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2023 (7) TMI 882 - AT - Service TaxDemand of serviced ax on collection of liquidated damages, penalty and forfeiture of security deposits - declared service or not - HELD THAT - In M/S SOUTH EASTERN COALFIELDS LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE AND SERVICE TAX, RAIPUR 2020 (12) TMI 912 - CESTAT NEW DELHI the Tribunal observed 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 Circular dated February 28, 2023 issued by Board also provides that service tax cannot be levied on the amount collected towards liquidated damages. In view of the decisions of the Tribunal and the Circular, it is not possible to sustain the view taken by the Commissioner that since the task was not completed within the time schedule, the appellant agreed to tolerate the same for a consideration in the form of liquidated damages, which would be subjected to service tax under section 66E(e) of the Finance Act - As service tax could not be levied, the imposition of interest and penalty also cannot be sustained. Appeal allowed.
Issues Involved:
The issue in this case involves the demand of service tax on amounts collected by the appellant under the head of liquidated damages, penalty, and forfeiture of security deposits due to non-fulfillment of contractual obligations, under section 65B(44) and section 66E of the Finance Act, 1994. Summary: The appellant, engaged in manufacturing various products, entered into supply and works contracts with suppliers/service providers. The appellant included clauses for liquidated damages, penalty, and forfeiture of security deposits in the contracts to ensure smooth operations and timely execution. The department contended that such collections would be a 'declared service' under section 66E(e) of the Finance Act. A show cause notice was issued proposing to recover service tax from the appellant. The appellant responded, stating that the allegations were incorrect and no service tax was leviable. However, the Principal Commissioner confirmed the demand of service tax with interest and penalty. During the appeal, the appellant cited a previous case involving Steel Authority of India Ltd. and a Circular issued by the Central Board of Indirect Tax and Customs. The Tribunal's decision in the Steel Authority case was found applicable to the present appeal. The Tribunal analyzed the provisions of section 66E(e) and emphasized the need for consideration in agreements related to refraining from an act, tolerating an act, or doing an act. The Circular also clarified that activities under section 66E(e) require a specific agreement and flow of consideration. Based on the Tribunal's decisions and the Circular, it was concluded that the view taken by the Commissioner on levying service tax on liquidated damages was not sustainable. Therefore, the imposition of interest and penalty was also set aside. Ultimately, the order confirming the demand of service tax was set aside, and the appeal was allowed in favor of the appellant.
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