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TMI Blog2023 (5) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... . 83,35,72,810/- along with interest and also imposed penalties under Section 77 and 78 of Finance Act, 1994 on the appellant. 3. Briefly stated, the facts of the case are that the appellant herein is engaged in providing various taxable services, defined under Section 65(44) of the Finance Act, 1994. During the course of audit of accounts of the appellant, the department had observed from the Trial Balance for the financial year 2014 to June 2017 that the appellant had shown income under the head 'Liquidated Damages Deduction - Pending Decision' and 'Penalty/ Compensation recovered from the Contractors'. Considering such entries made in the books of accounts, the department had observed that the appellant receiving damages/compensation fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not form part of the taxable value for the purpose of computation of service tax liability. 5. On the other hand, Learned Authorised Representative appearing for Revenue reiterated the finding recorded in the impugned order. 6. Heard both sides and perused the records. 7. We find that the Tribunal in the case of Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Ltd (supra) has dealt an identical issue and has held against the Revenue, holding that the amount received as compensation for breach of contract should not be considered as taxable service within the purview of 'declared service' as per Section 66E ibid. We also find that the Tax Research Unit of the Department of Revenue in the Ministry of Finance vide Circular dated 3rd A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of breach, the aggrieved party shall be entitled to receive reasonable compensation not exceeding the amount so named or the penalty so stipulated. 7.1.3 It is argued that performance is the essence of a contract. Liquidated damages cannot be said to be a consideration received for tolerating the breach or nonperformance of contract. They are rather payments for not tolerating the breach of contract. Payment of liquidated damages is stipulated in a contract to ensure performance and to deter non-performance, unsatisfactory performance or delayed performance. Liquidated damages are a measure of loss and damage that the parties agree would arise due to breach of contract. They do not act as a remedy for the breach of contract. They do n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to such delayed construction and not for getting anything in return from the buyers. Similarly, forfeiture of earnest money by a seller in case of breach of 'an agreement to sell' an immovable property by the buyer or by Government or local authority in the event of a successful bidder failing to act after winning the bid, for allotment of natural resources, is a mere flow of money, as the buyer or the successful bidder does not get anything in return for such forfeiture of earnest money. Forfeiture of Earnest money is stipulated in such cases not as a consideration for tolerating the breach of contract but as Circular No. 178/10/2022-GST a compensation for the losses suffered and as a penalty for discouraging the non-serious buyers or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovable or immovable property may stipulate that the lessee shall not terminate the lease before a certain period and if he does so he will have to pay certain amount as early termination fee or penalty. Some banks similarly charge pre- payment penalty if the borrower wishes to repay the loan before the maturity of the loan period. Such amounts paid for acceptance of late payment, early termination of lease or for pre-payment of loan or the amounts forfeited on cancellation of service by the customer as contemplated by the contract as part of commercial terms agreed to by the parties, constitute consideration for the supply of a facility, namely, of acceptance of late payment, early termination of a lease agreement, of prepayment of loan and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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