2023 (5) TMI 1080 - AT - Service Tax

Recovery of Service tax with interest and penalty - levy of service tax on the amount deducted by the appellant from the vendors towards liquidated damages as they failed to supply the goods/execute the work within the stipulated time - HELD THAT - For the period prior to 01.07.2012 collection of amount towards liquidated damages was not included in any of the specified taxable services under any of the clauses of sub-section (105) of section 65 of the Finance Act, 1994. Thus, no service tax could have been levied on the amount of liquidated damages so collected. In M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI , the Tribunal held that liquidated damages recovered on account of breach or non-performance of contract are not consideration in view of any service but are in the nature of deterrent imposed so that such a breach or non-performance is not repeated. The Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs also provides that service tax cannot be levied on the amount collected for the said purpose. It is, therefore, not possible to sustain the demand - Impugned order set aside - appeal allowed.

Summary

Issues:
The judgment involves the levy of service tax on liquidated damages collected by a State Government undertaking from vendors for failure to supply goods or execute work within stipulated time.

Summary:
The appeal was filed against the order of the Commissioner directing recovery of service tax on liquidated damages collected by the appellant. The issue revolved around the levy of service tax on the amount deducted by the appellant from vendors for failure to supply goods or execute work within the stipulated time. The order confirmed the demand of service tax both before and after 01.07.2012.

For the period before 01.07.2012, it was held that since the collection of liquidated damages was not included in any specified taxable services under the Finance Act, no service tax could be levied on such amounts. However, for the period post 01.07.2012, it was observed that the amount received by the appellant due to the failure of contractors to honor the contract terms would be taxable under clause (e) of section 66E of the Finance Act.

The Tribunal, in a previous case, held that liquidated damages for breach of contract are not consideration for any service but act as a deterrent against future breaches. The Circular issued by the Central Board of Indirect Tax and Customs also clarified that activities under section 66E(e) require a specific agreement with a flow of consideration, which was not present in this case. As a result, the demand for service tax on liquidated damages was set aside, and the appeal was allowed.