Tax Ruling: Liquidated Damages not Subject to Service Tax

The forum held that Liquidated Damages for tolerating delays do not amount to "declared service" liable for Service Tax. The impugned order demanding Service Tax on Liquidated Damages was set aside, and the appeal was allowed in favor of the assessee, a public sector undertaking engaged in heavy engineering equipment manufacturing.

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Issues involved:
The issue involves whether the Liquidated Damages received by the appellant for tolerating the delay would amount to "declared service" within the meaning of Section 66E (e) of the Act and whether the appellant would be liable to Service Tax on the same in terms of Section 66B.

Comprehensive details of the judgment for each issue involved:

1. Background: The appellant, a public sector undertaking engaged in heavy engineering equipment manufacturing and project services, entered into contracts with vendors and subcontractors. An enquiry revealed that Liquidated Damages were charged for delays but Service Tax was not paid on it.

2. Adjudication: The Adjudicating Authority confirmed the demand for Service Tax on Liquidated Damages, citing Section 65B (44) and Section 66E (e) of the Finance Act, 1994, considering it as a "declared service" for tolerating deficiencies.

3. First Appeal: The appellant appealed before the Commissioner of G.S.T. and Central Excise (Appeals) who rejected the appeal, leading to the current appeal before the forum.

4. Arguments: The appellant cited precedents from various CESTAT Benches, including the case of M/s. South Eastern Coalfields Ltd., where it was concluded that penalties and damages for tolerating acts are not subject to Service Tax.

5. Decision: After reviewing the orders of lower authorities and the cited precedents, the forum agreed with the appellant's argument. Citing the settled issue in favor of the assessee in the case of M/s. South Eastern Coalfields Ltd., the forum held that Liquidated Damages for tolerating delays do not fall under "declared service" liable for Service Tax. Therefore, the impugned order was set aside, and the appeal was allowed in favor of the assessee.

6. Conclusion: The forum pronounced the order in open court on 26.04.2023, setting aside the impugned order and allowing the appeal with any consequential benefits as per law.

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