2024 (5) TMI 1058 - AT - Service Tax

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 ... Levy of service tax - 'Liquidated damages in the contracts' towards penalty/late delivery charges - section 66E (e) of the Finance Act, 1994 - applicability of circular issued by the Department of Revenue - appellant is a Central Government Public Sector Undertaking - HELD THAT:- Ld. Chartered Accountant further submitted that the Department of Revenue has recently issued Circular No. 178/10/2022-GST dated 3rd August 2022 in which they have clarified that there is no liability of payment of Service Tax/GST on liquidation damages charged by the company. We find that identical issue in the appellant’s own case has been decided by various Benches of Tribunal and which has consistently held that liquidated damages collected by the appellant as penalty/late delivery charges cannot be subjected to service tax u/s 66E (e) of the Finance Act. In this regard, we may refer the Final Order [2023 (4) TMI 54 - CESTAT NEW DELHI] passed by the Principal Bench in the appellant’s own case where identical issue was involved. Thus, we are of the considered view that the impugned order is not sustainable in law, therefore, we set aside the impugned order by allowing the appeal of the appellant with consequential relief, if any as per law. 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 damagesThe 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 ActThe 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 RevenueThe 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.