No service tax can be levied on the amounts received by an entity as compensation: CESTAT KOLKATA

Facts:

• The appellant, a joint venture company of Mahanadi Coal Fields Ltd, Neyeveli Lignite Corporation and Hindalco Industries Ltd., mines and sells coal.
• Coal Blocks allocated to the appellant for the purpose by the Government of India in 2005 were cancelled by the Hon’ble Supreme Court vide its order dated 24th September 2014 along with similar allocations to other mining companies. The blocks were thereafter allocated to other companies.
• Since the appellants and other companies which are similarly placed had already invested in these mines, the Coal Mines (Special Provisions) Act, 20151 and Coal Mines (Special Provisions) Rules, 2015 were enacted which provided for a compensation to be paid by the new allottees to the old ones (such as the appellant) in lieu of the financial loss incurred.
• Section 9 of CMSPA provides that a part of the proceeds, collected from the new allottees was to be paid to the old allottees as compensation.
• The appellant received compensation under this Act from the new allottees through the Government.
• A SCN dated 18.10.2019 was issued by the DG, GSTI, Bhubaneswar alleging that the appellant “tolerated the act of cancellation of coal blocks” by the Ministry of Coal and received a compensation in lieu of the cancellation and that this activity of the appellant appears to be covered by the definition of service as per Section 65B (44) read with 65B (22) and section 66E (e) of the Finance Act, 1994 and hence is chargeable to service tax.
• Service tax was demanded in the SCN under the proviso to section 73(1) invoking extended period of limitation along with interest under section 75. Penalties were proposed to be imposed under sections 76, 77 and 78 of the Finance Act, 1994.
• After following the due process, the learned commissioner has issued the impugned order demanding service tax under the aforesaid provisions along with interest and penalty.
• Aggrieved by the aforesaid impugned order, the Appellant filed present appeal.

Observations and Findings:

• It is undisputed that the compensation was received by the appellant. Coal blocks allocated to the appellant as well as to several others were cancelled as per the judgment of the Hon’ble Supreme Court. Thereafter, they were allotted to new companies.
• The appellant received such compensation through the Government. The case of the Revenue is that the appellant is tolerating the act of cancellation and has received this amount as consideration for such tolerance.
• The question of tolerating something and receiving a compensation for such tolerance pre-supposes that:
  • the person had a choice to tolerate or not;
  • the person chose to tolerate;
  • such tolerance was for a consideration as per an agreement (written or otherwise) to tolerate;
  • the tolerance was a taxable service.
• None of the above elements are present in the present case. The appellant had no choice of tolerating cancellation or not. The cancellation was in pursuance of the order of the Supreme Court and not as a result of a contract to tolerate cancellation. There was no consideration for tolerating the cancellation, only compensation provided for statutorily for the investment made in the mines by the appellant.
• Even in cases where any amount is received under a contract as a compensation or liquidated or unliquidated damages, it cannot be termed ‘Consideration’.
• This case is not even a case of payment under a contract. Both the cancellation of the allocation of the blocks and the receipt of compensation are by operation of law.
• It is unthinkable to say that the land-owner has tolerated the acquisition of his land as per an agreement and charge service tax on the compensation.
• These, cannot be called taxable services of tolerating a situation by any stretch of imagination. No service tax can be levied on the amounts received by the appellant as compensation.

Held:

 In view of the aforesaid impugned order cannot be sustained and therefore was set aside.