Service Tax could not have been levied on the amount recovered as Liquidated Damages: CESTAT [Read Order]

The Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that service tax could not have been levied on the amount recovered as liquidated damages.

The appellant, M/s Rajcomp Info Service Limited which is a wholly owned undertaking of the Government of Rajasthan, acts as a nodal agency in the implementation of various Information Technology related projects of the Department of Information Technology and Communication in the State Government.

The various public benefit schemes, for whose implementation the appellant had been appointed as a nodal agency, are predominantly oriented towards technological advancement of Departments. In the general scheme of events, as can be seen from the aforesaid chart, the concerned Department of the State Government, along with the Department of IT&C, prepare a report for a project. This report is given sanctity by the Apex Committee of the State Government, subsequent to which a project estimate is assigned. Considering the expertise of the appellant in execution of such projects, a formal request is extended to the appellant by the Department of IT&C for implementing the verified project. 

Thereafter, the appellant floats tenders on behalf of the concerned Department of the State Government and awards the work to one or more vendors for supply of goods and/or services. The vendor is thereafter reimbursed out of the funds sanctioned by the Department of the State Government. Wherever the appellant recovers a separate service charge from the Departments of the State Government, service tax is paid thereon, which fact has not been disputed by the Revenue.

The coram of Justice Delip Gupta and P.V.Subba Rao has ruled that a service conceived in an agreement where one person, for a consideration, agrees to an obligation to refrain from an act, would be a “declared service” under section 66E(e) read with section 65B(44) of the Finance Act and would be taxable under section 68 at the rate specified in section 66B. Likewise, there can be services conceived in agreements in relation to the other two activities referred to in section 66E(e) of the Finance Act.

The CESTAT has held that service tax could not have been levied on the amount recovered as liquidated damages. The demands confirmed against the appellant by orders that have been assailed in Service Tax Appeal therefore, cannot be sustained.

“The Commissioner has filed Service Tax Appeal No. 51698 of 2017 against that part of the order dated 16.01.2017 by which penalty against the appellant has been dropped by granting the benefit of section 80 of the Finance Act. It would not be necessary to examine whether the benefit of wavier of penalty under section 80 of the Finance Act was available to the appellant or not since the entire demand is being set aside,” the tribunal said.

To Read the full text of the Order CLICK HERE

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