2024 (11) TMI 613 - AT - Service Tax

Service tax on recovering liquidated damages for delay in execution of supply contract and service contract as per the agreement between the appellant with their clients - as submitted collection of liquidated damages cannot be considered as against a service as held by the Tribunal in their own case as reported in 2022 (9) TMI 1005 - CESTAT NEW DELHI - HELD THAT - We find that this Tribunal, in the appellant s other units for the same period 2024 (3) TMI 1282 - CESTAT BANGALORE following the judgement of Tribunal in their own case allowed the appeal with consequential relief held that amount cannot be made liable to tax in the name of it being consideration for providing deemed service. Thus the impugned order is set aside and the appeal is allowed.

Summary

Issues:
- Allegation of recovering liquidated damages for delay in execution of supply and service contracts
- Whether collection of liquidated damages constitutes a taxable service for the purpose of Service Tax

Analysis:
The appeal was filed against an Order-in-Original passed by the Principal Commissioner of Central Tax, Bengaluru, alleging recovery of liquidated damages for delay in execution of supply and service contracts. The appellants were issued show-cause notices for recovering Service Tax amounting to Rs.2,89,31,686/- and Rs.1,52,04,483/- for the period from 01.07.2012 to 30.06.2017, along with interest and penalty. The Commissioner confirmed the total demand, leading to the present appeal.

The advocate for the appellant argued that the collection of liquidated damages cannot be considered a taxable service, citing a previous Tribunal judgment. The Authorized Representative for the Revenue supported the Commissioner's findings. The Tribunal noted that in a previous case involving the appellant's other units, the appeal was allowed based on a similar issue. The Tribunal observed that the issue was no longer res integra and referred to a judgment regarding the interpretation of section 66E(e) and section 65B(44) of the Finance Act. The Tribunal emphasized that for an activity to be considered a declared service under section 66E(e), there must be a flow of consideration and a specific agreement regarding refraining from an act, tolerating an act, or doing an act. The Tribunal concluded that the recovery of liquidated damages did not constitute a taxable service as it was not the intention of the parties to impose penalties but rather to safeguard commercial interests and ensure compliance with contract terms.

Based on the above judgments and analysis, the Tribunal set aside the impugned order and allowed the appeal with consequential relief, if any, as per law. The decision was dictated and pronounced in open court, following the principles established in previous cases involving similar issues.