TaxTMI 
TaxTMI 
2026 (1) TMI 1491
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....earnest money and fines/penalties, liquidated damages against delayed completion of works is chargeable to service tax under Section 66E(e) of the Finance Act, 1994 [Act, 1994] 2. The appellant, a Government Company established to carry out power transmission functions in Uttarakhand. During audit, officers examined the appellant's books for the period 01.07.2012 to 31.03.2016 and noted that several contractors such as M/s. Hythro Power, Shri Krishna Constructions and others failed to perform their contractual obligations in time. As per the contractual terms, the appellant invoked bank guarantees and forfeited earnest money/performance securities and levied penalty. These sums were never charged as price for any service but were automat....
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....nfirmed the demand of Rs.7,98,78,160/- and penalty of equivalent amount under Section 76 and penalty of Rs.10,000/- under Section 77 of the Act. Hence, the present appeal has been filed before this Tribunal. 4. Both sides agreed that the issue is no longer res integra and has been settled by the Tribunal in the following cases:- (1) South Eastern Coalfields Ltd. Vs. CCE & ST, Raipur [2021 (55) GSTL 549 (Tri.-Delhi)] (2) CCE & ST, Raipur Vs. South-Eastern Coalfields Ltd. [11.07.2023 in Civil Appeal No.2372/2021] (3) Hindustan Zinc Limited Vs. Commissioner of CGST & Central Excise, Udaipur. [Final Order No.50474/2025 dated 8.4.2025] (4) Hindustan Zinc Limited Vs. Commissioner of CGST & Central Excise, Ud....
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....he obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. There has, therefore, to be a flow of consideration from one person to another when one person agrees to the obligation to refrain from an act, or to tolerate an act, or a situation, or to do an act. In other words, the agreement should not only specify the activity to be carried out by a person for another person but should specify the : (i) consideration for agreeing to the obligation to refrain from an act; or (ii) consideration for agreeing to tolerate an act or a situation; or (iii) consideration to do an act. 26. Thus, a service conceived in an agreement where one person, for a consideration, agrees to an ob....
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.... that is payable for the taxable 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 be....
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....nt view has been taken that the amount charged has necessarily to be a consideration for the taxable service provided under the Finance Act and the amount which has no nexus with the taxable service is not a consideration for the service provided and therefore, does not become part of the value which is taxable. Such amounts have been held to be in the nature of penal charges on account of breach or non-performance of contract and are recovered with the intention to make good for the losses and to also act as a deterrent to ensure that buyer or supplier do not violate the terms of the contract. These amounts cannot be termed as 'consideration' in lieu of any service under Section 65B (44) of the Act. Further, it has been laid down that an a....