Relief for Eastern Coalfields: CESTAT Rules Recovery of Liquidated Damages from Suppliers for Breach of Contract Not Declared Service [Read Order]
CESTAT held that recovery of liquidated damages from suppliers for breach of contract is not a declared service and is not liable to service tax.
The Kolkata Bench of the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the recovery of liquidated damages from suppliers for breach of contract is not a declared service under Section 66E(e) of the Finance Act, 1994, and is not liable to service tax.
Eastern Coalfields Limited, the appellant, deducted liquidated damages from the invoices of suppliers who failed to meet contractual terms. The department treated such deductions as consideration for “tolerating an act” under Section 66E(e) and issued a show cause notice demanding service tax for the period 2013-14 to 2015-16.
The adjudicating authority confirmed the demand, which was later upheld by the Commissioner (Appeals). Aggrieved by the decision, the appellant approached the tribunal.
The appellant’s counsel argued that liquidated damages are in the nature of compensation for breach of contract and not consideration for any service. They contended that there was no agreement to tolerate any act in exchange for consideration, and the recovery was only a contractual remedy for non-performance.
The counsel relied on tribunal decisions in South Eastern Coalfields Ltd. v. CCE, Raipur and Mahanadi Coalfields Ltd. v. CCE, Rourkela, which held that liquidated damages, penalties, and forfeiture of earnest money are not taxable under Section 66E(e). The appellant also referred to CBIC Circular No. 214/1/2023-ST dated 28.02.2023, which clarified that such recoveries do not constitute declared services.
The revenue’s counsel argued the findings of the lower authorities and argued that the amounts recovered for breach of contract represent consideration for tolerating the act of non-performance and are taxable.
The two-member bench comprising R. Muralidhar (Judicial Member) and K. Anpazhakan (Technical Member) accepted the appellant’s arguments. The tribunal observed that the issue is already settled by earlier decisions and clarified by CBIC.
The tribunal explained that for an activity to be taxable under Section 66E(e), there must be an express agreement to tolerate an act for consideration. In the present case, the deduction represented compensation for breach, not payment for any service.
The tribunal set aside the demand and held that liquidated damages are not taxable as declared services under Section 66E(e). The appeal was allowed with consequential relief to the appellant.
Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
