2022 (4) TMI 773 - AT - Service Tax

Levy of Service Tax - liquidated damages received by the appellants from the other parties who failed to perform as per the contracts - HELD THAT - This issue was not specifically dealt in the final order dated 14 January 2021 in respect of the appellant. However, this matter was dealt with in several cases by the Tribunal, such as, 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 In the present case, the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between conditions to a contract and considerations for a contract . Southeastern Coalfields was followed in several other decisions by this Tribunal In short, the view constantly held by this Tribunal is that there is a distinction between a consideration under a contract and the compensation for failure to fulfill the contract. While the consideration is something done by one party at the desire of the other party. Compensation or damages are paid when one party fails to perform - Consideration is the result of the performance of the contract. Compensation/damages are the result of frustration of contract or not performing the contract as per the conditions laid down in it. Compensation can be of two forms - HELD THAT - If the suffering party sues the other in a court and damages are award by the court such damages are un-liquidated damages. The quantum of damages is decided by the court taking into account the facts and circumstances of the case and the damage suffered. Liquidated damages are those damages and which are built into the contract itself. They provide that the defaulting party shall pay to the other a certain amount in case of default. The purpose of the liquidated damages in a contract is to dissuade the parties from reneging from the contract - What is chargeable to service tax is where the tolerance itself is the purpose of the contract. Liquidated damages are a compensation for failure of the defaulting party to perform as per the contract. Therefore, no service tax can be levied on liquidated damages received under any contract. The demand of service tax on late payment surcharge meter renting charges and supervision charges are set aside. The demand of service tax on works contract service and lease rent is upheld and the same stands already deposited by the appellant. The penalties for the extent of service tax on works contract service and lease rent is upheld and the remaining penalties are set aside - Appeal disposed off.

Summary

Issues Involved:
1. Late payment surcharge
2. Meter renting charges
3. Supervision charges (re-connection and dis-connection charges)
4. Lease rental
5. Works contract service
6. Liquidated damages

Issue-wise Detailed Analysis:

1. Late Payment Surcharge:
The appellants charged late payment surcharges in the electricity bills issued to customers. The demand was based on the argument that this surcharge constituted a declared service under Section 66E(e) of the Finance Act, 1994, as it involved tolerating the non-payment of electricity bills within the stipulated time. The Tribunal, referencing its final order dated 14 January 2021, dropped the demand for the prior period, asserting that such charges are not subject to service tax.

2. Meter Renting Charges:
The appellants collected meter rents from consumers. The Revenue argued that meter renting charges are not covered under the negative list of services exempt from service tax. However, the Tribunal, in its final order dated 14 January 2021, dropped this demand for the earlier period, ruling that meter renting charges are not subject to service tax.

3. Supervision Charges (Re-connection and Dis-connection Charges):
The Revenue contended that supervision charges for re-connection and dis-connection are not related to the transmission and distribution of electricity and thus not covered under the negative list of services. The Tribunal, in its final order dated 14 January 2021, dropped the demand for these charges, concluding they are not subject to service tax.

4. Lease Rental:
The appellants received lease rental from pole users for cable TV networks. The appellants did not dispute the service tax liability on this rental and had already deposited the same. The Tribunal upheld the demand and the penalties associated with this income.

5. Works Contract Service:
The appellants did not dispute the service tax liability under this head and had deposited the same. The Tribunal upheld the demand and the associated penalties.

6. Liquidated Damages:
The appellants collected liquidated damages from contractors who failed to meet their contractual obligations. The issue was whether service tax could be levied on these liquidated damages. The Tribunal, referencing several decisions including M/s. Southeastern Coal Fields versus Commissioner of Central Excise and Service Tax, Raipur, concluded that liquidated damages are not a consideration for a taxable service but a compensation for non-performance of a contract. Therefore, no service tax can be levied on liquidated damages.

Judgment Summary:
The Tribunal followed its previous order dated 14 January 2021 and the Gujarat High Court's judgment in Torrent Power Ltd. versus Union of India. It ruled that:

- The demands for service tax on late payment surcharge, meter renting charges, and supervision charges are set aside.
- The demands for service tax on lease rental and works contract service are upheld as the appellants did not dispute these and had already deposited the amounts.
- The demand for service tax on liquidated damages is set aside, as they are not considered a taxable service under Section 66E(e) of the Finance Act, 1994.

Appeal-wise Orders:
1. ST/50289/2019: Demand for late payment surcharge, meter renting charges, and supervision charges set aside. Demand for works contract service and lease rent upheld; associated penalties upheld.
2. ST/50168/2019: Appeal allowed; impugned order set aside.
3. ST/51066/2019: Appeal allowed; impugned order set aside.
4. ST/50513/2019: Appeal allowed; impugned order set aside.
5. ST/52104/2019: Demand for meter rent and re-connection/dis-connection charges set aside. Demand for rental from poles used by cable TV network upheld; associated penalties upheld.

Conclusion:
The appeals were disposed of with consequential relief, if any, to the appellants. The order was pronounced in open court on 12/04/2022.