No service tax payable on compensation received on cancellation of Coal blocks
By Tuhina Sinha, Associate Partner
TLC Legal is pleased to share with you a recent decision of the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”), Kolkata, holding that “compensation” paid to a prior allottee on cancellation of Coal block is not a consideration for tolerating the act of such cancellation and therefore, no Service tax is payable on the same.
The facts relevant to the said case are that the coal block allocated to the Appellant company, Jindal Steel & Power Limited, (the “Company”) were cancelled, along with several others, in terms of the Hon’ble Supreme Court’s order dated 24.09.2014. These cancelled coal blocks were subsequently re-allocated to new allottees. As per the provisions of Section 16 of the Coal Mines (Special Provisions) Act, 2015 (CMSPA), at the time of re-allocation of the cancelled coal blocks to the successful bidder (new allottee), the prior allottees were to be compensated for the transfer of the right, title and interest in the land and mine infrastructure to the successful bidder.
A demand of Service tax was confirmed on the compensation received by the Company under CMSPA, on the ground that such compensation was a consideration for tolerating the cancellation of the coal block. The Company challenged the said demand before the CESTAT interalia on the ground that compensation paid to reimburse them for their investment in land and mine infrastructure, is not a consideration for tolerating any act and therefore no Service tax is payable on the same. Reliance in this regard was placed on the decision of the CESTAT in MNH Shakti Limited1.
After considering the arguments presented, the CESTAT held that since both the cancellation of coal block as well as payment of the compensation are by operation of law, it cannot be said that the Company had a choice of tolerating the cancellation. It was also held that a compensation provided under a statute for recouping the investment made in the mines, is not a “consideration” for tolerating the cancellation of rights over such mines.
The CESTAT also laid down the following pre-requisites for determining whether an act falls within the scope of “tolerating” something and receiving compensation for such tolerance, so as to be leviable to Service tax:
a) the person had a choice to tolerate or not;
b) the person chose to tolerate;
c) such tolerance was for a consideration as per an agreement (written or otherwise) to tolerate;
d) the tolerance was a taxable service.
It was held that since none of the said pre-requisites were met in the facts of the case, the Service tax demand cannot be sustained.
It is seen that the Department has been very widely interpreting the “declared service” heading- ‘agreeing to the obligation to refrain from an act; or to tolerate an act or a situation or to do an act” under Section 66E (e) of the Finance Act, 1994, to include within its scope any compensation or payment in the nature of penalty/damages, such a liquidated damage, notice pay recoveries etc. The present decision of the CESTAT reinforces the argument that “compensation”, in absence of a specific contract to tolerate an act, is not a consideration for any service and therefore, no service tax is payable on the same.