CESTAT Holds Liquidated Damages of Brahmos Aerospace Not Taxable as ‘Consideration for Tolerating an Act’ u/s 66E(e) [Read Order]

In a recent ruling, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT),Hyderabad Bench has set aside a service‑tax demand against Brahmos Aerospace Pvt Ltd, holding that payments received as Liquidated Damages (LD) for delayed contractual performance cannot be treated as consideration for any taxable service under Section 66E(e) of the Finance Act, 1994.

The dispute arose after the Central Tax Department observed that appellant, Brahmos, had received certain payments in the nature of penalty for not adhering to the time limit prescribed in the agreement, and therefore, the said amount was considered Liquidity Damage (LD).

The company was “tolerating an act,” which constitutes a declared service under Section 66E(e). Because of that, the adjudicating authority confirmed the tax demand and imposed penalties.

Appearing for the appellant,  M.V.S. Prasad argued that the issue was no longer res integra, already settled by several tribunal decisions, including the Hyderabad Bench’s own ruling in Brahmos’s earlier case and he cited precedents such as Airport Authority of India v. CST Delhi, South Eastern Coalfields Ltd v. CCE, and Inox Air Products Pvt Ltd v. CCE, all of which held that LD is not taxable.

After hearing both sides, the bench comprising A.K. Jyotishi (Technical Member ) and  Angad Prasad (Judicial Member) observed that the question, whether LD or penalty amounts can be considered consideration for a declared service, has been conclusively answered by coordinate benches.

Referring to its own earlier decision and the ruling in Bharat Dynamics Ltd v. Commissioner, the tribunal reiterated that “held that no service tax is payable on the amount collected towards LD.”

Accordingly, the tribunal set aside the impugned order and allowed the appeal.

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