ONGC wins Service Tax Case: CESTAT rules Liquidated Damages not Taxable u/s 66E(e) [Read Order]

In a significant ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, set aside a service tax demand raised against Oil & Natural Gas Corporation Ltd. (ONGC), holding that amounts collected as liquidated damages and other related penalties do not attract service tax under Section 66E(e) of the Finance Act, 1994.

The appellant, M/s. Oil & Natural Gas Corporation Ltd., through its Keshav Dev Malviya Institute of Petroleum Exploration in Dehradun, was served with a show cause notice dated 20.08.2018, alleging non-payment of service tax on amounts received in the form of liquidated damages, forfeiture of security deposits, earnest money deposits, and fines or penalties from contractors and vendors. The adjudicating authority had earlier confirmed the demand by treating these recoveries as a “Declared Service” under Section 66E(e), which includes services relating to “agreeing to the obligation to tolerate an act.”

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However, ONGC contended that these deductions were made solely as compensation for breach of contractual obligations, and not for any independent agreement to tolerate non-performance or delay. The appellant further submitted that such penal clauses are built into contracts to safeguard commercial interests, and not to provide or accept any service.

The bench comprising Binu Tamta, Member (Judicial), and Hemambika R. Priya, Member (Technical), accepted ONGC’s arguments and observed that the issue had already been adjudicated by multiple benches of the Tribunal, including the Principal Bench in the case of South Eastern Coalfields Ltd. The Tribunal reiterated that liquidated damages, penalties, and forfeited amounts are not consideration for any service and hence do not constitute a taxable activity under Section 66E(e).

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The bench noted that penal clauses in contracts are designed to deter default and ensure adherence to terms, and not to generate revenue through taxability. It further held that in the absence of an independent agreement to tolerate or refrain from an act, such compensatory recoveries cannot be treated as services for the purpose of taxation.

The Tribunal also addressed ONGC’s alternative plea concerning amounts received from vendors located outside India. However, since the case was already decided in ONGC’s favour on merits, the bench did not delve into the issue of export of services or place of provision.

The CESTAT accordingly set aside the impugned Order-in-Original dated 08.07.2019 and allowed the appeal filed by ONGC.

To Read the full text of the Order CLICK HERE

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