TaxTMI 
TaxTMI 
2026 (7) TMI 1541
X X X X Extracts X X X X
X X X X Extracts X X X X
....t Nigam Ltd (RINL), challenging the respective Orders-in-Appeal, whereby, the service tax demand along with interest and penalties has been confirmed on the amount received by the appellant as 'despatch money' from foreign buyers. 2. Since common questions of fact and law are involved in all the appeals, the same are taken up together for disposal by this common order. 3. The facts of the case, in brief, are that the appellant is a Government of India Undertaking engaged in manufacture and sale of iron and steel products. The goods are sold in domestic as well as export markets. The dispute relates to export transactions undertaken on FOB (Free on Board) basis. Under the terms of export contracts, the goods are delivered by the appell....
X X X X Extracts X X X X
X X X X Extracts X X X X
....not consideration for any service. It has been argued that despatch money is merely an incentive for faster turnaround of the vessel and is in the nature of bonus/incentive/liquidated adjustment under the contract. 8. Learned Counsel has also submitted that contractual clauses clearly show that demurrage and despatch are two sides of same contractual mechanism - one penalizes delay, while other rewards efficiency. 9. It has been further argued that there is no independent service agreement between the appellant and the vessel owner. The appellant merely performs contractual obligation arising from the sale contract. The despatch money cannot be artificially separated from the main contract and subjected to tax. Reliance has been place....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appellant? B) Whether despatch money is merely an incentive/contractual adjustment akin to demurrage and non-taxable consideration? C) Whether service tax demand, interest and penalties are sustainable? 14. The entire controversy centers around true character of despatch money. It is undisputed that despatch money becomes payable only when loading is completed before expiry of agreed laytime. Likewise, if loading exceeds laytime, demurrage becomes payable by the appellant. Thus, both demurrage and despatch arise from the same contractual clause governing time efficiency in loading/unloading operations. 15. The fundamental question is whether receipt of despatch money can be treated as consideration for an independen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ty 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 noncompliance." 17. Even this Bench in the case of M/s Rashtriya Ispat Nigam Ltd Vs CCE & ST, Visakhapatnam-I [Final Order No. A/30151/2026 dt.13.03.2026], held that nature of demurrage, liquidity damages, etc., cannot be subjected to service tax as they are conditions of the contract and not a consideration for executing the contract. The relevant para is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n order to cover it under the category of port service and assume that the despatch money paid is the consideration for this agreed upon activity. It is more in the nature of demurrage, liquidity damages, etc., which cannot be subjected to service tax as they are conditions of the contract and not a consideration for executing the contract." 18. We find considerable force in the appellant's argument that despatch money is akin to incentive or contractual price adjustment. Demurrage and despatch are reciprocal clauses. If demurrage is a contractual compensation for delay, despatch is nothing but incentive for faster performance. Neither creates an independent service. A contract as a whole must be read harmoniously. Revenue's attempt to i....