In a recent judgement, the Delhi bench of the Customs, Excise, and Service Tax Appellate Tribunal ( CESTAT ) ruled that penalty or late delivery charges cannot be subjected to service tax under Section 66E of the Finance Act, 1994.
The appellant, Mangalam Cement Limited a manufacturer of cement and clinker, holds Central Excise Registration No. AABCM6602QXM001 and is also registered for service tax under Registration No. AABCM6602ST001. During an audit, it was observed that the appellant had declared an income of ₹38, 18,710 under the head “Other Receipts,” which was collected as penalties for dishonored cheques from customers. The amounts ranged from ₹500 to ₹1500 per dishonored cheque, in accordance with the contractual terms. The Department argued that these collections were a form of consideration and thus subject to service tax.
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Consequently, a Show Cause Notice dated 08.03.2016 was issued, and the demand of ₹15, 11,667, along with interest and penalty, was confirmed through Order-in-Original No. 11/ST/2017 dated 28.11.2017. This order was subsequently upheld by the Commissioner (Appeals), leading to the current appeal before the Tribunal.
Mr. B.L. Narsimhan, representing the appellant, contended that the amounts collected were penalty charges for dishonored cheques and late delivery by suppliers, not consideration for any service rendered. He argued that under Section 65B (44) of the Finance Act, 1994, for any amount to qualify as consideration, there must be a corresponding “quid pro quo,” which is absent in this case. Narsimhan further submitted that the charges were intended to compensate for losses and act as a deterrent against breach of contract.
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Relying on past rulings, he emphasized that such penal charges do not constitute taxable services under Section 66E (e) of the Finance Act. The counsel also maintained that there was no suppression of facts or fraudulent intent on the appellant’s part, as all relevant records were duly maintained. Citing the MTNL v. UOI 2023-TIOL-407-HC-DEL-ST case, he argued that the extended period of limitation was inapplicable. He further asserted that interest and penalties under Sections 75 and 78 of the Finance Act were not sustainable, as the demand itself was unsound, and there was no malafide intent involved.
On behalf of the department, S.K. Ray contended that the appellant had categorized the collections as “other income” in their accounts without paying the necessary service tax. He argued that the amounts collected as penalties for dishonored cheques and late deliveries fell within the scope of Section 66E (e) of the Finance Act, 1994, as the appellant tolerated non-compliance by customers and suppliers. He also countered the appellant’s claim regarding accidental charges under Rule 6(2)(vi) of the Service Tax Rules, 2006, by asserting that the penalties collected were over and above the amounts due, thus representing additional consideration for tolerating the breach of contract.
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The bench, comprising Judicial Member Binu Tamta and Technical Member Hemambika R. Priya, reviewed the submissions and observed that the issue had been settled in previous rulings, such as the Tribunal’s decision in M/s South Eastern Coal Fields Ltd. The bench concluded that penalties and late delivery charges could not be subjected to service tax under Section 66E of the Finance Act, 1994. Accordingly, the impugned order dated 08.01.2019 was set aside, and the appeal was allowed.
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