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13 February 2020

Recent judgments settling the pending cases under Section 66E(e) of the Finance Act 1994 (Declared Services)

There are many ongoing litigations pertaining to erstwhile Service Tax regime where Revenue is of the view that Service Tax shall be charged on various receipts in the nature of penalty, like, compensation charged on account of delayed payment, late delivery, poor/deficient supply of services, notice pay recovery, etc. under clause (e) of Section 66E of the Finance Act 1994 ("Declared Service") which read as "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." 

However, some recent judicial pronouncements have settled the disputes in this regard wherein it was held that these charges in the nature of compensation do not qualify as service. A summary of some recent rulings is as below -
  • M/s K. N. Food Industries Pvt. Ltd. v. The Commissioner of CGST & Central Excise, Kanpur (Allahabad CESTAT) - Final Order No. 71917/2019 dated 26 November 2019

    Facts of the case - In this matter, the Appellant is engaged in manufacture of confectionaries falling under Chapter 17 of the Central Excise Tariff Act, 1985 for and on behalf of the principal manufacturer, M/s Parle Biscuits Pvt. Ltd. As per the terms of contract, in case the quantum of goods provided by M/s Parle is less than standard mutually agreed upon quantum, the appellants are entitled ex-gratia job charges to cover up the loss or deficiencies in normal job charges to be received by the appellant. Revenue is of the view that such Ex-gratia job charges amounts to providing services under Section 66E(e) of the Finance Act 1994.

    Decision - The Hon'ble Allahabad CESTAT, while setting aside the demand of Service Tax, held that the the ex gratia charges paid by principal manufacturer to Appellant were towards making good the damages, losses or injuries caused due to breach of terms of contract 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.

  • Notice pay recovery - There is a standard practice in industry wherein employment contract is drafted in such a way to include terms that where any employee wishes to leave the organization, he/she has to serve a notice period, like, fifteen days, one month, two months, etc. varying from organization to organization. Now if any employee does not serve such notice period and chooses to leave the organization immediately upon resignation, an option is provided that certain salary (as per the terms of contract) shall be payable by the outgoing employee to employer for covering the losses incurred on account of not serving the notice period. Revenue in this case is of the view that such ‘notice pay recovery’ by employers shall be taxable under Section 66E(e) ibid since employer has tolerated the act of outgoing employee of not serving the notice period.

    a. GE T & D India Limited v. Deputy Commissioner of Central Excise, Large Tax Payer Unit (Madras High Court) cited at MANU/TN/9682/2019 (07 November 2019) - The Hon'ble High Court of Madras in this matter has held that there is no rendition of service by employer in this scenario as the employer has not tolerated any act rather has merely facilitated the exit of employee upon imposition of a cost upon him for the sudden exit. It was observed by Hon'ble Bench that Notice pay does not give rise to the rendition of service either by the employer or employee.

    b. M/s HCL Learning Limited v. Commissioner of Central Goods & Service Tax, Noida (Allahabad CESTAT) - Final Order No. 71950/2019 dated 25 November 2019 -  Subsequently, Hon'ble Allahabad CESTAT in the same set of facts also held that Service tax shall not be leviable on such consideration received from outgoing employee.

  • M/s Accounts Officer, Madhya Pradesh Kshetra Vidyut Vitran Company Ltd. v.  Commissioner of Central Goods & Service Tax, Customs & Central Excise (Delhi CESTAT) - Final Order No. 50807/2019 dated 27 May 2019

    Facts of the case - In this matter, the Appellant is an electricity distribution company engaged in transmission or distribution of utility covered under Negative List of Services (Section 66D). The Appellant in the present case was deducting the penalty from their suppliers and contractor's bills due to various reasons, like, delay in commencing the work, stopping the work or delay in completing the work. Also, some penalties were levied by Appellant for delay in supply of goods or services by a contractor. The revenue is of the view that such receipt of penalty is covered under clause (e) of Section 66E of the Finance Act,1994, thus taxable. 

    Decision - The Hon'ble Delhi CESTAT, while setting aside the demand of Service Tax, inter-alia held that the amount received by Appellant is not towards any service rendered as given under Section 66E(e) ibid.