2023 (12) TMI 904 - AT - Service Tax

Levy of service tax - earnest money deposit/security deposit - liquidated damages collected by the appellant - service in the nature of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act as defined under section 66E (e) of Finance Act or not - HELD THAT - 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 since liquidated damages recovered on account of breach or non-performance of contract are not consideration for any service, but are in the nature of deterrent imposed so that such a breach or non-performance is not repeated service tax would not be leviable on the amount so collected. 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. In view of the aforesaid decision of the Tribunal in South Eastern Coalfields and the Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs, the contention advanced by the learned counsel for the appellant has to be accepted. It is, therefore, not possible to sustain the demand. The order dated 25.06.2019 passed by the Commissioner (Appeals) is, accordingly, set aside - Appeal allowed.

Summary

Issues:
The issues involved in this case are the liability of service tax on charges collected by the appellant from buyers/vendors for breach of contract and the interpretation of section 66E (e) of the Finance Act.

Liability of Service Tax on Charges Collected for Breach of Contract:
The appellant, a mineral development corporation, collected amounts such as forfeiture of deposits and penalties from customers for breach of contract during the period from July 2012 to June 2017. The Department contended that these charges would be liable to service tax under section 66E (e) of the Finance Act. The Additional Commissioner confirmed the demand of service tax, which was upheld by the Commissioner (Appeals) in the order dated 25.06.2019.

Interpretation of Section 66E (e) of the Finance Act:
The appellant argued that the charges collected were not consideration for any service but were in the nature of deterrents against breach or non-performance of the contract. They relied on the decision of the Tribunal in South Eastern Coalfields case and a Circular issued by the Central Board of Indirect Tax & Customs. The Tribunal in the South Eastern Coalfields case held that liquidated damages for breach of contract are not consideration for service and should not be taxed. The Circular also clarified that activities under section 66E (e) require a flow of consideration for a specific activity, which was not present in this case.

In conclusion, the Tribunal accepted the appellant's contention based on the decision in the South Eastern Coalfields case and the Circular issued by the Central Board of Indirect Tax and Customs. Therefore, the demand for service tax was set aside, and the appeal was allowed.