2022 (6) TMI 381 - AT - Service Tax

Contractor wins appeal: penalty not subject to service tax.

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 - penalty - consideration for service - service declared under Section 66E(e) as agreeing to refrain from, to tolerate or to do an actLiquidated damages - penalty - service declared under Section 66E(e) as agreeing to refrain from, to tolerate or to do an act - consideration for service - Whether the amounts recovered by the appellant from its contractor as liquidated damages are exigible to service tax as consideration for a declared service under Section 66E(e). - HELD THAT: - The Tribunal found on the material before it that there was no contractual obligation between the appellant and the contractor whereby the appellant agreed to refrain from an act, to tolerate an act or situation, or to do an act in favour of the contractor such that any remuneration for such forbearance or tolerance was prescribed. The amounts recovered were levied as liquidated damages and operated as penalty for non-performance. Such recoveries, being in the nature of penalty and not paid as consideration for any service falling within the ambit of Section 66E(e), do not constitute consideration for a declared service. The Tribunal applied its earlier reasoning in Lemon Tree Hotel (Tri. Del.) where forfeiture of advance on cancellation was held to be a penalty and not consideration under Section 66E(e), and reached the same conclusion on the facts of this case.The liquidated damages collected from the contractor are penalty and not consideration for a declared service under Section 66E(e); accordingly the demand for service tax is not sustainable.Final Conclusion: Appeal allowed; the impugned order confirming service tax, penalty and interest on the amounts recovered as liquidated damages is set aside and the appellant is entitled to consequential benefits. 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.