Service Tax cannot be levied on Liquidity Damages: CESTAT allows BHEL's appeal [Read Order]

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad Bench, allowed Bharat Heavy Electricals Ltd (BHEL) ‘s appeal and held that service tax cannot be levied on liquidity damages.

The facts of the case are that the appellant, BHEL, entered into contracts for supply of certain materials and services and while placing the purchase orders, it contained a penalty clause for recovering charges towards ‘liquidity damages’, which stipulated that on delay caused by the supplier, the supplier was required to pay a penalty at a rate specified per week. The department noticed the substantial amount as ‘liquidity damages’ and felt that it was a consideration which was liable to service tax as ‘declared service’ under Section 66E(e) of the Finance Act, 1994.

The appellant was represented by Ch. Sumanth while the Commissioner of Central Tax, Visakhapatnam - GST (Respondent) was represented by V. Srikanth Rao. The counsel for the appellant submitted that service tax on liquidity damages has been held to be not leviable as per Bharat Dynamics Ltd v. CCT, Hyderabad-GST (2025).

The tribunal noted that these liquidity damages were charged only when the supplier failed to deliver goods within the time limit specified in the contract. CESTAT observed that the contention of the appellant deserves merit and the issue whether ‘liquidity damages’ can be subjected to service tax is no longer res integra.

The bench of A. K. Jyotishi (Technical Member) and Angad Prasad (Judicial Member) held that no service tax can be levied on liquidity damages and allowed the appeal, accordingly.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates