Service Tax Not Payable On Liquidated Damages Collected From Contractor: CESTAT

The Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) consisting of Anil Choudhary (Judicial Member) ruled that service tax is not payable on liquidated damages collected from the contractor.

The appellant/assessee is in the business of providing taxable services under the head renting of immovable properties, legal consultation, manpower supply service, etc. A show cause notice was issued under Section 66E (e) of the Finance Act, proposing to demand service tax. The demand was made on the charge of a penalty levied and collected by the appellant from their contractors.

The show cause notice was adjudicated on contest and the proposed demands were confirmed with an equal amount of penalty.

The appellant stated that the amount collected from the contractor was in the nature of liquidated damage for non-performance. Thus, there is no amount received for any service, as defined in Section 66E (e) of the Finance Act.

According to Section 66E(e), the declared service includes agreeing to the obligation to refrain from an act, to tolerate an act or a situation, or to perform an act.

The appellant claimed that there was no agreement between the parties, namely the appellant and the contractor, that the appellant would perform any of the acts specified in Section 66E(e).

The CESTAT observed that the amount of liquidated damages levied by the appellant against their contractor was in the nature of a penalty and not in exchange for any service as defined in Section 66E(e).

Case Title: M.P. Audyogik Kendra Vikas Nigam (Indore) Limited Versus Commissioner, Central Goods, Service Tax and Central Excise

Citation: Service Tax Appeal No. 50774 of 2022-SM

Dated: 03.06.2022

Counsel For Appellant: Advocate Ankur Upadhyay

Counsel For Respondent: Authorised Representative Tamanna Alam

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