/2020 dated 22 December 2020. • K.N. Food Industries Pvt. Ltd. Vs CCE Kanpur 202 (38) GSTL 60- (Tri-All) • Amit Metalinks Ltd. Vs CCGST, Bolpur 2019- TIOL—3177- CESTAT Kol. • Lemon Tree Hotels vs CCE, Indore 2020 (34) GSTL 220 (Tri-Del) The Hon’ble CESTAT held that the appellant had no choice of tolerating cancellation or not. The cancellation was in pursuance of the order of the Supreme Court and not as a result of a contract to tolerate cancellation. There was no consideration for tolerating the cancellation, only a compensation provided for statutorily for the investment made in the mines by the appellant. These, cannot be called taxable services of tolerating a situation by any stretch of imagination. No service tax can be levied on the amounts received by the appellant as compensation. The above decision deals with compensation received by virtue of Statue or direction of Supreme Court. However, the ratio of the decision should be made applicable for compensations received on account of breach of contractual obligations also where there is no specific intention to provide the service of “tolerate an act”. We have extensively covered the dispute as regards leviability of tax on liquidated damages in our earlier updates and have concluded that tax should be levied only when there is express intention to perform such services, say for example in case of noncompete agreements. The assessees should not be fastened with tax demands for compensations received during normal course of trade due to breach of conditions of the contract. The dispute is continued In GST era as well as serial no. 5(e) of Schedule II of the CGST Act, 2017, is identically worded as Section 66E(e) of the Finance Act. Interestingly, several advance rulings under the GST regime have ruled that payment of liquidated damages is liable to tax, without taking into consideration that damages are essentially compensatory in nature and are payable in case of breach of a contract to monetarily place the aggrieved party in the position it would be in if the breach was not committed. The reasoning of the judgment discussed in update will have persuasive value in the GST regime too as the clauses for damages or penalty for deficiency in services is a common feature.

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Update No. 92nd on SERVICE TAX ON CANCELLATION CHARGES RECEIVED ON ACCOUNT OF SC DIRECTION dt. 15.11.2021

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