2023 (9) TMI 654 - AT - Service Tax

Tribunal rules in favor of appellant: Service Tax on liquidated damages not applicable

The Tribunal set aside the Order-in-Original confirming demands for Service Tax, interest, and penalties on liquidated damages recovered by the appellant ... Non-payment of service tax - liquidated damages - charging and recovering liquidated damages from the outstanding payment due to suppliers / service providers for delay in supply contract and service contract, but tax not paid - HELD THAT:- Circular No. 214/1/2023-Service Tax dated 28.02.2023 relied upon by the Ld. Advocate wherein the Board has chosen not to pursue Civil Appeals filed by the Department against some of the Orders of the Tribunal before the Hon’ble Supreme Court considered. The contentions of the Ld. Advocate agreed upon that the demand of Service Tax on liquidated damages has been set aside in those orders. Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts recovered by the assessee from suppliers/contractors as 'liquidated damages' under contractual provisions constitute a 'declared service' under Section 66E(e) of the Finance Act, 1994 (Service Tax), thus attracting Service Tax with effect from 01.07.2012. 2. Whether the demand of Service Tax, interest and penalties on such recovered liquidated damages can be sustained where the Tribunal has earlier taken a view in favour of taxpayers and the Department has, by administrative circular, chosen not to pursue appeals to the apex court against those Tribunal orders. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability of liquidated damages as a 'declared service' under Section 66E(e) Legal framework: Service Tax law (Finance Act, 1994) defines 'declared services' under Section 66E(e). The question is whether contractual recoveries labeled 'liquidated damages' are consideration for tolerating or condoning delay (or similar acts) such that they fall within the scope of declared services and thereby taxable. Precedent Treatment: The Tribunal has in several co-ordinate decisions examined identical factual and legal claims and has held in favour of taxpayers that liquidated damages recovered from suppliers/contractors do not attract Service Tax under the declared services provision. Those Tribunal decisions are relied upon by the appellant and form the primary precedent framework applied. Interpretation and reasoning: The Court (Tribunal) considered the nature and character of the recoveries recorded in the assessee's books as 'Recovery from suppliers/contractors towards penalty damages' and examined whether such recoveries amount to a service of 'tolerating an act' or similar activity contemplated under the declared services definition. Relying on the ratio of the co-ordinate Tribunal decisions, the Court accepted that the contractual liquidated damages are compensatory in nature for breach or delay and do not constitute a service rendered by the assessee (i.e., the assessee is not providing an act of toleration or condonation as a service for consideration). The Court further treated the prior Tribunal findings as controlling, applying their ratio to the facts at hand and rejecting the Revenue's characterization of those amounts as taxable consideration. Ratio vs. Obiter: The holding that liquidated damages recovered from suppliers/contractors are not taxable as declared services is articulated as the ratio decidendi applied to the appeal. Any ancillary observations on the manner of accounting or the Revenue's investigatory steps are obiter and not necessary to the decision. Conclusions: The demand of Service Tax on liquidated damages is not justified; such recoveries do not fall within Section 66E(e) as a declared service and therefore do not attract Service Tax for the period under consideration. The impugned demand is set aside on this substantive ground. Issue 2 - Effect of co-ordinate Tribunal decisions and Board's administrative position on sustaining departmental demand Legal framework: Administrative decisions of the Department (including decisions whether to pursue appeals) and binding/precedential value of co-ordinate Tribunal orders inform adjudication; where consistent Tribunal precedents favour the taxpayer and the Department elects not to pursue higher appellate review, the Tribunal's ratio is persuasive and determinative for similarly situated cases. Precedent Treatment: Co-ordinate Tribunal orders addressing the same legal point and reached uniformly in favour of taxpayers were cited and followed. The administrative circular indicating the Department's decision not to pursue apex-court appeals against those Tribunal orders was considered by the Tribunal as reinforcing the practical finality of that line of authority. Interpretation and reasoning: The Tribunal placed weight on the settled view in the cited Tribunal decisions and took judicial notice of the Board's administrative stance (via circular) declining to challenge those decisions further. The Tribunal reasoned that when the Department has chosen not to contest the Tribunal's conclusions before the apex court, those conclusions attain a degree of finality for like cases and are entitled to be followed, absent distinguishing facts or contrary binding higher-court authority. Ratio vs. Obiter: The reliance on co-ordinate Tribunal decisions constitutes ratio for the decision to set aside the demand here. The reference to the Board's circular is consequential and supportive; it is an administrative fact relied upon to underline the decision's practical binding effect but is not the primary legal basis supplanting the Tribunal precedent. Conclusions: Given the consistent Tribunal precedent favouring non-taxability of liquidated damages and the Department's administrative decision not to pursue further appellate challenge, the Tribunal followed that line of authority and set aside the demand, interest and penalties; the appeal was allowed with consequential benefits, if any, as per law. Cross-references 1. Issue 1 and Issue 2 are interrelated: the substantive legal conclusion on taxability (Issue 1) is applied in the present appeal by following the settled Tribunal line of cases (Issue 2). The Board's administrative stance reinforces but does not independently create the legal rule applied.