Liquidated damages and penal interest at 2% on delayed loan payments not subject to service tax under section 66E

CESTAT New Delhi held that liquidated damages and penal interest charged at 2% by the appellant on delayed loan payments are not subject to service tax. The tribunal determined these charges are penal in nature rather than additional consideration for taxable services. Such penalties do not constitute declared services under section 66(E) of the Act as they lack separate agreements or consideration flow. The charges being purely punitive for payment delays cannot be construed as taxable services, making service tax inapplicable.

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Issues:
- Whether charging of liquidated damages/penal interest over and above the applicable interest in the event of default in payment is exigible to service tax.

Detailed Analysis:
1. The Revenue appealed against the Order-in-Original dropping the demand towards service tax, arguing that the respondent, engaged in banking and financial services, charged liquidated damages/penal interest in case of default in payment, which should be taxable under section 66E(e) of the Act.
2. The department claimed a demand of Rs. 20,42,52,714/-, contending that the liquidated damages/penal interest constituted additional consideration. However, the Adjudicating Authority dropped the demand, citing the Tribunal's decision in Religare Securities Ltd., stating that such charges were contingent on the occurrence of an event and not referable to any taxable service.
3. The issue was extensively discussed, referencing various judicial pronouncements, including decisions like South Eastern Coalfields Ltd., Northern Coalfields Ltd., and Religare Securities Ltd., which established that such charges were not exigible to service tax.
4. The Tribunal referred to the Larger Bench's decision in LSE Securities Ltd., which set parameters for determining taxable amounts, emphasizing that only commission or brokerage charged by a service provider should be considered for service tax, not other receipts.
5. The Tribunal acknowledged that the issue of delayed payment charges (DPC) had been settled in favor of the appellant in previous decisions, such as Religare Securities Ltd., where DPC was deemed not to be commission/brokerage for securities transactions.
6. The Tribunal delved into the concept of liquidated damages and non-performance payments, citing the South Eastern Coalfields Ltd. case to explain that consideration must flow from the service recipient to the provider for it to be taxable, emphasizing the distinction between contractual conditions and considerations.
7. Subsequent decisions like M/s Bajaj Finance Ltd., Western Coalfields Ltd., and others followed the principles laid down in the South Eastern Coalfields case.
8. Circular No. 214/01/2023-S.T. clarified that activities under section 66E required specific agreement references and consideration flow, which were not present in the case of liquidated damages/penal interest charged by the appellant.
9. The Tribunal concluded that the charges were penal in nature, not additional consideration for taxable services, hence not liable for service tax, as they were not related to the services provided by the appellant.
10. It was held that the charges did not fall under the declared service under section 66E of the Act, as there was no separate agreement for such liability between the respondent and the borrower.
11. As the issue was decided in favor of the appellant, the consequential issues of extended limitation period, interest, and penalty were not considered.
12. The impugned order was upheld, and the appeal by the Revenue was dismissed.

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