Booking Cancellation Charges are Compensation for Breach of Contract, not Consideration for Service; No Service Tax Applies: CESTAT [Read Order]

The Customs, Excise & Service Tax Appellate Tribunal ( CESTAT ), New Delhi, has ruled that booking cancellation charges do not attract service tax as they are compensations for breach of contract and not consideration for any service.

The decision came in the appeal filed by M/s Divine Autotech Private Limited against the Commissioner of Central Tax, Delhi.

The appellant, M/s Divine Autotech Private Limited, represented by Shri Atul Gupta and Anmol Gupta argued that booking cancellation charges are not consideration for service but are damages for breach of contract.

It was also contended that such charges are compensatory in nature and cannot be taxed under service tax. The appellant pointed out that Section 66E(e) of the Finance Act, invoked by the Commissioner, was not mentioned in the show cause notice and did not exist before 01.07.2012.

The respondent revenue, Commissioner of Central Tax, represented by Shri Anand Narayan argued that booking cancellation charges fall under the category of declared services as per Section 66E(e) of the Finance Act, which includes ‘agreeing to the obligation to refrain from an act or to tolerate an act or situation’.

The respondent asserted that these charges should be subject to service tax, as they are received in exchange for tolerating the cancellation of the booking, constituting a taxable service.

The Tribunal noted that the Commissioner of Central Tax had erroneously classified the cancellation charges under the ambit of taxable services, despite the fact that these charges are penalties for non-fulfilment of a contractual obligation.

The bench relied on several case laws, including South Eastern Coalfields Limited vs. Commissioner of C. Ex. & ST., Raipur, to substantiate that compensations for contract breaches cannot be considered taxable services.

The judgment highlighted that such charges are a form of liquidated damages and not a payment for any declared service under Section 66E(e) of the Finance Act.

The two-member bench of the CESTAT comprising Ms. Binu Tamta (Judicial Member) and Mr. P. V. Subba Rao (Technical Member) concluded that booking cancellation charges are compensatory in nature and not a consideration for any service. Consequently, they are not subject to service tax.

In result, the tribunal set aside the service tax demand on these charges, emphasising the distinction between contractual damages and taxable services.

To Read the full text of the Order CLICK HERE

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