Service tax not payable on liquidated damages collected from the contractor: CESTAT


The Delhi Bench of the Customs, Excise and Service Tax Appeal Tribunal (CESTAT) composed of Anil Choudhary (judicial member) ruled that service tax is not payable on liquidated damages collected from the contractor.

The appellant/appraised carries out an activity of provision of taxable services under the title rental of real estate, legal consultation, service of supply of labor, etc. A show cause notice has been issued under Section 66E(e) of the Finance Act, proposing to request a tax service. The application was made on the accusation of a penalty imposed and collected by the appellants from their contractors.

The show cause notice was judged on a competitive basis and the proposed requests were confirmed with an equal amount of penalty.

The appellant stated that the amount collected from the contractor was in the nature of a lump sum indemnity for non-performance. Thus, no amount is charged for any service whatsoever, as defined in Article 66E (e) of the Finance Act.

According to Section 66E(e), declared service includes accepting an obligation to refrain from an act, to tolerate an act or condition, or to perform an act.

The appellant asserted 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 damages imposed by the Appellant on his contractor was in the nature of a penalty and not in exchange for a service as defined in Article 66E(e).

Case title: MP Audyogik Kendra Vikas Nigam (Indore) Limited Versus Commissioner, Central Goods, Service Tax and Central Excise

Quote: Service charge Call No. 50774 from 2022-SM

Date: 03.06.2022

Counsel for the Appellant: Lawyer Ankur Upadhyay

Counsel for the Respondent: Tamanna Alam Authorized Representative

Click here to read/download the order

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