2023 (1) TMI 509 - AT - Service Tax

Price reduction clause - levy of service tax on liquidated damages - declared services or not - applicability of CBIC vide circular no.178/10/2022-GST dated 3rd August, 2022 - HELD THAT - CBIC has issued a circular No.178/10/2022-GST dated 3rd August, 2022 in which it has stated its stand on the issue of taxability of various transactions claimed to be liquidated damages . At the time of adjudication by commissioner and hearing before tribunal, this circular was not available on record and therefore, the adjudicating authority could not take benefit of the same. While the issue of levibility of service tax on liquidated damages is a debatable issue, the CBIC has vide Circular No. 178/10/2022-GST clarified its stand on the subject in respect of GST. 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 impugned order is set aside and the matter is remanded to the original adjudicating authority to decide the issue afresh - Appeal allowed by way of remand.

Summary

Issues Involved:
1. Demand of service tax on liquidated damages under Section 66E(e) of the Finance Act, 1994.
2. Taxability of recoveries from employees for breach of employment contract under Section 66E(e) of the Finance Act, 1994.

Issue-wise Detailed Analysis:

1. Demand of Service Tax on Liquidated Damages:
The appellant, engaged in the manufacture of fertilizers, assigned work orders to various companies for construction and allied works. The contracts included a price reduction clause for delays in completion. The demand for service tax was raised under Section 66E(e) of the Finance Act, 1994, which defines declared services as including "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act." The appellant argued that liquidated damages for delays do not constitute consideration for any service but are compensatory in nature. The CBIC's Circular No. 178/10/2022-GST dated 3rd August 2022 clarified that liquidated damages are not taxable as they are compensatory and not for any service provided. The Tribunal noted that this circular was not available during the original adjudication and thus remanded the matter for reconsideration in light of the circular.

2. Taxability of Recoveries from Employees for Breach of Employment Contract:
The appellant also faced a demand for service tax on amounts recovered from employees for violating employment contract terms. The employment contracts included conditions to recover specific amounts if trainees breached the contract. The CBIC circular clarified that such recoveries are not taxable as they are penalties to deter breaches and not consideration for any service. The Tribunal highlighted that the circular, which was not available during the original adjudication, clarified that such recoveries are not taxable as they do not represent consideration for tolerating an act or situation.

Conclusion:
The Tribunal set aside the impugned order and remanded the matter to the original adjudicating authority to reconsider the issues in light of the CBIC circular, which clarifies that liquidated damages and recoveries from employees for contract breaches are not taxable under Section 66E(e) of the Finance Act, 1994. The judgment was pronounced in the open court on 10.01.2023.