CESTAT rules debit notes, notice pay recovery, cheque bounce penalties not subject to service tax liability

CESTAT New Delhi ruled in favor of appellant regarding service tax liability on four disputed items. The tribunal held that debit notes issued for price adjustments were mere book entries without consideration, making them non-taxable. Notice pay recovery was deemed not subject to service tax based on HC precedent. Cheque bounce penalties were ruled deterrent in nature rather than consideration for services, supported by GST circular reasoning. Liquidated damages demand was unsustainable following SC dismissal of department's appeal. Commissioner's order dated 08.03.2018 was set aside and appeal allowed.

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Issues Involved:
1. Debit notes raised to offset the excess credit in the ledger account.
2. Notice pay recovery.
3. Cheque return penalty.
4. Liquidated damages.

Summary:

1. Debit Notes:
The appellant argued that debit notes are mere book adjustments to balance the ledger without any consideration paid. The Tribunal accepted this argument, referencing the decision in *Futura Polyster Ltd vs. Commissioner of Central Excise, Chennai* which held that no service tax can be levied merely because of the entries made in the books of account. The Tribunal concluded that no consideration is paid, and the debit notes are adjustments in price reduction due to quality or quantity discrepancies in supplied goods.

2. Notice Pay Recovery:
The appellant contended that notice pay recovery is not for tolerating the termination of the contract but for preventing the breach of contract. The Tribunal agreed, referencing the CBIC Education Guide and the *Madras High Court in GE T & D India Limited vs. Deputy Commissioner of C.Ex. Chennai*, which clarified that notice pay recovery is not subject to service tax. The Tribunal also cited *Shriram Pistons And Rings Ltd. vs. Commissioner of C.T., Ghaziabad* to support this view.

3. Cheque Return Penalty:
The appellant argued that cheque bounce penalties are deterrent in nature and not consideration for tolerating the activity of cheque bounce. The Tribunal accepted this argument, referencing Circular No. 178/10/2022-GST and the decision in *Rohan Motors Ltd vs. Commissioner of Central Excise, Dehradun*, which clarified that cheque bounce penalties are not subject to service tax as they are penalties imposed to deter such acts.

4. Liquidated Damages:
The appellant argued that liquidated damages are penalties to deter delay in delivery schedules and not consideration for tolerating the delay. The Tribunal referred to its decision in *South Eastern Coalfields Ltd vs. Commissioner of Central Excise and Service Tax, Raipur*, which held that liquidated damages are not taxable under service tax. The Tribunal noted that the department's appeal against this decision was withdrawn following the CBIC Circular dated 28.02.2023.

Conclusion:
The Tribunal set aside the order dated 08.03.2018 passed by the Commissioner, concluding that none of the four demands can be sustained, and allowed the appeal.

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