2022 (8) TMI 540 - AT - Service Tax

Valuation - recovery of certain amounts under the head of liquidated damages for delays in supply contracts or service contracts as per various agreements entered into between them and their vendors - HELD THAT - Prime facie Para 5(e) of Schedule-II of CGST Act, is identically worded as Section 66E(e) of the Finance Act, 1994. The circular expresses the stand of CBIC in case of GST on an interpretation of an identical expression. The circular was not available to the adjudicating authority when the matter was decided and he could not examine the issue in the light of the aforesaid circular. The issue in dispute can be decided in the light of the aforesaid circular. The matter is remanded to the original adjudicating authority to decide the issue afresh in the light of the arguments given in the aforesaid circular - Appeal allowed by way of remand.

Summary

Issues Involved:
1. Taxability of liquidated damages under service tax.
2. Interpretation of Section 66E(e) of the Finance Act, 1994.
3. Applicability of CBIC Circular No. 178/10/2022-GST dated 3rd August 2022.

Detailed Analysis:

1. Taxability of Liquidated Damages under Service Tax:
The primary issue in this case is whether liquidated damages charged by the appellant for delays in supply or service contracts are subject to service tax. The appellant argued that these damages are not consideration for any service but compensation for breach of contract. The CBIC Circular No. 178/10/2022-GST clarifies that payments like liquidated damages are not taxable if they are merely compensatory and not consideration for any independent service. The circular states, "Liquidated damages cannot be said to be a consideration received for tolerating the breach or non-performance of contract. They are rather payments for not tolerating the breach of contract." Therefore, liquidated damages are not considered a taxable supply under GST if they are compensatory in nature.

2. Interpretation of Section 66E(e) of the Finance Act, 1994:
Section 66E(e) of the Finance Act, 1994, declares that "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" constitutes a taxable service. The CBIC Circular interprets this provision similarly to Para 5(e) of Schedule II of the CGST Act. The circular explains that for a transaction to be taxable under this provision, there must be an express or implied agreement where one party agrees to tolerate an act or refrain from an act in exchange for consideration. The circular further clarifies that penalties or liquidated damages for breach of contract do not constitute an agreement to tolerate an act but are compensatory in nature and, therefore, not taxable.

3. Applicability of CBIC Circular No. 178/10/2022-GST:
The CBIC Circular No. 178/10/2022-GST provides detailed guidelines on the taxability of various transactions, including liquidated damages. The circular was not available during the original adjudication, and therefore, the adjudicating authority did not consider its guidelines. The circular clarifies that payments like liquidated damages, penalties, and compensation for breach of contract are not taxable as they do not constitute consideration for any supply. The tribunal noted that the circular's interpretation aligns with the provisions of Section 66E(e) of the Finance Act, 1994, and should be considered in re-adjudicating the case.

Conclusion:
The tribunal set aside the impugned order and remanded the matter to the original adjudicating authority for fresh decision-making in light of the CBIC Circular No. 178/10/2022-GST. The adjudicating authority is directed to re-examine the issue, considering the arguments and guidelines provided in the circular, to determine the taxability of liquidated damages accurately.

(Pronounced in the open court on 10.08.2022)