The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that late payment charges received as interest for delayed payment against the supply of industrial gases cannot be subjected to service tax as a “declared service” under Section 66E of the Finance Act, 1994.
The bench of Somesh Arora (Judicial Member) and Satendra Vikram Singh (Technical Member) observed that payments having the character of damages do not become consideration for a service merely because they are described as “interest.” It accordingly set aside the order passed against the industrial gas supplier and allowed its appeal.
The appellant/assessee had supplied industrial gases to its customers and received late payment charges, in the nature of interest, when the customers failed to make payments within the stipulated period.
The Service Tax Department treated these charges as consideration for the provision of a declared service. According to the Department, the company’s receipt of the charges fell within Section 66E of the Finance Act, 1994, which included within the taxable service framework an agreement to refrain from an act, tolerate an act or situation, or perform an act.
The company challenged the tax treatment before the Tribunal. Its counsel relied upon the CESTAT’s earlier decision in Commissioner of Central GST and Central Excise, Vadodara-II v. Lanxess India Private Limited, decided on February 26, 2026.
In that case, the Tribunal had examined the relationship between an activity, consideration and the scope of a declared service. It had held that service tax could arise only when an activity was carried out by one person for another in exchange for consideration.
The expression “for consideration,” the Tribunal had explained, also governs services included within the expanded category of declared services. Consequently, the mere presence of an obligation to tolerate an act or situation would not be sufficient to attract service tax unless a genuine element of consideration existed between the parties.
Referring to Section 2(d) of the Indian Contract Act, 1872, the earlier decision had stated that consideration must move at the desire of the promisor. An act, abstinence or promise performed at the promisor’s desire constitutes consideration for the promise.
Damages and liquidated damages, however, ordinarily arise from an undesired event, accidental conduct or breach of contractual obligations. They are not paid because the injured party intended to provide a service or agreed to tolerate the breach as part of a commercial arrangement.
The Tribunal had therefore concluded that damages, liquidated damages and contractual penalties resulting from an undesired act or an unforeseen situation cannot be treated as consideration for a service. The absence of consideration prevents such receipts from falling either within the general definition of “service” or within the category of a “declared service.”
Applying that principle to INOX Air Products’ case, the Bench held that payments possessing the character of damages would remain outside the declared-services category even when the contractual documents described those payments as interest.
The Tribunal noted that the legal issue was no longer open for fresh determination in view of its decision in Lanxess India. The Department’s authorised representative also agreed that the earlier ruling covered the controversy, while reiterating the findings recorded by the lower authority.
The Bench consequently held that the late payment charges received by the company could not be treated as consideration for tolerating delayed payment by its customers.
The appellate tribunal set aside the order passed by the Commissioner (Appeals), CGST and Central Excise, Surat, dated August 7, 2020, and allowed the company’s appeal. The decision was dictated and pronounced in open court on September 8, 2026.
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