The Delhi Bench of Customs,Excise and Service Tax Appeal ( CESTAT ) granted relief to Steel Authority of India Limited (SAIL), ruling that the forfeited amount collected on breach of contract was not liable to service tax.

Steel Authority of IndiaLimited,appellant-assessee, was engaged in trading iron and steel products manufactured by Bhilai Steel Plant. It had entered into a Conversion Agreement dated 01.06.2011 with M/s SKS Ispat & Power Ltd. for converting billets into rolled products for a per-ton consideration.

The agreement prohibited the job worker from unauthorised removal of goods, and on breach of Clause 27, the assessee claimed Rs.337 crores in damages and adjusted Rs.6.63 crores.

Following an audit, the Department treated the forfeited amount as consideration for a declared service under Section 66E(e) of the Finance Act 1994, and issued a show cause notice on 30.10.2017 for April 2014 to March 2015, demanding Rs.73,00,383 with interest and penalty.

The adjudicating authority dropped the demand, but the Department’s appeal was allowed on 30.09.2019, and the entire demand was confirmed.

The assessee counsel submitted that the liability of service tax and penalty on liquidated damages, compensation, forfeiture amounts, and cancellation charges was already settled by various decisions. It was argued that such recoveries were made due to breach or non-compliance of contractual terms and could not be treated as ‘consideration’ for refraining from or tolerating an act; hence, they were not liable to service tax.

The counsel relied on several rulings, including Hindustan Zinc Ltd., South Eastern Coal Fields Ltd., and the CBIC Circular No.214/1/2023-Service Tax dated 28.02.2023, which consistently held that amounts collected as penalties or damages had no nexus with any taxable service. These were considered penal charges aimed at compensating for losses and preventing future violations, not consideration for any service under Section 65B(44) of the Finance Act.

It was also submitted that, as clarified in these decisions, an activity could be treated as a declared service under Section 66E of the Act only when there was a separate agreement to refrain from, tolerate, or perform an act, which was not applicable in this case.

The two member bench comprising Binu Tamta (Judicial Member) and P.V.Subba Rao (Technical Member) found no merit in the impugned order, set it aside, and allowed the appeal.

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