2024 (9) TMI 1832 - AT - Service Tax

Liquidated damages and forfeited earnest money/security deposits not subject to service tax under s.66E(e) of Finance Act

CESTAT (AT) allowed the appeal, holding that liquidated damages and forfeited earnest money/security deposits recovered from contractors do not attract ... Levy of service tax - liquidated damages recovered and forfeiture of earnest money deposit/security deposit by the appellant from contractors/bidders on account of breach or non-performance of the contract - declared service in terms of Section 66E(e) of the Finance Act, 1994 or not - HELD THAT:- The issue has already been settled by this Tribunal in the case M/s. National Aluminium Co. Ltd. v. Principal Commissioner, C.G.S.T. & Central Excise, Bhubaneswar [2024 (6) TMI 763 - CESTAT KOLKATA] and therefore, the issue is no more res integra. In the said case, the Tribunal has observed that 'the appellant received certain amount as Liquidated Damages, Security Deposit (SD), Earnest Money Deposit (EMD), Retention Money withheld from the contractors on account of breach of terms and conditions of the contract in the event of unsatisfactory or late execution of service contract / supply contract causing deviation from the stipulated terms and conditions of the contract for agreement with the sales and service vendors. In the event of non-execution of the awarded contract, the said amount paid by the contractors were forfeited by the appellant.' As the issue has already been settled, holding that the assessee is not liable to pay Service Tax on the liquidated damages and earnest money deposit / security deposit forfeited, in these circumstances, we hold that no Service Tax is payable by the appellant - also, no penalty is imposable on the appellant in the facts and circumstances of the case. The impugned order is set aside - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether recoveries by a supplier from contractors/bidders as liquidated damages and forfeiture of earnest money deposit/security deposit constitute a 'declared service' under Section 66E(e) of the Finance Act, 1994 and are liable to Service Tax. 2. Whether penalties and interest imposed in respect of the demand for Service Tax on such recoveries are maintainable where the recoveries are held not taxable. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of liquidated damages and forfeited earnest/security deposits as 'declared service' under Section 66E(e) Legal framework: - Section 66E(e) of the Finance Act, 1994 defines certain 'declared services' which attract Service Tax by deeming specified activities to be services. The Revenue contended that recoveries by way of liquidated damages and forfeiture of earnest/security deposits fall within the ambit of a declared service and thus attract Service Tax for the relevant period. Precedent treatment: - The Tribunal relied on a prior decision of the same bench (or of the Tribunal) in which an identical issue-recovery of liquidated damages, security deposit, earnest money deposit and retention money forfeited by an assessee from contractors for breach/non-performance-was considered and adjudged. In that precedent the Tribunal held that such recoveries are not liable to Service Tax. The present decision follows that prior ruling. Interpretation and reasoning: - The Court/Tribunal accepted that the amounts in question are recoveries on account of breach or non-performance of contractual obligations (liquidated damages) and forfeiture of deposits taken to secure performance or participation (EMD/SD). The character of these receipts was assessed in the light of the nature of the contractual relationship and the terms governing the deposits and liquidated damages. - Applying the principle established in the cited Tribunal authority, the Court/Tribunal treated these receipts as compensatory or penal in nature and not as consideration for any service rendered by the recipient to the payer. The reasoning rests on the distinction between revenue arising from provision of services and amounts recovered as damages/forfeitures consequent upon breach or failure by the contractor/bidder. - Because the recoveries do not constitute consideration for a service provided by the appellant, they do not fall within the definition of a declared service under Section 66E(e). The Tribunal therefore concluded that the impugned amounts are not taxable under Service Tax law for the period in question. Ratio vs. Obiter: - Ratio: The binding ratio of the decision is that liquidated damages and forfeited earnest/security deposits received by a principal from contractors/bidders for breach/non-performance are not consideration for a declared service under Section 66E(e) and thus not subject to Service Tax. - Obiter: Any ancillary observations about classification of receipts or factual permutations not necessary to reach the conclusion were not treated as ratio; the decision principally follows and applies the prior Tribunal precedent. Conclusion: - The Tribunal held that no Service Tax is payable on liquidated damages and forfeited earnest money deposit/security deposit recovered by the appellant from contractors/bidders on account of breach or non-performance of contracts, following the earlier Tribunal ruling that settled the issue. Issue 2: Liability to penalties and interest where the underlying demand for Service Tax is held unsustainable Legal framework: - Penalties and interest can be imposed under the Service Tax regime where tax liabilities are established and there is default or misdeclaration. Question arises whether penalties and interest remain imposable where the primary tax demand itself is not sustainable. Precedent treatment: - The Tribunal, applying the same precedent, treated penalties as consequential upon the taxability conclusion and examined imposition of penalties in the light of settled non-taxability. Interpretation and reasoning: - Given the Tribunal's conclusion that the recoveries were not taxable as services, the legal foundation for levying penalties in respect of that tax demand falls away. The Tribunal therefore evaluated the imposition of penalties against the factual finding that the appellant's position was consistent with the binding precedent, implying absence of culpable conduct warranting penalty. Ratio vs. Obiter: - Ratio: Where the underlying demand for Service Tax is held unsustainable on the merits (and the assessee's position aligns with binding Tribunal precedent), penalties imposed in respect of that demand are not imposable in the facts and circumstances of the case. - Obiter: The decision does not elaborate a general test for penalty in all circumstances where tax demands are later disallowed; it confines the conclusion to the present facts and the existence of controlling precedent. Conclusion: - The Tribunal held that no penalty is imposable on the appellant in the facts and circumstances of the case, and that consequential relief follows from the setting aside of the tax demand. Interest consequences were addressed in consequence of the tax being set aside. Cross-references and final operative conclusions - The Tribunal expressly followed the prior Tribunal decision on identical factual and legal issues; therefore the holding is not novel but an application of established precedent. - Operatively, the impugned order confirming Service Tax demand and penalties was set aside; the appeal was allowed with consequential relief, and the Court/Tribunal directed that no Service Tax or penalty is payable in respect of the liquidated damages and forfeited earnest/security deposits for the period under consideration.