2019 (7) TMI 500 - AT - Service Tax

Demand of service tax on penalty - penalty which is deducted from the supplier/contractor s bill and on encashment of bank guarantee of defaulters/ suppliers - scope of Section 66E(e) of the Finance Act - HELD THAT - The said amount of penalty in question is part of the net amount after deduction of service tax and other applicable tax from the gross amount. Further the service tax is a destination based tax and the amount is taxable only once - Thus admittedly when the amount is already taxed and it is part of the taxed amount being deducted from the bill by way of penalty and reflected by the appellant under the head Miscellaneous Income not pertaining to Revenue . The said amount cannot be again subjected to service tax on this score alone. Further this amount is not for any service to be rendered under Section 66E(e) of the Finance Act. The service tax and penalty retained by the Commissioner (Appeals) is set aside - appeal allowed - decided in favor of appellant.

Summary

Issues:
1. Whether service tax is rightly demanded on the amount of penalty deducted from supplier/contractor's bill and on encashment of bank guarantee of defaulters/suppliers.

Analysis:
The appellant, an electricity distribution company, was registered for various services and was audited for showing income under "Miscellaneous Income not pertaining to Revenue." The Revenue observed penalty deductions and encashment of bank guarantees. The Revenue contended that such deductions are covered under Section 66 E of the Finance Act, 1994, as a declared service. The show cause notice demanded a specific amount, which was confirmed with penalty under Section 78. The ld. Commissioner (Appeals) partially allowed the appeal, reducing the demand related to bank guarantee encashment. The appellant argued that the penalty amount was already subjected to service tax and should not be taxed again. The Revenue argued that the penalty amount qualifies as a service under Section 66 E(e) of the Finance Act.

The Tribunal analyzed that the penalty amount was part of the net amount after deduction of service tax and other applicable taxes from the gross amount. Considering service tax as a destination-based tax, the Tribunal concluded that the penalty amount, already taxed and reflected under "Miscellaneous Income not pertaining to Revenue," cannot be taxed again. The Tribunal found that the penalty amount did not pertain to any service under Section 66 E(e) of the Finance Act. Consequently, the appeal was allowed, setting aside the service tax and penalty imposed by the ld. Commissioner (Appeals). The appellant was granted consequential benefits in accordance with the law.

This judgment clarifies the taxation aspect of penalty deductions and bank guarantee encashment in the context of service tax liability. It emphasizes the principles of destination-based taxation and the non-taxability of amounts already subjected to tax. The decision provides guidance on interpreting relevant provisions of the Finance Act, 1994, and highlights the importance of distinguishing between taxable services and non-taxable income in such cases.