2023 (5) TMI 11 - AT - Service Tax

Taxability - Liquidated damages/ penalties recovered by the appellant from its suppliers and contractors for delayed completion of the assigned work - Section 65E(e) of the Finance Act, 1994 - HELD THAT - The provision of the taxable services, the appellant had paid the service charges along with service tax amount as per the claims made in the invoices. The liquidated damages / penalties recovered by the appellant for delay in completion of the work or supply of goods cannot be considered as Service , for the purpose of levy of service tax. Further, the amount received by the appellant cannot also be termed as Consideration for provision of the taxable service. Thus, the amount charged by the appellant towards liquidated damages / penalty cannot form part of the taxable value for payment of service tax thereon. Reliance can be placed in appellant own case BHEL Bhopal Vs. CCE 2022 (9) TMI 1005 - CESTAT NEW DELHI - the order passed by this Tribunal in the case of the appellant itself has also been accepted by Service Tax Department inasmuch as no appeal against the said order was filed before the Hon ble Supreme Court. Leviability of service tax on the declared service under the category Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act under clause (e) of Section 66E of the Finance Act, 1994 - HELD THAT - The CBIC vide Circular No. 214-1-2023-ST dated 28.02.2023 has clarified that the above expression has three limbs namely, agreeing to the obligation to refrain from an act; agreeing to the obligation to tolerate an act or a situation; and agreeing to the obligation to do an act. It has further been clarified that in order to be covered under such phrase, there must be independent contractual arrangements and must have necessary and sufficient nexus between the supply (agreement to do or to abstain from doing something) and the consideration. In the present case, it is not a matter of routine that the appellant had invariably collected the amount towards liquidated damages / penalties from each and every contract entered into between it and the service provider. Since, collection of such amount is towards delayed completion of work, which is not a regular phenomenon and arises out of non-performance of the contract in the manner prescribed, on rare occasions, it cannot be said that there are sufficient nexus between the parties on a regular basis for payment of such charges in order to abstain in proper performance of the assigned task within the scheduled time frame - such amount should not be equated with consideration , for the purpose of rendering any taxable service. Appeal allowed.

Summary

Issues:
Taxability of liquidated damages/penalties recovered by the appellant from suppliers and contractors for delayed completion of work.

Issue 1: Taxability of Liquidated Damages/Penalties

The dispute revolved around the taxability of liquidated damages and penalties recovered by the appellant from suppliers and contractors for delays in completing assigned work. The Service Tax Department considered these amounts as "consideration" for services provided, classifying them under Section 65E(e) of the Finance Act, 1994 for service tax levy. The Department's adjudication order confirmed a service tax demand of Rs. 6,52,76,360/- along with penalties. The appellant challenged this order before the Tribunal.

The appellant, engaged in erection and commissioning services, works contracts, and repair/maintenance services of power plants, procured materials and services from contractors/suppliers. Contracts included clauses for liquidated damages/penalties for delays in work completion. The appellant argued that these amounts were not "service" for service tax purposes and did not constitute "consideration" for taxable services. Citing previous Tribunal judgments, including BHEL Bhopal Vs. CCE, the Tribunal found that liquidated damages/penalties were not taxable, as they were not part of the taxable value for service tax payment.

The Tribunal noted that the Service Tax Department had accepted a previous order in favor of the appellant, and a circular by the CBIC clarified the leviability of service tax on declared services. The circular emphasized the need for a sufficient nexus between supply and consideration. The Tribunal concluded that the collection of liquidated damages/penalties was not routine and did not reflect a regular obligation between parties, therefore not constituting "consideration" for taxable services. Based on the established legal principles and precedents, the Tribunal set aside the impugned order, allowing the appeal in favor of the appellant.