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2023 (4) TMI 919 - AT - Service TaxLevy of service tax with interest and penalty - consideration received by them on account of liquidated damages - reimbursement of expenses paid to foreign entity - Circular No. 214/1/2023-ST dt. 21.02.2023 - HELD THAT - This Bench in the case of M/S BHARAT DYNAMICS LTD. VERSUS COMMISSIONER OF CENTRAL TAX, HYDERABAD. 2022 (9) TMI 1445 - CESTAT HYDERABAD on this issue, wherein it was held such amounts collected by way of penalty/liquidated damages for non-compliance of contract, cannot be considered as consideration for tolerating an act and hence, not leviable to service tax under section 66E (e) of the Finance Act. While the above Orders have been passed by the Tribunal in 2022, subsequently, CBIC has issued Circular No. 214/2023-Service Tax dt. 28.02.2023. In this Circular, the issue of leviability of Service Tax on Liquidated Damages has been considered in elaborate details - The Department has not disputed in the present case that the amount received by the Appellant is on account of Liquidated Damages only. Service Tax on reimbursement of expenses paid to foreign entity and equal amount of penalty under section 78 - HELD THAT - The appellant has not been able to prove that they have followed the procedure so as to be eligible for abatement on account of reimbursable expenses. Since the statute is very clear and they have been following the other procedures correctly, the escapement of Service Tax on account of this aspect of reimbursements of expenses cannot be considered as a bonafide mistake since the same erroneous system was followed by them for more than two years till the issue was pointed out by the Audit in the 4th year. Accordingly, the appeal towards confirmed demand of Rs. 13,28,164/- along with interest is rejected - the Penalty is to be paid @ 25% of this amount, if the confirmed demand, interest and Penalty are paid within 30 days from date of communication of this Order. Appeal allowed in part.
Issues:
The issues involved in the judgment are: 1) Contesting Service Tax on liquidated damages and reimbursement of expenses. 2) Interpretation of Circular No. 214/1/2023-ST regarding Service Tax on liquidated damages. 3) Bonafide belief in non-payment of Service Tax on reimbursements. 4) Review of liquidated damages issue by CBIC. 5) Determination of Service Tax on reimbursements and invocation of extended period of limitation. Service Tax on Liquidated Damages: The appellant contested the Service Tax demand on liquidated damages citing Circular No. 214/1/2023-ST and previous case laws. The Tribunal referred to various decisions and held that charges for breach of contractual terms are not considered as consideration for refraining or tolerating an act, thus not leviable to Service Tax. The Tribunal set aside the impugned order based on the settled issue and previous judgments. Service Tax on Reimbursements: Regarding the reimbursement of expenses paid to a foreign entity, the appellant claimed a bonafide belief in not paying Service Tax. However, the Tribunal found that the expenses were not clearly required to be made by the appellant, leading to the inclusion of reimbursements in the consideration for calculating Service Tax. The extended period of limitation was invoked due to non-payment of Service Tax even after clear provisions were in place. CBIC Circular and Tribunal Orders: The Tribunal highlighted Circular No. 214/2023-Service Tax which clarified the issue of Service Tax on liquidated damages. The Tribunal noted that the confirmed demand of Rs. 79,67,98,696/- was not legally sustainable based on the cited cases and CBIC clarifications. The Tribunal allowed the appeal in this regard. Additionally, the Tribunal rejected the appeal on the confirmed demand of Rs. 13,28,164/- for reimbursement expenses, reducing the penalty to 25% if paid within 30 days. Conclusion: The Tribunal partially allowed the appeal, setting aside the Service Tax demand on liquidated damages but upholding the demand on reimbursement expenses. The penalty imposed was reduced subject to timely payment. The judgment provided a detailed analysis of the legal issues involved and concluded based on the interpretation of relevant laws and circulars.
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