Service Tax Not Payable on liquidated damages collected from supplier on account of non-performance of the contracts: CESTAT [Read Order]

The Bangalore bench of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that service tax is not payable on liquidated damages collected from suppliers on account of non-performance of the contracts.

The short issue for consideration is whether non-payment of service tax on the liquidated damages collected from the supplier on account of non-performance of the contracts, delay in performance of the contracts or not meeting the quality, delay in supplies of material or service, etc., is chargeable to service tax.

The issue has been considered by the Principal Bench in NMDC Ltd., the  appellant’s own case vide Final Order No.51664/2023 dated 11.11.2023, after analysing the judgments. In South Eastern Coalfields, the Tribunal held that since liquidated damages recovered on account of breach or non-performance of contract are not a consideration for any service but are like deterrent imposed so that such a breach or non-performance is not repeated service tax would not be leviable on the amount so collected.

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The Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs also provides that service tax cannot be levied on the amount collected for the said purpose.

The issue also came up in the CESTAT  in the case of M/s Dy. GM (Finance) Bharat Heavy Electricals Ltd in which the Tribunal relied on the judgment of divisional bench in case of M/s South Eastern Coal Fields Ltd Vs. CCE Raipur (2021 (55) G.S.T.L 549(Tri-Del)).

It was clarified that the activities contemplated under section 66E(e), i.e. when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity. Field formations are advised that while taxability in each case shall depend on facts of the case, the guidelines discussed above and jurisprudence that has evolved over time, may be followed in determining whether service tax on an activity or transaction needs to be levied treating it as service by way of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Contents of Circular No. 178/10/2022GST dated 3rd August, 2022, may also be referred to in this regard.

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In view of the decision of the Tribunal in South Eastern Coalfields and the Circular dated 28.02.2023 issued by the Central Board of Indirect Tax and Customs, the contention advanced by the counsel for the appellant has to be accepted. 

A two-member bench of Dr. D.M. Misra, Member (Judicial) and  Mrs. R. Bhagya Devi, Member (Technical) set aside the impugned order and allowed the appeals with consequential relief.

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