CESTAT Rules ONGC Not Liable to Pay Service Tax on Liquidated Damages from Overseas Contractors
Pranav B Prem
The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has ruled that Oil & Natural Gas Corporation Ltd. (ONGC) is not liable to pay service tax on liquidated damages received from contractors located outside India. The tribunal bench, comprising Hon'ble Ms. Binu Tamta (Judicial Member) and Hon'ble Ms. Hemambika R. Priya (Technical Member), held that the amount received from overseas contractors or vendors is deemed to have been provided outside India and, therefore, does not attract service tax liability under Indian law.
Background of the Case
ONGC, engaged in the exploration of oil and natural gas, is registered with the Service Tax Authorities. The Directorate General of GST Intelligence (DGGSTI), previously known as the Directorate General of Central Excise, Delhi, conducted an inquiry alleging that ONGC had collected an amount of Rs.34,13,05,380 in the form of fines, penalties, liquidated damages, and forfeiture of performance guarantees, Earnest Money Deposits (EMD), security deposits, and bid security. These amounts were received as compensation for losses incurred due to contractors' failure to provide services within the stipulated time or for breach of contractual terms. The department contended that these amounts were received in exchange for "tolerating the act" of non-performance, substandard work, or breach of contract, thereby making them taxable under Section 66E(e) of the Finance Act, 1994, which categorizes such payments as "Declared Services."
CESTAT's Observations and Findings
The tribunal analyzed whether the collection of liquidated damages, fines, and penalties by ONGC constituted a taxable service under Section 66E(e) of the Finance Act, 1994. The bench observed that penalties and damages are imposed to deter non-compliance and to compensate for losses, rather than to provide a service.
Citing previous judgments, including South Eastern Coalfields Ltd. v. CCE [(2021) 55 GSTL 549 (Tri.-Del.)], the tribunal reiterated that penal clauses serve as safeguards to commercial interests rather than as a means of rendering a service. The judgment noted: "The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted." Further, the tribunal relied on the Supreme Court's decision in Union of India v. Intercontinental Consultants and Technocrats [(2018) 10 GSTL 401 SC] to reinforce that the mere existence of a penal clause does not automatically convert liquidated damages into a service taxable under Section 66E(e).
Non-Taxability of Services Rendered Outside India
Another critical aspect of the tribunal’s ruling was that liquidated damages received from contractors located outside India cannot be taxed under Indian law. CESTAT examined Rule 3 of the Place of Provision of Services Rules, 2012, which states that when the recipient of a service is outside India, it qualifies as an export of service and is not taxable. The tribunal held: "The amount received from the contractors or vendors located abroad would be deemed to have been provided outside India and cannot be taxed in India." This view was reinforced by judicial precedents such as Indian Association of Tour Operators v. Union of India [(2017) 5 GSTL 4 (Del.)] and Mohit Minerals Pvt. Ltd. v. Union of India [(2022) 61 GSTL 257 (SC)], where courts held that services provided outside the taxable territory are beyond the ambit of service tax.
CESTAT's Final Decision
Considering these findings, CESTAT categorically ruled in favor of ONGC, setting aside the service tax demand and observing that: "The amount received from the recipients located abroad is hereby set aside. The order deserves to be set aside. The appeal is, accordingly, allowed."
Appearance
For Appellant: Ms. Sukriti Das and Ms. Daliya Singh, Advocates
For Respondent: Ms. Jaya Kumari, Authorized Representative
Cause Title: M/s. Oil & Natural Gas Corporation Ltd. Versus Commissioner of Central Goods & Service Tax, Dehradun
Case No: Service Tax Appeal No.52596 of 2019
Coram: Hon’ble Ms. Binu Tamta [Member (Judicial)], Hon’ble Ms. Hemambika R. Priya [Member (Technical)]
[Read/Download order]
