No Service Tax Is Payable On Amount Collected Towards Liquidated Damages: CESTAT
Pranav B Prem
The Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT), comprising Angad Prasad (Judicial Member) and A.K. Jyotishi (Technical Member), has ruled that no service tax is payable on the amount collected towards liquidated damages (LD). The bench categorically observed that such amounts cannot be considered as receipts towards any service per se; hence, there is no liability to pay service tax on the LD amount collected by the appellant, M/s Bharat Dynamics Ltd.
Background
The appeal was filed by M/s Bharat Dynamics Ltd, a Government of India undertaking under the Ministry of Defence, against the order passed by the Principal Commissioner of Central Tax, Hyderabad. The adjudicating authority had earlier confirmed the demand of service tax on the amount received by the appellant on account of liquidated damages (LD) from its vendors or contractors.
The issue involved in the appeal was whether the demand of service tax on liquidated damages or penalties recovered by the appellant, under Section 66E(e) of the Finance Act, 1994, was legally sustainable.
The case arose after the department demanded service tax from the appellant on LD collected from vendors/contractors for alleged non-fulfilment or delay in contractual obligations. The department had treated the LD as taxable under the declared service category as defined under Section 66E(e) of the Finance Act, claiming that such receipts were in the nature of consideration for tolerating an act or situation.
Appellant’s Submissions
The appellant, represented by its counsel, argued that the demand was unsustainable in law, as the issue was no longer res integra. In support, the appellant relied upon several judicial pronouncements where similar demands had been set aside, including:
South Eastern Coal Fields Ltd. Vs. CCE & ST, Raipur [2021 (55) GSTL 549 (Tri-Del)]
Steel Authority of India Ltd., Salem Vs. CGST & CE [2021 (7) TMI 1092 (Chennai)]
Bharat Heavy Electricals Ltd. Vs. CCT, Medchal-GST
Sembcorp Energy India Ltd. Vs. CCT, Hyderabad-GST [2023 (385) ELT 245 (Tri-Hyd)]
Krishnapatnam Port Co. Ltd. Vs. CCE & ST, Guntur [2023 (72) GSTL 259 (Tri-Hyd)]
MP State Mining Corporation Ltd. Vs. Principal Commissioner, CGST & E, Bhopal [2023 (10) CENTAX 253 (Tri-Del)]
The counsel pointed out that in the appellant’s own previous case, the Tribunal had set aside the demand on LD vide Final Order No. A/30130/2022 dated 14.09.2022. The counsel argued that liquidated damages are not in the nature of service consideration but a mere compensation for breach or delay under contract terms and hence cannot attract service tax under Section 66E(e).
Department’s Stand
The department’s representative accepted that the issue is no longer res integra. It was admitted that the earlier order passed by the Tribunal in favour of the appellant on identical facts and circumstances had already been accepted on merits by the department.
Tribunal’s Observations
After hearing both sides and examining the records, the Tribunal noted that the controversy revolved around the demand raised on LD collected by the appellant from vendors and contractors. The department sought to classify this under the taxable category of "agreeing to the obligation to refrain from an act or to tolerate an act or a situation" under Section 66E(e) of the Finance Act, 1994.
However, the Tribunal placed reliance on judicial precedents that clearly distinguished LD as compensation rather than consideration for any service rendered or agreed to be rendered. It referred to the ruling in Steel Authority of India Ltd. and South Eastern Coal Fields Ltd., where the demand of service tax on LD was set aside on the ground that LD cannot be considered as a service by itself, nor as an activity for which any service recipient is compensated.
Importantly, the Tribunal also referred to its own earlier decision in the appellant’s case itself (Final Order No. A/30130/2022 dated 14.09.2022) where similar demands had been quashed. In view of these facts, the Tribunal held that the adjudicating authority’s decision to confirm the service tax demand on LD was not legally sustainable.
Decision
Concluding the matter, the Tribunal set aside the impugned order dated 16.03.2020 passed by the Principal Commissioner of Central Tax, Hyderabad, and allowed the appeal filed by M/s Bharat Dynamics Ltd. The bench categorically held that there is no leviability of service tax on amounts collected towards liquidated damages as such amounts are not receipts towards any service under the Finance Act. The appeal was allowed with consequential relief, as per law.
The CESTAT Hyderabad Bench reaffirmed the established legal position that liquidated damages collected for breach or delay under contract terms are compensatory in nature and cannot be subjected to service tax under the category of declared service. Accordingly, the demand raised by the department was set aside, granting relief to M/s Bharat Dynamics Ltd.
Appearance
Shri Siddhant Indrajit, Advocate for the Appellant.
Shri M. Anukathir Surya, AR for the Respondent.
Cause Title: Bharat Dynamics Ltd V. Commissioner of Central Tax Hyderabad – GST
Case No: Service Tax Appeal No. 30173 of 2020
Coram: Hon'ble Mr. A.K. Jyotishi [Member (Technical)], Hon'ble Mr. Angad Prasad [Member (Judicial)]
[Read/Download order]
