CESTAT sets aside service tax demand on liquidated damages for supply delay and service charges under supplier agreements

CESTAT Allahabad set aside service tax demand on liquidated damages for delay in supply contract and service charges under written agreement with suppliers. The tribunal relied on precedent from CESTAT New Delhi in a similar case involving the same appellant's different unit, which had decided in favor of the appellant. The tribunal found no merit in the impugned order demanding service tax on liquidated damages and consequently set aside demands for service tax, interest, and penalty. Appeal was allowed.

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Issues Involved:
1. Demand and recovery of Service Tax.
2. Interest on the demanded Service Tax.
3. Imposition of penalty.

Summary:

1. Demand and Recovery of Service Tax:
The appeal challenges the order demanding Service Tax of Rs 3,14,05,595/- u/s 73(2) of the Finance Act, 1994 read with Section 174 of the CGST Act, 2017. The appellant, a Public Sector Undertaking, faced identical show cause notices demanding service tax on liquidated damages collected during 01.07.2012 to 30.06.2017. The tribunal had previously set aside similar demands in other units of the appellant, supported by a Circular No 214/1/2023_ST dated 28.02.2023 favoring the appellant.

2. Interest on the Demanded Service Tax:
The impugned order also levied interest on the demanded amount u/s 75 of the Finance Act, 1994 read with Section 174 of the CGST Act, 2017. The tribunal, referring to prior decisions, found no merit in the demand for service tax, thus nullifying the interest demand.

3. Imposition of Penalty:
A penalty equivalent to the demanded Service Tax amount was imposed u/s 78 of the Finance Act, 1994 read with Section 174 of the CGST Act, 2017. The tribunal, referencing prior judgments including M/s South Eastern Coal Fields Ltd. and M.P. Poorva Kshetra Vidyut Vitran Co. Ltd., concluded that liquidated damages do not constitute a taxable service u/s 66E(e) of the Finance Act, 1994. Consequently, the penalty was also set aside.

Conclusion:
The tribunal set aside the demand for Service Tax, interest, and penalty on liquidated damages, aligning with previous rulings that such damages do not fall under taxable services u/s 66E(e) of the Finance Act, 1994. The appeal was allowed.

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