CESTAT Delhi Sets Aside Service Tax Demands on Debit Notes, Notice Pay, Cheque Bounce Penalties and Liquidated Damages — KJS Cement Ltd
Background and Proceedings
M/s KJS Cement Ltd approached the Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal, New Delhi, by way of Service Tax Appeal No. 51642 of 2018, challenging an adjudication order dated 08.03.2018 issued by the Commissioner, Central GST, Central Excise & Customs, Jabalpur. The said order had confirmed recovery of service tax amounting to Rs. 3,95,60,896/- along with applicable interest and penalty.
The appeal was taken up for hearing and decided on 07.12.2023 by a Bench comprising Justice Dilip Gupta, President, and P.V. Subba Rao, Member (Technical).
Nature of the Assessee's Business and Audit Findings
The assessee is engaged in the manufacture of cement clinker and cement, sourcing raw materials and inputs from multiple suppliers. During the course of a departmental audit, the audit team observed that certain amounts received or adjusted by the assessee had not been subjected to service tax, even though the Department treated these amounts as consideration for "declared services" within the meaning of Section 66E(e) of the Finance Act, 1994.
Pursuant to the audit, a show cause notice dated 17.10.2017 was issued, covering the period 01.07.2012 to 31.03.2017. The notice alleged that the assessee had:
- Recovered penalties from raw material suppliers for supply of substandard materials through ledger adjustments
- Recovered cheque-return penalties
- Recovered notice pay from departing employees
- Recovered liquidated damages from suppliers who failed to adhere to agreed delivery timelines
All four categories were alleged to constitute "declared services" attracting service tax liability.
The assessee filed a detailed reply disputing the allegations. However, the Commissioner, by the impugned order dated 08.03.2018, confirmed the demand along with interest and penalty, prompting the present appeal before CESTAT.
Statutory Framework: Declared Services Under the Finance Act, 1994
Before examining each disputed category, the Tribunal set out the relevant statutory provisions governing the controversy.
Definition of "Declared Service"
Section 65B(22) of the Finance Act, 1994 defines the term as follows:
"65B(22) 'Declared service' means any activity carried out by a person for another person for consideration and declared as such under section 66E."
Section 66E(e) — The Core Provision
Section 66E(e) of the Finance Act, 1994 reads:
"66E. Declared services: The following shall constitute declared service, namely:— (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;"
The Tribunal noted that for a transaction to qualify as a declared service under Section 66E(e), two essential conditions must co-exist:
- There must be an agreement specifically referring to the activity of refraining, tolerating, or doing an act
- There must be a demonstrable flow of consideration from one party to another specifically for undertaking that obligation
Absent either condition, the transaction cannot be treated as a taxable service.
Analysis of the Four Disputed Demands
1. Debit Notes Raised Against Suppliers
Nature of the Transaction
The assessee's procurement process involved receipt of raw materials — primarily natural minerals — from suppliers. Since the quality and quantity of such materials could only be ascertained through laboratory analysis, the assessee would initially credit the supplier's ledger account with the full invoice value. Upon receipt of the inspection report, the actual value was computed using a pre-agreed computation algorithm. Where the delivered materials were found to be deficient in quality or quantity relative to the invoiced commitment, the differential was adjusted through a debit note raised on the supplier.