Compensation For Breach Of Agreement To Sell Land Not Taxable As Declared Service U/S 66E(e) Of Finance Act: CESTAT

Section 66E(e) of the Finance Act, 1994 lists out “declared services” for the purpose of levy of service tax. It deems 'Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act' as a declared service.

Binu Tamta (Judicial Member) and P.V. Subba Rao (Technical Member) stated that the amount of Rs. 4.5 crores each received by the assessee from the land owners is compensation for the reneging on the agreement to sell. It does not fall under section 66E(e) and is not a declared service.

In this case, the assessee/appellants were providing the service of renting immovable property and have been paying service tax on the rental income.

The land owners signed an agreement with the assessee to sell 17 acres of agricultural land. As per the agreement, the assessee had also paid earnest money to the sellers. Thereafter, instead of selling the land to the assessee, the landowners sold it to some other persons.

Aggrieved, the assessee filed civil suits in 1988 in the Delhi High Court seeking an injunction against the land owners and the buyers.

After prolonged litigation, the assessee settled the matter with the land owners by signing a Memorandum of Settlement, as per which each of the assessee was paid a sum of Rs. 4.5 crores. The land owners paid the amount, and the dispute was settled.

The case of the department is that the assessee had received this amount of Rs. 4.5 crores each to tolerate the situation in which the land, after having agreed to sell to the assessee, was sold to someone else. The amount so received, according to the department, was liable to service tax under section 66E (e) of the Finance Act, 1994.

The assessee submitted that the amounts received by the assessee are in the nature of damages for reneging on the Agreement to sell by the land owners and not in the nature of consideration for a service. Therefore, it is not covered by section 66 E (e) of the Act, and no service tax is payable.

The bench noted that under the Agreement to sell, the landowners agreed to sell the land to the assessee and the assessee had paid an earnest money for the purpose. While the assessee paid the earnest money thereby fulfilling their part of the Agreement to sell, the landowners did not fulfil their part of the deal by not selling the land to the appellants.

The Tribunal observed that the assessee had filed suits before Delhi High Court but finally both parties agreed to settle the dispute and as a part of the settlement, the land owners paid a sum of Rs. 4.5 crore to each of the appellants.

This is clearly only a settlement of the dispute and the amount received is only damages for reneging on the agreement to sell. This is clearly not an agreement to tolerate any act or situation. It is beyond the scope of section 66E (e) of the Act and therefore it is not a declared service, added the Tribunal.

The bench held that the demands of service tax on the assessee cannot be sustained and need to be set aside.

In view of the above, the Tribunal allowed the appeal.

Case Title: Ajay Kumar Sood v. Commissioner (Appeals-I), CGST- Delhi

Case Number: SERVICE TAX APPEAL NO. 51127 OF 2020

Counsel for Appellant/ Assessee: Shri A.K. Batra and Ms. Sakshi Khanna, Chartered Accountants

Counsel for Respondent/ Department: Shri Rajeev Kapoor and Shri Suresh Nandanwar