Forfeiture of deposit is not leviable to service tax as toleration of an act

 Tribunal in the case of Tirupati Balaji Furnaces Pvt Ltd., 2021 (11) TMI 600, held that Service Tax (‘ST’) would not be levied on forfeiture of earnest money and retention of compensation / liquidation damage for non-delivery of purchased goods by the supplier.    

 

Facts of the Case

 

·                The Appellant received the following amounts and did not pay ST on the same:

 

                       i.       Damages collected from suppliers for failure in delivering consignments within the delivery schedule

 

                     ii.       Earnest Money Deposit (‘EMD’) forfeited on failure of successful bidders to make full payment within the date specified in the sale order

 

·                The Revenue, however, demanded ST on the said amounts considering them as the amounts pertaining to ‘agreeing to the obligation to refrain from any, or to tolerate an act or a situation, or to do an act’.

 

CESTAT Decision

 

·                The Appellant is neither carrying on any activity to receive compensation nor can there be a presumption on the intention of other party to violate the contract and inflict the damage. The only purpose of damages/compensation is to ensure that violation of the contract does not happen or repeated.

 

·                Retention of the said amounts cannot be said to be an act of receiving consideration towards toleration of an act.

 

 Remarks

 

·                In our view, the decision is correct and may squarely be applied under GST regime as well.

 

·                From the experience, we have felt that Authorities are covering anything and everything under ‘toleration of an act’. What the Authorities fail to understand is that the ‘toleration of an act or refrain from an act’ itself has to be a positive service for the other person. A ‘service’ cannot be an action against the other person but an action for the other person.

 

·                Following examples will make it clear:

 

Example 1: Consideration charged for waiver of non-compete clause. Here, the supplier is allowing the other person to compete with him, thereby, agreeing to tolerate the recipient’s act of competition. It’s actually what the recipient wants and thus, an act/service for the recipient.

 

Example 2: Amount charged for withdrawal of a suit. Here, the supplier is refraining itself from going ahead with the suit. This is what the recipient wishes i.e. an act/service for the recipient.