2024 (9) TMI 407 - AT - Service Tax

Levy of service tax - cheque dishonour charges - late delivery Charges - amount recovered by the Appellant is a consideration or not - HELD THAT - This issue is no more res-integra. The Learned Counsel reliance on the Tribunal s decision in M/s South Eastern Coal Fields Ltd 2020 (12) TMI 912 - CESTAT NEW DELHI is justified - It was held in the case that ' The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance.' The Tribunal has consistently held that penalty/late delivery charges cannot be subjected to Service Tax Under Section 66E of the Finance Act 1994. Consequently, the impugned order dated 08.01.2019 is set aside. Appeal allowed.

Summary

Issues:
Appeal against demand of service tax on cheque dishonour charges and late delivery charges.

Detailed Analysis:

1. Background:
The appeal arose from an Order-in-Appeal confirming a demand of service tax against the appellant for collecting penalty amounts from customers for cheque dishonour during the audit period. The appellant argued that the collected amounts were not consideration for any service provided, thus not liable to service tax.

2. Appellant's Arguments:
The appellant contended that the amounts collected were penal charges to deter contract violations, not consideration for any service. They cited various decisions supporting non-taxability of such charges, emphasizing no quid pro quo or activity for consideration.

3. Department's Arguments:
The department argued that the collected amounts fell under Section 66E(e) of the Finance Act, 1994, as the appellant agreed to tolerate the situation created by clients' cheque dishonour or late delivery charges. They asserted that the appellant's actions constituted a service under the Act.

4. Tribunal's Decision:
The Tribunal referred to precedent cases and analyzed Section 66E(e) in light of the agreements between the parties. It concluded that penal clauses were safeguards for commercial interests, not services for consideration. Citing consistent rulings, the Tribunal held that penalty/late delivery charges were not subject to service tax under Section 66E.

5. Outcome:
The impugned order confirming the demand of service tax was set aside, and the appeal was allowed in favor of the appellant. The decision was pronounced in open court on 05.09.2024.

This detailed analysis highlights the key arguments presented by both parties, the interpretation of relevant legal provisions, and the Tribunal's reasoning leading to the final decision in favor of the appellant.