The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has observed that recovery of liquidated damages/penalty is not ‘consideration’ and no service tax is payable.
The bench of Rachna Gupta (Judicial Member) and Hemambika R. Priya (Technical Member) has observed that the activity of receiving such an amount of penalty is wrongly alleged to be an amount towards rendering the declared services. The act of receiving such an amount/liquidated damages is otherwise covered under Section 73 and 74 of the Contract Act.
The appellant, M/s Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. Ltd is a State Government company registered with the Service Tax department. During the course of the scrutiny of appellant‟s record i.e. ST-3 return for the period from October March 2015-16 as well as the challans showing payment of service tax.
The appellant had collected an amount of penalties from the contractors/suppliers. The amount is alleged to have been collected for tolerating the act of the contractors which is a “declared service‟ in terms of Section 66E(e) of the Finance Act, 1994. Accordingly, the service tax amounting to Rs. 2,10,11,500/- is proposed to be recovered on the amount of penalties collected by the appellant from 2014-2015 to June 2017-2018.
The department issued the show cause notice proposing to recover the service tax along with the interest and the penalties. The proposal was confirmed.
The tribunal held that there is no agreement nor any intention to breach the terms of the agreement. The appellant herein has simply agreed to be compensated by deducting charges from the bills for any loss or admitted cause to them from the breach of contract on part of the contractor. Resultantly, the recovery of liquidated damages/penalty from the other parties cannot be called as service and the amount so received cannot be called as the amount of consideration. The activity of receiving such an amount of penalty is wrongly alleged to be an amount towards rendering the declared services.
Case Details
Case Title: Madhya Pradesh Poorva Kshetra Vidyut Vitaran Co. Ltd. Versus Commissioner, Central Excise & CGST, Jabalpur
Case No.: Service Tax Appeal No. 50804 of 2020
Date: 01/01/2025
Counsel For Appellant: Rajeev Agarwal
Counsel For Respondent: Rajeev Kapoor
