2025 (3) TMI 969 - AT - Service Tax

Taxability - declared service - amounts received in the nature of Liquidated damages forfeiture of security deposits fines/penalties/Earnest Money deposit etc. as compensation for the losses incurred on account of delay on part of the contractors/vendors in completion of the work project etc. amounts to toleration of an act or not - HELD THAT - In the case of South Eastern Coalfields 2020 (12) TMI 912 - CESTAT NEW DELHI the Principal Bench of this Tribunal after considering the provision of Section 65B(44) defining service Section 66E(e) enumerating the declared services and the provisions of Section 67 dealing with the valuation of taxable service for charging service tax and referring to the decision of the Hon ble Apex Court in the case of Commissioner of Service Tax Vs. M/s. Bhayana Builders 2018 (2) TMI 1325 - SUPREME COURT and Union of India Vs. Intercontinental Consultants and Technocrats 2018 (3) TMI 357 - SUPREME COURT and the TRU Circular dated 20.06.2012 held as t is therefore not possible to sustain the view taken by the Principal Commissioner that penalty amount forfeiture of earnest money deposit and liquidated damages have been received by the appellant towards consideration for tolerating an act leviable to service tax under section 66E(e) of the Finance Act. There is no reason to differ with the settled principles of law as enunciated by the decision in the case of South Eastern Coalfields Ltd. The amount recovered by the appellant towards penalty is not a consideration for any activity which has been undertaken by the appellant and as a result there is no service in terms of Section 65B(44) of the Act. The facts of the present case do not suggest that there is any other independent agreement to refrain or tolerate or to do an act between the parties hence the issue is decided in favour of the appellant. The other issues related to invocation of extended period of limitation penalty and interest are not required to be gone into as the issue on merits stands decided in favour of the appellant. The learned Counsel for the appellant has also submitted that in certain transactions the amounts received in the nature of liquidated damages/forfeited amounts from the contractors located outside India i.e. in Canada Hong Kong Singapore etc there cannot be any service tax liability on the alleged service of tolerating the act of delay in the hands of the appellant - Since the issue is held in favour of the appellant on merits it is not necessary to go into the said argument raised by the learned Counsel. The amount received from the recipients located abroad is hereby set aside. Conclusion - The amounts collected as penalties and liquidated damages do not constitute consideration for any service under the Finance Act 1994. The impugned order deserves to be set aside. The appeal is accordingly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue considered in this judgment is whether the amounts collected by the appellant as "Liquidated damages, forfeiture of security deposits, fines/penalties/Earnest Money deposit, etc." for delays and breaches by contractors/vendors constitute a "Declared Service" under Section 66E(e) of the Finance Act, 1994, and are therefore taxable. Additionally, the applicability of service tax on amounts received from contractors located outside India was also considered.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of Liquidated Damages and Penalties as Declared Service

Relevant Legal Framework and Precedents: The legal framework is based on Section 66E(e) of the Finance Act, 1994, which defines certain activities as "Declared Services" liable for service tax. The appellant argued that liquidated damages and penalties are not for "tolerating an act" but are compensatory in nature. The Tribunal referred to several precedents, including South Eastern Coalfields Ltd. and the Supreme Court's decision in Commissioner of Service Tax Vs. M/s. Bhayana Builders, which clarified the interpretation of "service" and "consideration."

Court's Interpretation and Reasoning: The Tribunal emphasized that the intention behind contracts was not to tolerate breaches but to ensure compliance with terms. Penalties were viewed as safeguards for commercial interests rather than consideration for services rendered. The Tribunal found that the recovery of penalties does not constitute a service under Section 65B(44) and is not taxable under Section 66E(e).

Key Evidence and Findings: The Tribunal noted the absence of any independent agreement to tolerate acts or refrain from enforcement of contract terms. The penal clauses were intended to deter breaches, not to generate revenue from toleration of such breaches.

Application of Law to Facts: The Tribunal applied the legal principles established in previous cases, concluding that the amounts collected were not for any service provided by the appellant but were compensatory in nature.

Treatment of Competing Arguments: The Tribunal acknowledged the Revenue's argument but found it inconsistent with established legal interpretations and precedents. The appellant's reliance on prior decisions was deemed persuasive.

Conclusions: The Tribunal concluded that the amounts collected as penalties and liquidated damages were not taxable as they did not constitute consideration for any service.

Issue 2: Taxability of Amounts Received from Foreign Contractors

Relevant Legal Framework and Precedents: The Place of Provision of Service Rules, 2012, and Section 64 and 65B(52) of the Finance Act, 1994, were considered. The appellant argued that services provided to foreign contractors are deemed exports and not taxable in India.

Court's Interpretation and Reasoning: Although the Tribunal did not delve deeply into this issue due to its decision on the primary issue, it acknowledged the appellant's argument that services provided outside India's taxable territory are not subject to service tax.

Key Evidence and Findings: The Tribunal noted the geographical location of the contractors and the applicability of the Place of Provision of Service Rules, supporting the view that such services are not taxable.

Application of Law to Facts: The Tribunal did not need to apply this legal framework extensively due to its decision on the main issue but noted the relevance of the appellant's argument.

Treatment of Competing Arguments: The Tribunal did not find it necessary to address competing arguments on this issue due to its decision on the merits of the primary issue.

Conclusions: The amounts received from foreign contractors were deemed not taxable, aligning with the Tribunal's decision on the primary issue.

3. SIGNIFICANT HOLDINGS

The Tribunal held that the amounts collected as penalties and liquidated damages do not constitute consideration for any service under the Finance Act, 1994. The Tribunal emphasized that the intention of the parties was not to tolerate breaches but to ensure compliance with contract terms. The Tribunal's decision was influenced by established precedents and the interpretation of "service" and "consideration" under the Act.

Core Principles Established: The Tribunal reinforced the principle that penalties and liquidated damages are compensatory, not consideration for services, and thus not taxable under Section 66E(e). The Tribunal also highlighted the non-taxability of services provided outside India's taxable territory.

Final Determinations on Each Issue: The appeal was allowed, and the impugned order was set aside, with the Tribunal ruling in favor of the appellant on both the primary issue and the secondary issue concerning foreign contractors.