St applicability on compensation as per arbitration award

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Preety Gupta (Querist)
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17 August 2013 Party A and party B had entered into an agreement and as per the agreement, if the owner of land was unable to remove the encroachment in the land, the buyer of such property had reserved his right to cancel the agreement. now in this regard, when party A was not able to remove such encroachment within the scheduled time of the Agreement, a dispute arose and both the parties went for a arbitration settlement. In the arbitration award it was decided that party A shall pay 8cr as on march, 2013 to party B as compensation for not completing the work in time.

Question: does such compensation attracts to service tax applicability?

MY INFERENCE IN THE ABOVE SITUATION WAS:-

‘Service’ (section 65B (44)) does not include –
any activity that constitutes only a transfer in title of
Ø goods or (ii) immovable property by way of sale, gift or in any other manner
Ø a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution
Ø a transaction only in (iv) money or (v) actionable claim
Ø a service provided by an employee to an employer in the course of the employment.
Ø fees payable to a court or a tribunal set up under a law for the time being in force
And as in the context of payment of COMPENSATION to the other party in lieu of Arbitration Award, no service is being provided or is to be provided but such transaction only involves transfer of money.
Conclusion: NO SERVICE TAX IS APPLICABLE.

KINDLY CORRECT ME IF I AM WRONG AS CERTAIN PEOPLE SAY ST APPLICABILITY IS ATTRACTED IN CASE ON NON_FULFILLMENT OF THE CONTRACT.

CA Suresh Jain

CA Suresh Jain (Expert)
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18 August 2013 Basic ingredients of the service is that it should be 1. an activity 2. carried out for another person and 3. carried out for a consideration.
The compensation received by your client is not for any activity done and therefore, not a service.

disclaimer- all answers are given as per the facts narrated by you. Answer may differ after study of full facts/statements/agreements etc. involved in the case

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