Relief to BHEL: CESTAT Rules Liquidated Damages Not Liable to Service Tax [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai bench has ruled that liquidated damages are not subject to Service Tax. This ruling came in response to the appeal filed by M/s. Bharat Heavy Electricals Limited (BHEL), Vellore, Tamil Nadu, against the Commissioner of Goods and Services Tax (GST) and Central Excise, Chennai.

The dispute began when the Commissioner of GST and Central Excise, Chennai Outer Commissionerate, issued a Show Cause Notice (SCN) to BHEL in April 2018. The notice proposed a demand of Rs.4,86,41,012/- towards Service Tax on liquidated damages that BHEL had recovered from suppliers and contractors for delays in supply and service contracts.

The main issue was whether liquidated damages, which BHEL had been charging and recovering from outstanding payments due to suppliers and service providers for delays in supply and service contracts, should be subject to Service Tax.

Liquidated damages are a common practice in contracts, where parties agree in advance on the compensation to be paid in case of a breach of contract.

The appellant, represented by Shri Raghav Rajeev denied any liability for Service Tax on these liquidated damages and contested the allegations citing several judgments where the demand for Service Tax on liquidated damages had been set aside including the cases of Neyveli Lignite Corporation Ltd. v. Commissioner of Cus., C.Ex. & S.T. [2021 (53) G.S.T.L. 401 (Tri. – Chennai)], Steel Authority of India Ltd., Salem v. Commissioner [2021 (7) TMI 1092 – CESTAT, Chennai, South Eastern Coalfields Ltd., M.P. Poorva Kshetra Vidyut Vitran Co. Ltd., Bharat Heavy Electricals Ltd., and Dy. GM (Finance), BHEL.

The appellant also highlighted Circular No. 214/1/2023-Service Tax dated 28.02.2023, where the Central Board of Indirect Taxes and Customs accepted the views of the CESTAT and decided not to pursue appeals before the Supreme Court against similar orders.

Furthermore, they also referenced Bharat Heavy Electricals Ltd. v. Commissioner of G.S.T. & C.Ex., Tiruchirappalli [2023 (4) TMI 1196 – CESTAT, Chennai], where the CESTAT Chennai Bench had already decided in favour of BHEL regarding the same issue.

The respondent revenue, represented by Smt. Anandalakshmi Ganeshram argued that these damages constituted “declared services” as per Section 66E(e) of the Finance Act, 1994, and therefore attracted Service Tax.

The two-member bench comprising Mr. P. Dinesha (Judicial Member) and (Technical Member) Mr. M. Ajit Kumar ruled that the demand for Service Tax on liquidated damages was not justified. The decision was based on the consistent rulings in similar cases and the government’s decision not to contest them further.

The bench concluded that liquidated damages should not be subjected to Service Tax.

In result, the CESTAT allowed the appeal filed by BHEL and quashed the order that imposed Service Tax on liquidated damages.

To Read the full text of the Order CLICK HERE

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