CESTAT: Compensation For Breach Of Agreement To Sell Land Not Taxable As Declared Service U/S 66E(e) Of Finance Act
Pranav B Prem
The New Delhi Principal Bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), comprising Ms. Binu Tamta (Judicial Member) and Mr. P.V. Subba Rao (Technical Member), has held that compensation received for breach of an agreement to sell land cannot be treated as a “declared service” under Section 66E(e) of the Finance Act, 1994.
The appeals were filed by three brothers—Ajay Kumar Sood, Satish Kumar Sood, and Raman Kumar Sood—challenging orders of the Commissioner (Appeals), which had upheld service tax demands of ₹55.62 lakh each along with equal penalties under Section 78 and interest under Section 75. The Revenue alleged that each appellant received ₹4.5 crores from landowners under a Memorandum of Settlement in 2013, which, according to the department, was consideration for “tolerating” the breach of an agreement to sell land, and hence taxable under Section 66E(e).
Background of the dispute
In 1987, the landowners signed an agreement to sell 17 acres of agricultural land at Samalkha, New Delhi, to the appellants. The appellants paid earnest money under the agreement. However, instead of completing the sale, the landowners sold the land to third parties. The appellants filed civil suits in the Delhi High Court in 1988 seeking injunctions. After prolonged litigation, the parties reached a settlement in 2013. Under a Memorandum of Settlement dated 6 September 2013, the landowners agreed to pay each of the appellants ₹4.5 crores. The Revenue later took the view that this payment was consideration for the appellants’ tolerance of the breach and initiated service tax proceedings.
Appellants’ arguments
The appellants contended that the amounts received were purely damages for breach of contract, not consideration for any service. They argued that Section 66E(e) applies only where there is an agreement to tolerate, refrain from, or do an act, which was not the case here. The payment was a settlement of a civil dispute arising out of the original agreement to sell and could not be equated to rendering a service. They further argued that the settlement amounted to actionable claims, which are excluded from the definition of service under Section 65B(44). It was also submitted that the extended period of limitation could not be invoked, and if tax were ever to be demanded, cum-tax benefit should be given.
Revenue’s stand
The Revenue contended that by signing the Memorandum of Settlement, the appellants agreed to tolerate the landowners’ breach of contract and surrender their right to purchase the land, for which they received ₹4.5 crores each. This, the department claimed, squarely fell under Section 66E(e) as a declared service. The Revenue also stressed that the appellants had shown the receipts in their accounts as “surrender of booking rights in land,” which could not be treated as actionable claims.
Tribunal’s findings
The Tribunal noted that Section 66E(e) 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. However, the bench clarified that this provision applies only when the agreement itself is for tolerance or refraining, and not where compensation is paid as damages for breach of an earlier agreement.
It observed that the Memorandum of Settlement was not a fresh contract to tolerate an act but merely a means to settle the dispute arising from the landowners’ failure to honour the original agreement to sell. The ₹4.5 crores received by each appellant was clearly compensation or damages, not consideration for any service. The bench categorically held that such compensation was “beyond the scope of Section 66E(e)” and could not be taxed as a declared service. Consequently, the demands of service tax, interest, and penalties were quashed. CESTAT allowed all three appeals, set aside the impugned orders, and granted consequential relief to the appellants.
Appearance
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
Cause Title: Ajay Kumar Sood V. Commissioner (Appeals-I), CGST- Delhi
Case No: Service Tax Appeal No. 51127 Of 2020
Coram: Ms. Binu Tamta (Judicial Member), Mr. P.V. Subba Rao (Technical Member)
