The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Delhi bench has held that the penalty collected from a contractor, being ‘liquidated damages’ in nature, shall not attract service tax liability.
The department was of the view that the assessee, M. P. Audyogik Kendra Vikas Nigam (Indore) Limited, is liable to service tax on the amount of penalty (liquidated damages) collected from their contractor.
According to the department, during the period 2016-17, the appellant-assessee has received or collected an amount of Rs. 6,94,225/- and during the period April, 2017 to June, 2017 they have recovered an amount of Rs. 39,500/-, totaling Rs. 7,36,725/-.
After hearing rival contentions, Mr. Anil Choudhary, Member (Judicial) has held that under the facts and circumstances there is no contract between the appellant and their contractor – to refrain from an act or to tolerate an act or a situation or to do an act in favor of their contractor or to tolerate any act or situation.
“Further, for such alleged act or tolerance, no remuneration is prescribed in the contract. The amount of liquidated damages levied by the appellant from their contractor is in the nature of the penalty, and not by way of any consideration for any service as defined under Section 66E(e). This Tribunal in the case of Lemon Tree Hotel (supra) under the fact that their customer used to book accommodation by making an advance payment, and upon cancellation of the booking, the hotel was retaining or forfeiting some of the advance deposit in the nature of penalty, by way of cancellation charges. This Tribunal held that the said amount collected by the hotel is in the nature of penalty, and not a consideration as defined under Section 66E(e) of the Finance Act, 1994,” the Tribunal held.
Mr. Ankur Upadhyay, Advocate represented the appellant-assessee.
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