Liquidated damages from suppliers for delayed supply not taxable under service tax provisions

CESTAT Bangalore held that collection of liquidated damages from suppliers and service providers for delayed supply of goods and services beyond contractual due dates does not constitute taxable service under service tax provisions. The Tribunal followed its earlier precedent in appellant's case for other units, ruling that such amounts cannot be taxed as consideration for deemed service. The decision was endorsed by the Board through Circular No.214/2023-S.T. dated 28.02.2023. The impugned order was set aside and appeal allowed.

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Issues involved: Determination of whether service tax is payable on the amount collected as liquidated damages for delay in supply of goods and services.

The appeal was filed against Order-in-Appeal No.593/18 CT dated 18.02.2019 passed by the Commissioner of Central Excise (Appeals) Bangalore. The appellant was issued a show-cause notice alleging the recovery of liquidated damages for delay in execution of supply and service contracts, leading to a demand of Service Tax amounting to Rs.75,75,961/- for the period of July 2012 to June 2017. The appeal was made after the Commissioner (Appeals) rejected their appeal, based on the allegation that the services rendered were taxable u/s 66E(e) of the Finance Act, 1994. The core issue raised was whether liquidated damages can be considered a taxable service, with the appellant arguing against it based on a previous Tribunal judgment.

The learned advocate for the appellant contended that the collection of liquidated damages for supply of goods and services beyond the due date cannot be considered a 'service', citing a previous Tribunal case. The Authorised Representative for the Revenue supported the findings of the Commissioner (Appeals). The main issue for determination in the appeal was whether service tax is payable on liquidated damages collected by the appellant for delays in supply of goods and services.

The Tribunal found that the issue was previously addressed in the appellant's own case for the Bhopal / Dehradun Unit by the Principal Bench. Referring to the earlier judgment, it was noted that the recovery of liquidated damages due to a violation of contract terms does not amount to a declared service, and thus, the amount cannot be made liable to tax. The Tribunal also highlighted a Circular emphasizing the need for an express or implied agreement for taxable supply to exist, and that the mere flow of money does not constitute a service. The judgments were accepted by the Board via Circular No.214/2023-S.T. dated 28.02.2023.

Therefore, based on the precedent and interpretation of relevant legal provisions, the impugned order was set aside, and the appeal was allowed with consequential relief, if any, as per law.

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