2022 (6) TMI 381 - AT - Service Tax

Levy of Service Tax on amount of penalty (liquidated damages) collected from their contractor - to refrain from an act or to tolerate an act or a situation or to do an act - HELD THAT - Under the facts and circumstances there is no contract between the appellant and their contractor - to refrain from an act or to tolerate an act or a situation or to do an act in favour of their contractor or to tolerate any act or situation. Further, for such alleged act or tolerance, no remuneration is prescribed in the contract. The amount of liquidated damages levied by the appellant from their contractor is in the nature of penalty, and not by way of any consideration for any service as defined under Section 66E(e). This Tribunal in the case of M/S LEMON TREE HOTEL VERSUS COMMISSIONER, GOODS SERVICE TAX, CENTRAL EXCISE CUSTOM 2019 (7) TMI 767 - CESTAT NEW DELHI under the fact that their customer used to book accommodation by making advance payment, and upon cancellation of the booking, the hotel was retaining or forfeiting some of the advance deposit in the nature of penalty, by way of cancellation charges. This Tribunal held that the said amount collected by the hotel is in the nature of penalty, and not consideration as defined under Section 66E(e) of the Finance Act, 1994. Appeal allowed - decided in favor of appellant.

Summary

Issues:
- Liability of service tax on penalty (liquidated damages) collected from contractor

Analysis:
The case involved the issue of whether the appellant, engaged in providing taxable services, was liable to pay service tax on the penalty (liquidated damages) collected from their contractor. The Revenue alleged that the appellant had collected a significant amount as penalty during the relevant period and issued a show cause notice demanding service tax under Section 66E(e) of the Finance Act. The show cause notice also proposed penalties under Section 76 and interest under Section 75. The adjudication confirmed the demands with an additional penalty under Section 78, not initially proposed. The Commissioner (Appeals) upheld the order-in-original, leading to the appellant's appeal before the Tribunal.

The appellant argued that the amount collected from the contractor was in the nature of liquidated damages for non-performance and did not constitute consideration for any service as defined in Section 66E(e) of the Act. The appellant contended that there was no contract obligating them to refrain from an act or to tolerate a situation, as specified in Section 66E(e). Relying on the precedent set in the case of Lemon Tree Hotel vs. Commissioner, GST, CE & Customs, Indore, the appellant asserted that the amount collected was akin to penalty and not subject to service tax.

The Tribunal, after considering the arguments from both parties, found that there was no contractual obligation between the appellant and their contractor to perform any act or tolerate a situation for remuneration. The Tribunal determined that the amount collected as liquidated damages was in the nature of penalty and did not constitute consideration for a service under Section 66E(e). Citing the Lemon Tree Hotel case, where a similar penalty was deemed non-taxable, the Tribunal allowed the appeal, setting aside the impugned order and granting the appellant consequential benefits.

In conclusion, the Tribunal ruled in favor of the appellant, holding that the penalty collected from the contractor was not subject to service tax as it was considered liquidated damages and not payment for any service as defined in the relevant section of the Finance Act.