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2021 (7) TMI 1090 - AT - Service TaxLevy of service tax - liquidated damages recovered by the appellant for acts of default - delayed or deficient supplies by various suppliers - consideration for tolerance of an act or not - penalties - HELD THAT - There is substance in the submission advanced by the learned counsel for the appellant that no service tax is payable on the amount collected towards liquidated damages as this issue has been decided by the Tribunal in favour of the appellant in M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI where it was held that It is, therefore, not possible to sustain the view taken by the Principal Commissioner that penalty amount, forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. In view of the aforesaid decisions of the Tribunal, it is not possible to sustain the view taken by the Commissioner that since BHEL did not complete the task within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax under section 66E(e) of the Finance Act. Penalty - HELD THAT - As service tax could not be levied, the imposition of interest and penalty also cannot be sustained. Appeal allowed - decided in favor of appellant
Issues Involved:
1. Demand of service tax on liquidated damages. 2. Interpretation of Section 66E(e) of the Finance Act, 1994. 3. Applicability of service tax on liquidated damages as consideration for tolerating a contractual default. 4. Validity of penalties and interest imposed under Sections 76, 78, and 75 of the Finance Act, 1994. Issue-wise Detailed Analysis: 1. Demand of Service Tax on Liquidated Damages: The core dispute in the appeals revolves around the demand for service tax on liquidated damages recovered by the appellant for defaults such as delayed or deficient supplies by various suppliers. The Department contended that these liquidated damages constituted consideration for the appellant tolerating contractual defaults, thereby rendering a declared service under Section 66E(e) of the Finance Act, 1994. The appellant argued that no service tax was payable on such damages and penalties. 2. Interpretation of Section 66E(e) of the Finance Act, 1994: Section 66E(e) of the Finance Act, 1994, specifies that agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to do an act constitutes a declared service. The Department argued that the liquidated damages were for tolerating the delay, thus falling under this provision. However, the Tribunal referenced previous decisions, notably in South Eastern Coalfields Ltd. and M.P. Poorva Kshetra Vidyut Vitran Co. Ltd., which clarified that liquidated damages for breach of contract terms do not constitute consideration for a service. Instead, they are penalties for non-compliance, not payments for tolerating an act. 3. Applicability of Service Tax on Liquidated Damages as Consideration for Tolerating a Contractual Default: The Tribunal analyzed the nature of liquidated damages and concluded that they are not consideration for any service. The intention behind such damages is to ensure compliance with contract terms, not to provide a service of tolerating breaches. The Tribunal emphasized that the penal clauses in contracts are safeguards for commercial interests and cannot be construed as services rendered for consideration. 4. Validity of Penalties and Interest Imposed under Sections 76, 78, and 75 of the Finance Act, 1994: Given the decision that service tax could not be levied on liquidated damages, the imposition of interest and penalties under Sections 76, 78, and 75 of the Finance Act, 1994, was also deemed unsustainable. The Tribunal set aside the orders imposing these penalties and interest, as the foundational demand for service tax itself was invalid. Conclusion: The Tribunal allowed the appeals, setting aside the impugned orders dated 04.05.2016, 20.06.2016, 20.02.2018, 20.02.2018, and 22.06.2018. It concluded that liquidated damages for contractual defaults do not constitute consideration for a service under Section 66E(e) of the Finance Act, 1994, and thus, no service tax is payable on such amounts. Consequently, the associated penalties and interest were also annulled.
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