CESTAT: Service Tax Not Leviable on Unclaimed Amounts Written Off Without Evidence of Taxable Service

The CESTAT has ruled that Service Tax cannot be levied on unclaimed or unpaid amounts that a company writes off, even if these amounts are recorded as income. The Tribunal found that simply transferring these balances to 'unclaimed' and later writing them off, in line with accounting practices, does not automatically mean they represent consideration for a taxable 'declared service'. Crucially, for an act to be considered a declared service, there must be an agreement and a flow of consideration in return for tolerating an act or situation.

The CESTAT, New Delhi, has set aside a Service Tax demand of ₹20.40 lakh raised on unclaimed/unpaid amounts written off by M/s National Engineering Industries Ltd., holding that merely recording such amounts as income in the books does not make them consideration for a taxable service.

During audit, the Department noticed that the appellant had transferred retention amounts from vendors and advance payments from customers to unclaimed/unpaid balances in its books. The Department treated these amounts as consideration for “tolerating an act” under Section 66E(e) of the Finance Act, 1994, and demanded Service Tax of ₹20,40,513 on ₹1,46,91,645.

The appellant contended that there was no flow of consideration from vendors or other parties and no activity undertaken by it in return for retaining the amounts. The accounting entries merely represented writing back outstanding balances in accordance with accounting practices.

CESTAT's Key Observations

The Tribunal examined the scope of “declared service” under Section 66E(e) and held that an activity involving refraining from an act, tolerating an act/situation, or doing an act must arise from an agreement or contract, whether express or implied. There must also be consideration flowing in return for such activity.

In the present case, the amounts represented unclaimed balances that had remained unpaid for three years and were subsequently written off, as well as cheques that became invalid because vendors did not present them within the prescribed period. The Tribunal held that merely treating such amounts as “income” in the financial records, in accordance with accounting practices, does not establish that they were consideration for rendering a taxable service.

The Tribunal also relied upon the established principle that penalties, liquidated damages, compensation, forfeiture amounts and cancellation charges arising from breach or non-compliance with contractual conditions cannot automatically be treated as consideration for tolerating an act under Section 66E(e).

Further, the Tribunal noted that CBIC Circular No. 178/10/2022-GST clarifies that an agreement to do, abstain from doing, or tolerate an act cannot simply be presumed merely because money flows from one party to another.

Extended Period Also Set Aside

CESTAT held that the extended period of limitation was wrongly invoked, as there was no evidence of any positive act by the appellant to evade payment of tax.

Final Decision

The Tribunal concluded that the written-off amounts were wrongly treated as consideration for a declared service. Accordingly, the impugned order was set aside and the appeal was allowed.

This AI-generated summary is for informational purposes only. Please view attached original judgment for the complete text and authoritative interpretation.