Tribunal quashes service tax on liquidated damages, citing CBIC Circular

The Tribunal set aside the demand for service tax on liquidated damages, remanding the matter for fresh consideration by the adjudicating authority in light of CBIC Circular No. 178/10/2022-GST, which clarified that such payments are not taxable under Section 66E(e) of the Finance Act, 1994. The Circular emphasized that liquidated damages are compensatory and not consideration for tolerating an act, thus not constituting a taxable supply.

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Issues Involved:
1. Demand of service tax on liquidated damages under Section 66E(e) of the Finance Act, 1994.
2. Applicability of CBIC Circular No. 178/10/2022-GST dated 03rd August, 2022.

Summary:

Issue 1: Demand of Service Tax on Liquidated Damages

This appeal was filed by M/s. Linde Engineering India Private Limited against the confirmation of a demand for service tax on amounts claimed by the appellant as liquidated damages. The demand was made under Section 66E(e) of the Finance Act, 1994. The appellant contended that the amounts received from their vendors for delays or defaults in contracts were wrongly taxed by the revenue under the said section. The learned counsel for the appellant argued that, according to CBIC Circular No. 178/10/2022-GST dated 03rd August, 2022, no service tax is payable on such amounts.

Issue 2: Applicability of CBIC Circular No. 178/10/2022-GST

The Tribunal noted that the CBIC Circular No. 178/10/2022-GST addresses the taxability of transactions claimed as liquidated damages. This circular was not available during the adjudication by the commissioner or the hearing before the tribunal, and thus, the adjudicating authority could not benefit from it. The circular clarifies that payments such as liquidated damages for breach of contract are not a consideration for tolerating an act or situation and thus are not taxable. It emphasizes that such payments are compensatory in nature and not for any independent activity of tolerating an act. The circular further clarifies that these payments do not constitute a supply within the meaning of the Act.

Conclusion:

The Tribunal set aside the impugned order and remanded the matter to the original adjudicating authority to decide the issue afresh in light of the arguments given in the aforesaid CBIC circular. The decision was pronounced in the open court on 14.03.2023.

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