2023 (4) TMI 54 - AT - Service Tax

Levy of Service Tax - declared services or not - charging and recovering liquidated damages on account of delay in supply contract and service contract as per written agreement with their supplier - applicability of Circular dated 3.08.2022 - HELD THAT - This issue is no more res integra. This Tribunal in the case of Steel Authority of India Ltd. 2021 (7) TMI 1092 - CESTAT CHENNAI has held activities, therefore, that are contemplated under section 66E(e), when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. The decision rendered in appellants own case vide Final Order No. 50879/2022 dated 20.09.2022 in Service Tax Appeal No. 50080 of 2019 2022 (9) TMI 1005 - CESTAT NEW DELHI , however for Bhopal unit with respect to goods and transport service , is also about the same issue holding the receiving liquidated damages due to violation of terms of contract does not amount to any such act as may be called as declared service. The amount cannot be made liable to tax in the name of it being consideration for providing deemed service. Demand set aside - appeal allowed.

Summary

Issues:
1. Whether the liquidated damages collected due to breach of contract can be considered as consideration for providing declared service?

Analysis:
The appellant challenged the order holding the liquidation damages received as consideration for providing the declared service of tolerating an act or situation, along with the interest demanded and penalty imposed. The appellant, registered for taxable services, was found to be charging liquidated damages for delays in supply contracts without paying service tax on them. The show cause notice proposed recovery of the amount along with interest and penalty. The main issue was whether the liquidated damages constituted consideration for providing declared service.

The appellant's counsel argued that the recovery of liquidation damages cannot be considered under the ambit of declared services as defined in the Finance Act, 1994. They cited relevant cases to support their argument. On the other hand, the department referred to a recent circular regarding the applicability of GST on liquidated damages but acknowledged the decision of the Tribunal in a similar case. The Tribunal analyzed the issue of whether the liquidated damages collected for breach of contract timeline could be considered as providing declared service.

The Tribunal referred to previous decisions and held that the liquidated damages for breach of contract did not amount to providing declared service. It emphasized that there must be a flow of consideration for refraining from an act, tolerating a situation, or doing an act to constitute a declared service. The Tribunal also noted that the circular emphasized the need for an express or implied agreement for taxable supply to exist. Relying on previous judgments, the Tribunal concluded that the liquidated damages did not constitute consideration for providing deemed service.

In conclusion, the Tribunal set aside the order under challenge and allowed the appeal, stating that the liquidated damages for breach of contract did not amount to consideration for providing declared service. The decision was based on the analysis of relevant legal provisions, previous judgments, and the circular issued by the Department of Revenue.