2022 (6) TMI 381 - AT - Service Tax

Contractor wins appeal: penalty not subject to service tax.

M.P. Audyogik Kendra Vikas Nigam (Indore) Limited Versus Commissioner, Central Goods, Service Tax and Central Excise, Indore

M.P. Audyogik Kendra Vikas Nigam (Indore) Limited Versus Commissioner, Central Goods, Service Tax and Central Excise, Indore - TMI Issues:- Liability of service tax on penalty (liquidated damages) collected from contractorAnalysis:The case involved the issue of whether the appellant, engaged in providing taxable services, was liable to pay service tax on the penalty (liquidated damages) collected from their contractor. The Revenue alleged that the appellant had collected a significant amount as penalty during the relevant period and issued a show cause notice demanding service tax under Section 66E(e) of the Finance Act. The show cause notice also proposed penalties under Section 76 and interest under Section 75. The adjudication confirmed the demands with an additional penalty under Section 78, not initially proposed. The Commissioner (Appeals) upheld the order-in-original, leading to the appellant's appeal before the Tribunal.The appellant argued that the amount collected from the contractor was in the nature of liquidated damages for non-performance and did not constitute consideration for any service as defined in Section 66E(e) of the Act. The appellant contended that there was no contract obligating them to refrain from an act or to tolerate a situation, as specified in Section 66E(e). Relying on the precedent set in the case of Lemon Tree Hotel vs. Commissioner, GST, CE & Customs, Indore, the appellant asserted that the amount collected was akin to penalty and not subject to service tax.The Tribunal, after considering the arguments from both parties, found that there was no contractual obligation between the appellant and their contractor to perform any act or tolerate a situation for remuneration. The Tribunal determined that the amount collected as liquidated damages was in the nature of penalty and did not constitute consideration for a service under Section 66E(e). Citing the Lemon Tree Hotel case, where a similar penalty was deemed non-taxable, the Tribunal allowed the appeal, setting aside the impugned order and granting the appellant consequential benefits.In conclusion, the Tribunal ruled in favor of the appellant, holding that the penalty collected from the contractor was not subject to service tax as it was considered liquidated damages and not payment for any service as defined in the relevant section of the Finance Act.