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2021 (7) TMI 1092 - AT - Service TaxLevy of Service tax - amount collected towards liquidated damages - agreement to tolerate breach of timelines stipulated in the contract - agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act - period involved in all the appeal is after 01.07.2012 - interest - penalty - 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. Thus, in view of the aforesaid decisions of the Tribunal, it is not possible to sustain the view taken by the Commissioner that since the task was not completed 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. Interest - 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:
Service tax liability on liquidated damages and penalties recovered under a contract. Analysis: 1. The case involved a Public Sector Undertaking engaged in manufacturing seeking to quash an order upholding the demand of service tax on liquidated damages and penalties imposed for contractual breaches. 2. The Department alleged that the appellant agreed to tolerate breach of contract timelines, considering the amounts imposed as liquidated damages as consideration for tolerating contractual defaults. 3. The amounts in question were liquidated damages, forfeiture of Earnest Money Deposit (EMD), and Ground Rent, all linked to contractual non-compliance. 4. The Department issued a show cause notice demanding service tax, interest, and penalties, which the appellant contested, arguing that no service tax was payable on liquidated damages and penalties. 5. Despite the appellant's detailed reply, the Assistant Commissioner upheld the demand, leading to an appeal before the Commissioner (Appeals), who also ruled against the appellant. 6. The Commissioner's order highlighted the Department's contentions regarding the consideration received by the appellant for tolerating contractual breaches falling under declared services liable for service tax. 7. The appellant cited precedents where similar issues were decided in their favor, emphasizing that penalties for non-compliance should not attract service tax. 8. The Tribunal analyzed the agreements in question, emphasizing that penalties were safeguards for commercial interests, not consideration for tolerating acts, thereby rejecting the Department's contentions. 9. Referring to the Tribunal's decisions in similar cases, the Tribunal ruled in favor of the appellant, stating that service tax could not be levied on liquidated damages, leading to the allowance of the appeal and setting aside of the Commissioner's order. 10. Consequently, the imposition of interest and penalties was also deemed unsustainable due to the absence of service tax liability on the amounts in question. This detailed analysis outlines the legal battle over service tax liability on liquidated damages and penalties under a contract, ultimately resulting in the Tribunal ruling in favor of the appellant and setting aside the demand for service tax, interest, and penalties.
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