PSU liquidated damages for late delivery not liable to service tax under section 66E(e) Finance Act 1994

CESTAT Chandigarh held that liquidated damages collected as penalty for late delivery charges by a Central Government PSU are not liable to service tax under section 66E(e) of Finance Act, 1994. The tribunal relied on Department of Revenue Circular No. 178/10/2022-GST clarifying no service tax/GST liability on liquidation damages and consistent decisions by various tribunal benches on identical issues. The impugned order was set aside, allowing the appellant's appeal with consequential relief.

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Issues:
1. Liability to pay service tax on liquidated damages.
2. Interpretation of Section 66E (e) of the Act.
3. Applicability of circular issued by the Department of Revenue.

Analysis:

Issue 1: Liability to pay service tax on liquidated damages
The case involved the appellant, a service provider, who received amounts labeled as "liquidated damages" from suppliers/contractors for delayed supply of goods/services. The department contended that these amounts attracted service tax under Section 66E (e) of the Act. A show cause notice was issued demanding service tax, interest, and penalties. The adjudicating authority confirmed a demand amount, dropped another demand, and imposed penalties. The appellant appealed against this order.

Issue 2: Interpretation of Section 66E (e) of the Act
The appellant argued that the issue had been previously decided in their favor by different benches of the Tribunal. They cited various decisions in support of their case. Additionally, they referred to a recent circular issued by the Department of Revenue clarifying that there is no liability to pay service tax/GST on liquidated damages. The Tribunal examined the previous decisions and the circular, concluding that liquidated damages collected as penalty/late delivery charges cannot be subjected to service tax under Section 66E (e) of the Finance Act.

Issue 3: Applicability of circular issued by the Department of Revenue
The Tribunal considered the circular issued by the Department of Revenue, which emphasized the need for an express or implied agreement for taxable supply to exist. The circular highlighted that a mere flow of money does not imply a taxable supply. The Tribunal found that the circular supported the appellant's position that liquidated damages should not be subject to service tax.

In the final judgment, the Tribunal set aside the impugned order, allowing the appeal of the appellant based on the decisions of various benches and the interpretation of Section 66E (e) of the Act. The Tribunal found that the impugned order was not sustainable in law and provided consequential relief to the appellant as per law.

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