Forfeited Security Deposits And Tender Fee Do Not Attract Tax: CESTAT Delhi

The New Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) on 3 February held that forfeiture of the Earnest Money Deposit (EMD), Security Deposit (SD) and collection of tender fee do not attract service tax, as such amounts cannot be treated as consideration for a declared service under the Finance Act, 1994.

A Bench comprising Judicial Member Dr. Rachna Gupta and Technical Member Hemambika R. Priya, allowed the appeal filed by RajComp Info Services Limited, an undertaking, wholly owned by the Government of Rajasthan, against a service tax demand confirmed for the period 2014-15 to 2016-17.

The dispute arose from an audit, following which the Department issued a show cause notice proposing recovery of service tax on multiple counts. While the Commissioner (Appeals) dropped the principal demand relating to e-procurement tender fees and Digital Signature Certificates, a residual demand of Rs. 12.21 lakh was sustained on forfeiture of Earnest Money Deposits (EMD) and Security Deposits (SD) for delay or non-performance of contractual obligations, as well as on tender fees collected from prospective bidders, treating both as “declared services.”

Setting aside the demand on forfeited EMD and SD, the Tribunal held that such forfeiture is merely a consequence of breach of contractual terms and does not involve any activity or quid pro quo so as to constitute consideration for a service.

The Bench stated that:

"the amount of security deposits or earnest money deposits cannot be called as consideration as for an amount to qualify as consideration there has to be “quid pro quo” or “activity for such consideration”, nor even, while forfeiting such amount on account of violation of agreed terms and conditions; no activity being undertaken against the forfeited amount. Hence, the amount cannot be called as the consideration towards the activity which can be called as service defined as 65B (44) of the Act."

The Bench further observed that judicial precedents and departmental circulars have settled the law that forfeiture of amounts for non-performance cannot be treated as “agreeing to tolerate an act” under Section 66E(e) of the Finance Act.

On the issue of tender fees, the Bench held that the amount was collected solely for supplying tender documents and to discourage non-serious or dummy bids, as fixed by the State Government. It added that a tender is merely an invitation to offer and not an agreement; therefore, the collection of such fee lacks the essential element of consideration required to constitute a taxable service.

The Tribunal opined:

".........against receiving the tender fee no service has been rendered by the appellant except providing the tender documents to the bidders which is as good as sale of documents. Otherwise also the tender is merely an offer and not an agreement. Hence, it is held that the tender cost/fee is wrongly held to be an amount received towards provision of service."

The Tribunal also held that, in the present case, invoking the extended period of limitation was unjustified, since the demand was based entirely on records maintained by the appellant and there was no evidence of fraud, suppression, or intent to evade tax.

Accordingly, the Tribunal set aside the entire service tax demand along with interest and penalties, and allowed the appeal.

For Appellant: Advocate, Kunal Aggarwal

For Respondent: Authorised Representative, Suresh Nandanwar