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2024 (1) TMI 676 - AT - Service TaxLevy of service tax - amount deducted by the appellant from the vendors towards liquidated damages - failure to supply the goods/execute the work within the stipulated time - demand of service tax both for the period prior to 01.07.2012 and post 01.07.2012 - 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 the Finance Act . Thus, no service tax could have been levied on the amount of liquidated damages so collected - For the period w.e.f. 01.07.2012, the impugned order has observed that as the appellant received the amount as consideration for the failure on the part of the contractors to honor the terms of the contract or violating the conditions of the contract, it would be taxable under clause (e) of section 66E of the Finance Act. 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. It is, therefore, not possible to sustain the demand - The order dated 16.11.2018 passed by the Commissioner, therefore, deserves to be set aside - Appeal allowed.
Issues involved:
The issues involved in this case are the levy of service tax on the amount deducted by the appellant from vendors towards liquidated damages for failure to supply goods or execute work within the stipulated time, and the confirmation of service tax demand for periods both before and after 01.07.2012. Levy of Service Tax - Period Prior to 01.07.2012: - The collection of amount towards liquidated damages was not included in any specified taxable services under the Finance Act, thus no service tax could have been levied on such amounts. - The agreements did not specify obligations for the appellant to refrain from an act or tolerate an act, distinguishing between conditions and considerations for a contract. Levy of Service Tax - Post 01.07.2012: - The impugned order observed that the amount received by the appellant for contractor failures would be taxable under clause (e) of section 66E of the Finance Act. - The Circular issued by the Central Board of Indirect Tax and Customs clarified that activities under section 66E(e) require a flow of consideration for specific activities mentioned in the agreement, and service tax cannot be levied on amounts collected for such purposes. - The Tribunal held that liquidated damages are not consideration for any service but act as a deterrent against breach of contract, emphasizing the distinction between contractual obligations and consideration for services. Precedent and Legal Interpretation: - The decision in South Eastern Coalfields case highlighted that penal clauses in contracts serve to safeguard commercial interests and are not intended to impose penalties on parties. - The Circular emphasized the necessity of a nexus between supply and consideration for activities under section 66E(e), and the need for specific agreements referring to refraining from an act, tolerating an act, or doing an act for service tax implications. Conclusion: - The Tribunal set aside the Commissioner's order, ruling that the demand for service tax could not be sustained based on the legal interpretations and precedents cited. - The appeal filed by the appellant was allowed, and the order was set aside accordingly.
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