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2022 (5) TMI 255 - AT - Service TaxLevy of service tax - liquidated damages/penalty collected for non-compliance of the terms of the contracts - Appellant had agreed to tolerate breach of timelines stipulated in the contract - delay in delivery terms as per Price Reduction Schedule (PRS) - HELD THAT - There is substance in the submission advanced by the learned counsel for the Appellant that no service tax is payable on the amount collected towards delay in delivery as this issue has been decided by the Tribunal in favour of the Appellant in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI . Various commercial contacts had been executed by South Eastern Coalfields and certain clause provided for levy of penalty for non-observance / breach of the terms of the contract. A show cause notice was issued with an allegation that the amount charged by the Appellant during the period from July 2012 to March 2016 appeared to be taxable as a declared services under Section 66E(e) of the Finance Act. The Principal Commissioner, however, did not accept the contention advanced on behalf of the Appellant and confirmed the demand of service tax holding that the amount received by the said appellant towards penalty, earnest money deposit forfeiture and liquidated damages would tantamount to a consideration for tolerating an act on the part of the buyers of coal/contractors, for which service tax would be levied under section 66 E(e) of the Finance Act. It is not possible to sustain the view taken by the Commissioner that since the delivery was not made within the time schedule, the Appellant agreed to tolerate the same for a consideration in the form of delay in delivery charges, which would be subjected to service tax under section 66E(e) of the Finance Act. Interest - penalty - HELD THAT - As service tax could not be levied, the imposition of interest and penalty also cannot be sustained. Appeal allowed - decided in favor of appellant.
Issues:
Service tax liability on delay in delivery charges under section 66E(e) of the Finance Act, 1994. Analysis: 1. The appeal involved the quashing of an order confirming a service tax demand of Rs. 7,90,08,905/- along with interest and penalty under section 75 and 78 of the Finance Act, 1994, imposed on a Central Public Sector Enterprise for tolerating an act under Section 66E of the Finance Act, 1994. 2. The Department contended that the delay in delivery charges imposed by the Appellant for breach of contract timelines constituted consideration for tolerating contractual default, falling under section 66E(e) of the Finance Act, 1994, for which service tax was leviable. 3. The Appellant argued, citing precedents, that penalties or liquidated damages for noncompliance of contract terms do not attract service tax, relying on judgments such as M/s South Eastern Coalfields Ltd. and M.P. Poorva Kshetra Vidyut Vitran Co. Ltd. The Appellant also highlighted a Larger Bench decision in Commissioner of Service Tax, Chennai vs. REPCO Home Finance Ltd., emphasizing that charges for breach of terms are not consideration for services. 4. The Tribunal analyzed the agreements in question and held that penalties or liquidated damages were safeguards for commercial interests, not consideration for tolerating acts, as per section 66E(e) of the Finance Act. The Tribunal emphasized that consideration must flow for refraining from an act, and penalties were not towards any service provided, but to ensure compliance. 5. Relying on the decisions in South Eastern Coalfields and M.P. Poorva Kshetra Vidyut Vitran, the Tribunal concluded that delay in delivery charges did not attract service tax under section 66E(e) of the Finance Act. Consequently, the imposition of interest and penalty was unsustainable as service tax could not be levied. 6. Therefore, the Tribunal set aside the Commissioner's order and allowed the appeal, providing consequential relief to the Appellant. The decision was pronounced in the Open Court on 04.05.2022.
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