Recent Tribunal decisions on ‘toleration of an act’

This is to update you on recent Tribunal decisions in the case of Accounts Officer, Madhya Pradesh Kshetra Vidyut Vitran Company Ltd. v. CGST, 2019 (7) TMI 500 – CESTAT NEW DELHI (‘MPKVVCL Case’) and Lemon Tree Hotel v. CGST, 2019 (7) TMI 767 – CESTAT NEW DELHI (‘Lemon Tree Case’). These decisions have been discussed in brief, as under:

MPKVVCL Case

• The taxpayer recovered penalty from the vendors for delay in supply of goods or services or delay in commencement of work.
• The department contended that the amount collected by taxpayer is on account of toleration of an act and the same qualifies as declared service under Section 66E(e) of the Finance Act, 1994.
• The Tribunal held that deduction of penalty from contractor’s bill will not be considered towards rendition of service under the category ‘toleration of an act’. The Tribunal observed that no service was rendered for which penalty amount was received. Further, imposing service tax on such amount will result in dual levy since service tax was already paid on contractor’s service. Basis above, the Tribunal held that service tax is not payable.

Lemon Tree Case

• The taxpayer was running a hotel and collecting advance booking amount from its customers. In case of cancellation, the taxpayer retained the full amount as cancellation fee. 
• The department contended that the cancellation fee is towards toleration of an act by the taxpayer and qualifies as declared service.
• The Tribunal held that no service tax will be payable on cancellation fee. The Tribunal held that the amount was received for agreeing to provide accommodation service and not for toleration of an act. The nature of this amount will not change when the guest do not avail the service. Hence, no service tax will be levied.

NITYA Comments:

 The aforesaid rulings are the first ones that discussed the scope of ‘toleration of an act’ introduced as ‘declared service’ post July 2012. Importantly, the rulings have highlighted that declared service (toleration of an act) requires a positive act by the supplier and will not encompass amounts in the nature of damages or cancellation fee.

These ruling will be relevant under GST regime as well which contains similar provisions. Post introduction of GST, GST is held to be payable on liquidated damages in several Advance Rulings. These rulings can now be distinguished basis the above judgements. We also analyzed these advance rulings and shared our view that no GST is payable on liquidated damages (Refer: NITYA’s Insight | Legal Precedents’ Series | Issue 2 dated January 23, 2019).