Bond Recovery from Employees & Fee Forfeiture from Students Not Taxable as Declared Service Under Service Tax: CESTAT Bangalore

Background and Context

A significant ruling has emerged from the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, in the matter of Manipal Academy of Higher Education Vs Commissioner of Central Tax (Appeals), wherein the Tribunal adjudicated upon three connected appeals involving Service Tax demands raised on two distinct types of recoveries — amounts recovered from employees who departed before completing their contractual notice period, and amounts forfeited from students who abandoned their enrolled courses midway.

The core legal question placed before the Tribunal was whether such recoveries could be classified either as liquidated damages or as a declared service falling under Section 66E(e) of the Finance Act, 1994 — specifically, the category of "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act."

Details of the Three Appeals

The three appeals covered different demand periods and Service Tax amounts as confirmed by the adjudicating authority. The table below captures the specifics:

Since all three appeals revolved around an identical legal issue, the Tribunal consolidated them and disposed of all three by way of a single order.

The adjudicating authority had, in each of these cases, confirmed the Service Tax demand along with applicable interest and had imposed penalties under the provisions of the Finance Act, 1994. The assessee challenged these orders before the Tribunal.

Statutory Framework: Definition of 'Service' and 'Declared Service'

The Tribunal's analysis began with an examination of the relevant statutory provisions under the Finance Act, 1994.

Section 66B(44) — Definition of 'Service'

Section 66B(44) of the Finance Act, 1994 defines "service" as follows:

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include — an activity which constitutes merely — (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or (iii) a transaction in money or actionable claim (a) a provision of service by an employee to the employer in the course of or in relation to his employment; (b) fees taken in any Court or tribunal established under any law for the time being in force."

Section 66E — Declared Services

Section 66E of the Finance Act, 1994 enumerates specific activities that constitute declared services, including:

• (a) Renting of immovable property
• (b) Construction of a complex, building, civil structure or a part thereof
• (e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act

The Revenue's case rested on Section 66E(e), arguing that the contractual arrangements between the University and its employees or students amounted to the University "tolerating" the act of premature exit in exchange for compensation.

Arguments Advanced by the Assessee

The assessee advanced a multi-pronged challenge to the Service Tax demands.

Primary Reliance on GE T&D India Ltd.

The assessee placed principal reliance on the judgment of the Madras High Court in GE T&D India Ltd. Vs Deputy Commissioner of Central Excise [2020 (1) TMI 1096], wherein the Court held: