2025 (4) TMI 107 - AT - Service Tax

Liquidated damages and late payment charges by PSU not declared services under Section 66E(e) Finance Act 1994

General Manager (TR) and M/s. Bharat Sanchar Nigam Limited Versus Principal Commissioner of CGST & Central Excise, Chennai

CESTAT Chennai held that liquidated damages and late payment charges collected by a public sector undertaking do not constitute declared services under ... Declared services under Section 66E(e) of FA or not - levy of service tax on the amounts collected as liquidated damages and late payment charges (LPC) - invocation of extended period of limitation - penalty - suppression of facts or not - HELD THAT:- It is apposite to reproduce the clarification given by the Central Board of Indirect Taxes and Customs, New Delhi vide its Circular, C.B.I. & C. Circular No. 214/1/2023-S.T., dated 28-2-2023 on the subject of “Leviability of Service Tax on the declared service “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under clause (e) of section 66E of the Finance Act, 1994”. There are substance in the contentions of the appellant that being a public sector undertaking, there cannot be an intent to evade payment of duty attributable to it, especially in the absence of any finding stating a positive act of collusion or wilful misstatement, or suppression of facts, with intent to evade payment of duty that has been done by the appellant. Reliance placed in this regard, on the decision in COLLECTOR OF CENTRAL EXCISE VERSUS CHEMPHAR DRUGS & LINIMENTS [1989 (2) TMI 116 - SUPREME COURT], is appropriate. Invocation of extended period of limitation - Penalty - suppression of facts or not - HELD THAT:- While issuing the second and third show cause notices, same/similar facts could not be taken as suppression of facts as these facts were already in the knowledge of the authorities. The decision in Nizam Sugar Factory v CCE, AP, [2006 (4) TMI 127 - SUPREME COURT] applies in this regard. Thus, in these matters, invoking the extended period of limitation and imposing equivalent penalty is, even otherwise, decidedly untenable. Conclusion - The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The demands of service tax made along with applicable interest and imposition of penalties in the impugned orders in original cannot sustain and the impugned orders in original are liable to be set aside - Appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe primary issue considered in these appeals was whether the appellant, an Internet & Telecommunication Service Provider, was liable for service tax on the amounts collected as liquidated damages and late payment charges (LPC) under Section 66E(e) of the Finance Act, 1994. This section pertains to 'declared services,' which include agreeing to the obligation to refrain from an act, tolerate an act or situation, or to do an act. The Tribunal also considered whether the invocation of the extended period of limitation and the imposition of penalties were justified.2. ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and PrecedentsThe legal framework primarily involved Section 66E(e) of the Finance Act, 1994, which defines certain activities as declared services subject to service tax. The Tribunal referred to various precedents, including the decisions in Northern Coalfields Ltd., South Eastern Coalfields, and Neyveli Lignite Corporation Ltd., which clarified that liquidated damages do not constitute consideration for a declared service.Court's Interpretation and ReasoningThe Tribunal noted that for an activity to be classified as a declared service under Section 66E(e), there must be a clear agreement to refrain from an act, tolerate an act, or do an act, with a corresponding flow of consideration. The Tribunal found no such agreement or consideration in the appellant's case. The liquidated damages and LPC were seen as penal charges for breach of contract, not as consideration for any service rendered.Key Evidence and FindingsThe Tribunal examined the terms and conditions in the Customer Application Form, which indicated that the appellant reserved the right to suspend services for non-payment, irrespective of LPC payments. This contradicted the notion that LPC constituted consideration for tolerating an act. The Tribunal also highlighted the contradictory findings of the adjudicating authority, which initially recognized LPC as penal charges but later treated them as consideration for a declared service.Application of Law to FactsThe Tribunal applied the legal principles established in prior cases to the facts at hand, concluding that the liquidated damages and LPC did not meet the criteria for declared services under Section 66E(e). The Tribunal emphasized that the appellant's actions were not intended to tolerate breaches but to enforce contractual compliance.Treatment of Competing ArgumentsThe Tribunal rejected the respondents' arguments that LPC constituted consideration for a declared service. It noted the lack of any express or implied agreement to tolerate acts of default and found the reliance on a circular under the GST regime misplaced, as it contradicted judicial precedents.ConclusionsThe Tribunal concluded that the liquidated damages and LPC were not subject to service tax as declared services. It also found the invocation of the extended period of limitation and the imposition of penalties unjustified.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal ReasoningThe Tribunal emphasized: 'The recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss.'Core Principles EstablishedThe Tribunal reinforced the principle that liquidated damages and penalties for contract breaches do not constitute consideration for declared services. It highlighted the necessity of a clear agreement and consideration for an activity to be taxable under Section 66E(e).Final Determinations on Each IssueThe Tribunal set aside the demands for service tax on liquidated damages and LPC, along with the associated interest and penalties. It allowed the appeals with consequential relief, affirming that the appellant's actions did not fall within the scope of declared services under the Finance Act, 1994.