2022 (9) TMI 1587 - AT - Service Tax

Whether demand of service tax rightly confirmed on liquidated damages/penalties recovered by the Appellant u/s 66E (e) of the Finance Act 1994 - Appellant is a PSU - Manufacture of heavy power electrical equipment - HELD THAT - The Tribunal in South Eastern Coalfields Ltd vs Commissioner of Central Excise Service Tax 2020 (12) TMI 912 - CESTAT NEW DELHI observed 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 u/s 66E (e) of the Finance Act. The contracts nowhere provided obligation on the assessee to refrain from an act or tolerate an act or a situation and flow of consideration thereof. Such liquidated damages/penalty cannot be considered as receipts towards any service per say, since neither assessee is carrying on any activity to receive compensation nor there can be an intention of other party to breach or violate the contract and suffer a loss. This Tribunal relied on the ruling of Hon'ble Supreme Court in Tara Chand vs Balkishan 1963 (1) TMI 46 - SUPREME COURT . Thus, we find that the issue herein is squarely covered in favour of the Appellant-assessee by the precedent order of this Tribunal in South Easter Coal Field Ltd vs CCE and ST (supra). Accordingly, we allow the appeal and set aside the impugned order. The appellant shall be entitled to consequential benefits, in accordance with law.

Summary

Issues involved: Whether demand of service tax rightly confirmed on liquidated damages/penalties recovered by the Appellant u/s 66E (e) of the Finance Act 1994.

Summary:
The Appellant, engaged in manufacturing heavy power electrical equipment, entered into agreements with suppliers containing penalty clauses for delays. The Appellant recovered penalties/liquidated damages from suppliers and declared them as other income. Revenue alleged these amounts fell under declared services u/s 66E (e) of the Finance Act, 1994. Show cause notices were issued invoking extended limitation periods. The Appellant contended that these amounts did not fall under declared services and were not subject to service tax. The matter was adjudicated, and demands were confirmed for the periods in question.

The Appellant appealed, citing precedents where similar issues were decided in favor of the assessee. The Tribunal noted that such penalties for non-compliance of contracts cannot be considered as consideration for tolerating an act, hence not liable for service tax u/s 66E (e) of the Finance Act. Relying on previous rulings and the Supreme Court's decision, the Tribunal allowed the appeal, setting aside the impugned order. The Appellant was granted consequential benefits as per the law.

Judgment:
The issue revolved around whether the demand of service tax on liquidated damages/penalties recovered by the Appellant was rightly confirmed u/s 66E (e) of the Finance Act 1994. The Appellant, a PSU engaged in manufacturing heavy power electrical equipment, entered into agreements with suppliers containing penalty clauses for delays. The Appellant recovered penalties/liquidated damages from suppliers and declared them as other income. Revenue alleged these amounts fell under declared services u/s 66E (e) of the Finance Act, 1994, leading to show cause notices being issued invoking extended limitation periods. The Appellant contended that these amounts did not fall under declared services and were not subject to service tax. The matter was adjudicated, and demands were confirmed for the periods in question.

The Appellant appealed, citing precedents where similar issues were decided in favor of the assessee. The Tribunal noted that such penalties for non-compliance of contracts cannot be considered as consideration for tolerating an act, hence not liable for service tax u/s 66E (e) of the Finance Act. Relying on previous rulings and the Supreme Court's decision, the Tribunal allowed the appeal, setting aside the impugned order. The Appellant was granted consequential benefits as per the law.