The Ahmedabad Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that no service tax payable on recovery of penalty charges from contactors for delay in providing goods or service.
The bench of Ramesh Nair (Judicial Member) and Raju (Technical Member) has observed that penalty towards non fulfillment of the condition of the contract will not fall under Section 66 E (e) of Finance Act, 1994, therefore the service tax under the declared service cannot be recovered.
The issue involved in the present appeal is that since transmission or distribution of electricity by an electricity transmission or distribution utility is exempt from Service Tax under section 66D (k) of the Finance Act, 1994, hence the major activity of the company isexempt from service tax. At times the appellant recover penalty charges from the contactors / suppliers for delay in providing the goods/ service. The department is of the view that on such penalty, service tax will be applicable.
Section 65B(44) defines “service” to mean any activity carried out by a person for another for consideration. Explanation (a) to Section 67 provides that “consideration” includes any amount that is payable for the taxable services provided or to be provided.
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 held that, the activity of not completing the contract within the stipulated time period as provided under contract does not fall under the aforesaid entry. Further, it is a penalty which is imposed on the contractor for not completing the work within the stipulated time period. Therefore, such a penalty is not the consideration towards any service. Accordingly, the same does not fall under the declared service as provided under Section 66 E (e) of Finance Act, 1994.
Case Details
Case Title: Madhya Gujarat Vij Company Limited Versus C.C.E. & S.T. – Vadodara-I
Case No.: FINAL ORDER NO. 12921 /2024
Date: 02.12.2024
Counsel For Appellant: Neeta Lodha
Counsel For Respondent: Rajesh Nathan
