The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has quashed tax demand on Hindustan Zinc, slammed adjudicating authorities for judicial indiscipline over misinterpretation of Section 66 E(e) of the Finance Act, 1994.
The bench of Dr. Rachna Gupta (Judicial Member) and P.V. Subba Rao (Technical Member) has observed that the penalties, fines and forfeited amounts cannot be treated as consideration towards declared services defined under section 66 E(e) of the Finance Act.
The bench observed that there has been plethora of orders in which clarified about leviability of service tax on the declared services, “agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act” under clause (e) of section 66E of Finance Act, 1994 and has clarified that the activities contemplated under section 66 E (e) i.e. when one party agrees to refrain from an act or to tolerate an act or a situation, or to do an act, are the activities where the agreements specifically refers to such an activity and there is a flow of consideration for this activity. These judicial precedents were not followed by the department amounting to judicial indiscipline.
The appellant/assessee, Hindustan Zinc is engaged in the manufacture of zinc lead ingots, copper sulphate solutions, HZP dust etc. During the course of the audit of the appellant’s record, the department observed that the appellant has booked income on account of SD/EMD forfeited and fine/ penalties recovered from the contractors.
The department formed the opinion that the said amount is received for agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act which is amount to ‘Declared Service’ in terms of Section 66 E(e) of the Finance Act, 1994 and the that service is liable to taxed.
The respective SCN proposing the demand were issued to the appellants for the period as mentioned in said table itself. The original adjudicating authorities confirmed the respective demand along with the interest and the appropriate penalties. The appeal against these orders in original has been rejected.
The issue raised was whether the income received as “forfeiture of security Deposit/ Earnest Money Deposit” and “Fine penalties recovered from contractors” by the appellant is a taxable declared service undersection 66E of the Finance Act, 1994 and liable to service tax.
The appellant contended that the amount recovered by the appellant is not a consideration as for an amount to qualify as consideration there has to be ‘quid pro quo’ or an “activity for such consideration”. However, the appellant has not undertaken any activity against the recovery of amounts in question. Hence, there is no element of ‘service’ which is defined under section 65B (45) of the Finance Act. The activity has wrongly been taxed under section 66E(e) of Finance Act. The disputed amounts are nothing but the penal charges which have been recovered by the appellant with the intention to make good the losses and to also act as a deterrent to ensure that buyer or supplier do not violate the terms of contract any further.
The tribunal ruled that the issue of considering a forfeited amount as an amount of consideration towards declared services stands already settled in favour of the assessee. The same is already held to not to be the consideration towards rendering declared service defined under section 66E(e) of the Finance Act, 1944. In fact the cancellation of contract itself is held to not to be a service
The CESTAT ruled that the act of the authority is held to be an act of judicial indiscipline. The authorities below are warned to be careful in future. An order of reflecting judicial indiscipline is otherwise not sustainable.
Case Details
Case Title: M/S Hindustan Zinc Ltd Versus Commissioner Of Cgst & Central Excise-Udaipur
Case No.: Service Tax Appeal No. 52134 Of 2019
Date: 08/04/2025
Counsel For Appellant: Sukriti Das
Counsel For Respondent: Shashank Yadav
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