In a recent decision the Customs, Excise and Service Tax Appellate Tribunal ( CESTAT ), Ahmedabad Bench comprising Ramesh Nair, Judicial Member and Raju, Technical Member, quashed confirmation of service tax demand on the amount claimed to liquidated damages.
The appeal has been filed by M/s. Linde Engineering India Private Limited against the confirmation of demand of service tax on the amount claimed by the appellant to the liquidated damages.
The counsel for the appellant pointed out that the demand has been confirmed in respect of the amount received by them which they claim to be liquidated damages. The demand has been made under Section 66E(e) of the Finance Act, 1994 and that the appellants are receiving certain amounts from their vendors when vendors delay or cause some other default in the contracts, such amount is sought to be taxed under the head of 66E(e) of the Finance Act, 1994 by revenue.
The Counsel further argued that the revenue has issued circular no.178/10/2022- GST dated 3rd August 2022 and, in this regard, and in terms of the said circular, no service tax is payable.
The Bench noted that “At the time of adjudication by the commissioner and hearing before the tribunal, this circular was not available on record and therefore, the adjudicating authority could not take benefit of the same. While the issue of leviability of service tax on liquidated damages is a debatable issue, the CBIC has vide Circular No. 178/10/2022-GST clarified its stand on the subject in respect of GST.”
The Circular makes it clear that in cases liquidated damages are merely a flow of money from the party who causes a breach of the contract to the party who suffers loss or damage due to such breach, then such payments do not constitute consideration for a supply and are not taxable. If a payment constitutes a consideration for a supply, then it is taxable irrespective of by what name it is called.
Setting aside the impugned order the Tribunal concluded by noting that the circular was not available to the adjudicating authority when the matter was decided and he could not examine the issue in the light of the aforesaid circular.
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