TaxTMI 
TaxTMI 
2025 (4) TMI 107
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....8/ 16-17 dt. 20.03.17 63 / ST.1 Adj dt. 29.7.16 On Liquidated damages 78,96,826 87,94,633 u/r.S.78 10,000 u/r.S.77 Legal fees (RCM) 6,37,826 (paid) Import Services 2,59,581 (Paid) Total 87,94,633 88,04,633 42715/ 2018 01.07.12 to 30.06.17 88/2018 dt. 21.08.18 14/2018 dt. 28.03.18 & corrigendum dt. 10.4.18 Late Payment Charges (LPC) 1,83,17,515 1,83,17,515 u/r S.78 40250 / 2019 01.10.12 to 30.06.17 113/2018 dt. 05.12.18 34/2018 dt. 30.08.18 On Liquidate d damages 3,53,62,808 3,53,62,808 u/r S.78 3. Brief facts are that M/s Bharat Sanchar Nigam Limited, Chennai Telephones, the appellant in all these appeals, are an Internet & Telecommunication Service Provider and registered under Service Tax under registration No.AABCB5576GST023. Special Audit was conducted in terms of Section 72A read with Section 83 of Finance Act by the Special Auditor appointed by the Commissioner of Service Tax, along with the officers of Internal Audit of Service Tax Commissionerate. After verification of the appellant's books of account, the Department was....
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....or tolerating the act or situation of delay in performance of the supply of equipment and service and that such liquidated damages are liable for service tax under Section 66 E (e) of Finance Act, 1994. After due process, this SCN was adjudicated vide OIO No.113/2018 dated 03.12.2018 as aforementioned. Aggrieved by the impugned orders in original, the appellant has preferred these appeals, details of which were tabulated above and are thus before this Tribunal. 4. Shri. V Ravindran, Learned Counsel appearing for the appellant submits that the appellant is one of the largest Public Sector Undertaking functioning under the Ministry of Telecommunications. The Ld. Counsel submits that Liquidated damages are amounts received for making good the damages, losses or injuries arising due to the breach of terms and conditions of the contract committed by the contractors/subcontractors of BSNL in the course of performing their obligations under the contract towards supply of goods or rendering of service. The declared services under Section 66E(e) requires agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to....
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....mits that the issue involved in this case, that is, exigibility of liquidated damages to service tax is no more res integra and the same has been decided in favour of the assessee in a number of Tribunal decisions, a few of which has been filed as relied upon. 7. Shri. Anoop Singh and Shri Sanjay Kakkar, Learned Authorised Representatives for the respondents reiterate the rationale advanced by the adjudicating authority in the respective orders in Original. Shri. Anoop Singh also submitted a Circular No.178/10-HGST/2022-GST dated 05th September 2022 issued by Excise and Taxation Commissioner-cum-Commissioner of State Tax, Haryana to contend that liquidated damages paid for breach of contract and late payment charges collected by any service provider for late payment of bills have been cited therein as examples of transactions answering the description "agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" and thus it can be seen that liquidated damages is distinct and separate from late payment charges. It is the submission of the Ld. AR that therefore the demand confirmed in the OIO 88/2018 dated 21.08.18 in so far as LPC is co....
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....d OIO, inter-alia, as under: " I am of the considered opinion, upon CBEC's clarification under Circular No.96/07/2007-ST dated 23.8.2007 that an amount collected for delayed payment of a telephone bill is not to be treated as consideration charged for providing of telecom service and, therefore, does not form part of the value of taxable service under Section 67 read with Service Tax (Determination of Value) Rules, 2006, holds good to the period after 01.07.2012. In the present case the notice itself admits that LPC amounts were charged by BSNLCT from their subscribers on the outstanding billed amount, if not paid within the due date i.e. 21 days from the bill date. In view of the legal position and factual position, I am of the view that late payment charges need not be included in the taxable value of telecommunication service provided." (emphasis in italics boldened) 10. Thereafter, citing the judgement of the Hon'ble Apex Court in UOI v. Intercontinental Consultants and Technocrats Pvt Ltd, the adjudicating authority goes on to hold that " The above case law strengthens my opinion that telephone charges are the consideration for telecommunication service an....
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....as it may, it is seen from the corrigendum to the SCN that Sl.No.5 of the terms and conditions in the Customer Application Form is as under: "5. PENAL CHARGES FOR DELAYED PAYMENT: 5.1. The payment against monthly bills beyond the stipulated date shall entail an interest charges @ 2% p.m or such other rate/fixed amount as may be decided by BSNL from time to time, over the payment from the date it became due. This however is without prejudice to the right of BSNL to suspend the services partially or fully due to non-payment." Apart from the said condition, Sl.No.6 deals with different scenarios wherein BSNL has the right to suspend and disconnect the services to the customer. 13. From a plain reading of the aforesaid condition No.5, it is clearly discernible that the appellant has in fact reserved its rights to suspend the services partially or fully due to nonpayment, without prejudice to the payment of penal charges. This only means that even if the subscriber makes the payment of penal charges, still the appellant has the right to suspend the services partially or fully. In other words, the right of the appellant to suspend the services, either partia....
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....company. Further the contractual obligation mandates/authorizes the telecom company, as per the agreement [CAF] to terminate the service if the customers commit breach of the terms and conditions contained therein. However, in cases where in the Customer willfully defaulted in terms of their monthly bill payment, the telecom company is authorized to charge an extra amount which they labeled as 'Surcharge / Late Payment Charges which they collected at the applicable predetermined rates from time to time in terms of the contractual enablement in the agreement [CAF] unconditionally agreed upon by the Customers. Thus, if any Customer defaulted in making the said payment by the prescribed due date, late payment charges is levied on him by the telecom company at applicable rates for the breach of the terms and conditions governing the payment of the amounts towards the receipt of the telecommunication services. The Customers were fully aware that in case of default they would be charged an extra amount by way of 'Surcharge/Late Payment Charges' for the said default. Further, it appears that the telecom companies did not resort to Suspension /Termination of the defaulting member&#....
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....te of being active. For example, as per Section 66E (e) of the Finance Act, 1994, 'agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act', is 'declared service' and liable to Service Tax, though there is no state of being active. Thus it can be seen that the term "activity" has very wide connotation. It could be active or passive. Therefore, it appears that the monetary value recovered by the telecom companies for tolerating the said defaults of their customers have automatically acquired the status and nature of 'consideration' to such passive activity of tolerance by the telecom companies 8 (l) (v) An analysis of the above provisions reveal that breach of contract is a legal concept in which there is a binding agreement respected by one or more of the parties to the contract is breached by non-performance or interference with the other party's performance Liquidated damages are damages whose amount the parties designate during the formation of a contract, for the injured party to collect as compensation upon a specific breach of the contract. The clause will be enforceable if it involves a genuine attempt to qu....
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....visions of service" are excluded, thereby meaning that the legislature does not intend to tax compensatory amounts/damages where there is no service involved. Further, legislative intent is not to exempt compensatory damages from the levy of service tax and this can be seen that as per the amendment to the Mega Exemption Notification list vide Notification No. 22/2016-ST dated 13.04.2015, only damages payable to the government are exempted from payment of service tax and damages payable to other non-government entities are not exempt from payment of service tax. The said view strengthens the contention that LPC paid to telecom companies are liable to service tax as liquidated damages' being paid as consideration for the said non-performance /delayed performance which appear to fall under clause (e) of Section 66E (e) of Finance Act, 1994 as a declared service as, "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" which is leviable to service tax. 8 (l) (viii) Further, either in 'Negative List' of services listed in Section 66D of Chapter V of the Finance Act, 1994, or in Mega exemption issued vide Notific....
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.... a declared service 51 11 telecommunication services 'service' as defined under Section 65B (44) which includes a declared service 52 12 - - 53 13 - - 54 14 telecommunication services as defined under Section 65B (51) of the Finance Act, 1994 'service' as defined under Section 65B (44) which includes a declared service under Finance Act, 1994. 55 14(a) telecommunication services 'service' as defined under Section 65B (44) which includes a declared service 56 14(b) - - 57 14(c) - - 58 14(d) - - 59 14(e) - - 60 14(f) - - 61 15 - - 62 15(a) the LPC amount collected should not form part of the value of taxable the LPC amount collected should not should not be classified as declared service as defined in Section 66 E (e) read with Section 65B (44) of the Finance Act, 1994 ....
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....es in these appeals therefore boil down to whether liquidated damages received by the appellant would come within the ambit of the declared services stipulated under Section 66E(e) of the Finance Act, 1994 as amended and consequently, whether the demand of service tax along with interest and penalties imposed under the impugned orders in original are tenable in law. 17. We find that we do not have to reinvent the wheel as the said issue is no more res-integra in the light of a host of judicial pronouncements. It is seen that in the case of Northern Coalfields Ltd v. Commr of CGST, CE & Cus, Jabalpur, 2023 (71) GSTL 63 (Tri-Del): (2023) 3 Centax 211 (Tri-Del), the department's proposal to levy service tax on liquidated damages as declared service under Section 66E(e) was examined and negated. The relevant portions are as under: "16. Section 65B(44) defines service to mean any activity carried out by a person for another for consideration and includes a declared service. One of the declared services contemplated under Section 66E is a service contemplated under clause (e) which service is agreeing to the obligation to refrain from an act, or to tolerate a....
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....able services provided or to be provided. 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 purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. 29. The situation would have been different if the party purchasing coal had an option to purchase coal from 'A' or from 'B' and if in such a situation 'A' and 'B' enter into an agreement that 'A' would not supply coal to the appellant provided 'B' paid some amount to it, then in such a case, it can be said that the activity may result in a deemed service contemplated under Section 66E(e). 30. The activities, therefore, that are contemplated under Section 66E(e), when one party agrees to refrain....
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....s a flow of money from one party to another. Unless there is an express or implied promise by the recipient of money to agree to do or abstain from doing something in return for the money paid to him, it cannot be assumed that such payment was for doing an act or for refraining from an act or for tolerating an act or situation. Payments such as liquidated damages for breach of contract, penalties under the mining act for excess stock found with the mining company, forfeiture of salary or payment of amount as per the employment bond for leaving the employment before the minimum agreed period, penalty for cheque dishonour etc. are not a consideration for tolerating an act or situation. They are rather amounts recovered for not tolerating an act or situation and to deter such acts; such amounts are for preventing breach of contract or non- performance and are thus mere "events' in a contract. Further, such amounts do not constitute payment (or consideration) for tolerating an act, because there cannot be any contract : (a) for breach thereof, or (b) for holding more stock than permitted under the mining contract, or (c) for leaving the employment before the agreed minimum period or (d....
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....be leviable to service tax. 3. The description of the declared service in question, namely, agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is similar in GST. "Agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act" has been specifically declared to be a supply of service in para 5(e) of Schedule II of the CGST Act, 2017. 4. As can be seen, the said expression has three limbs : - (i) Agreeing to the obligation to refrain from an act, (ii) Agreeing to the obligation to tolerate an act or a situation, (iii) Agreeing to the obligation to do an act. Service of agreeing to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act is nothing but a contractual agreement. A contract to do something or to abstain from doing something cannot be said to have taken place unless there are two parties, one of which expressly or impliedly agrees to do or abstain from doing something and the other agrees to pay consideration to the first party for doing or abstaining from such an act. Such contractual arrangement must be an independent arrange....