2022 (9) TMI 1445 - AT - Service Tax

Levy of Service Tax - declared service or not - liquidated damages/penalties recovered by the Appellant from its contractors - section 66E (e) of the Finance Act 1994 - scope of tolerate an act or a situation under section 66E(e) of the Act - period July 2012 to March 2015 - extended period of limitation - HELD THAT - The issue herein is squarely covered in favour of the Appellant-assessee by the precedent order of this Tribunal in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI where it was held that such amounts collected by way of penalty/liquidated damages for non-compliance of contract cannot be considered as consideration for tolerating an act and hence not leviable to service tax under section 66E (e) of the Finance Act. Appeal allowed.

Summary

Issues:
Whether the demand of service tax on liquidated damages/penalties recovered by the Appellant from its contractors under section 66E (e) of the Finance Act, 1994 was rightly confirmed.

Analysis:
The Appellant, a PSU under the Ministry of Defence, recovered penalties/liquidated damages from suppliers for delays as per contract terms. Revenue alleged these amounts fall under declared services, invoking service tax. Appellant argued these penalties are not for tolerating an act but for breach of contract, not attracting service tax. The show cause notice for service tax was contested, citing proper bookkeeping and no wilful suppression. The Order-in-Original confirmed a demand of Rs. 11,78,75,893/-, including penalties and notice pay recovery, with interest and penalty under Section 78 of the Finance Act.

In the appeal, the Appellant relied on a Tribunal ruling (Steel Authority of India Ltd vs Commissioner of GST & Central Excise) where it was held that penalties/liquidated damages are not subject to service tax under section 66E (e) of the Finance Act. The Tribunal observed that such amounts are not consideration for tolerating an act and do not involve refraining from an act or tolerating a situation, as per the contract terms. The ruling referenced a Supreme Court case (Tara Chand vs Balkishan AIR 1963 SC 1405) to support this interpretation.

The revenue, opposing the appeal, relied on the impugned order. However, the Tribunal found the issue to be covered in favor of the Appellant by the precedent order in South Eastern Coalfields Ltd vs Commissioner of Central Excise & Service Tax. Consequently, the appeal was allowed, and the impugned order was set aside, granting the Appellant consequential benefits as per the law.