No Service Tax can be levied on Liquidated Damages received under any Contract: CESTAT [Read Order]–TAXSCAN

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By Jwala K.P – On April 25, 2022 2:13 pm

No Service Tax - levied - Liquidated Damages - Contract - CESTAT - Taxscan

The Principal Bench of New Delhi Customs, Excise & Service Tax Appellate Tribunal (CESTAT) has held that no service tax can be levied on liquidated damages received under any contract.

The appellants M/s Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Limited, Madhya Pradesh Madhya Kshetra Vidyut Vitran Co. Ltd., and Madhya Pradesh Paschim Kshetra Vidyut Vitran Co. Ltd. are public sector undertakings established by the Government of Madhya Pradesh for distribution of electricity.

The issue before the Tribunal is that whether service tax can be levied on liquidated damages received by the appellants from the other parties who failed to perform as per the contracts.

The Tribunal observed that purpose of the liquidated damages in a contract is to dissuade the parties from reneging from the contract. In other words the liquidated damages are in terrorem, i.e., to strongly dissuade the party from defaulting. What is chargeable to service tax under Section 66 E (e) as a declared service is where the very purpose of the contract is tolerance of an Act or a situation. If (A) agrees with (B) to tolerate an act or situation for a consideration, it is covered under Section 66E (e) as declared service. However, if A agrees with B to do something and fails to do so and pays liquidated damages for his failure, it is not covered under Section 66E(e) as a declared service.

The Coram of Mr. S.K. Mohanty, Member (Judicial) and Mr. P.V. Subba Rao, Member (Technical)  by relying the decision in M/s. Southeastern Coal Fields v Commissioner of Central Excise and Service Tax held that “what is chargeable to service tax is where the tolerance itself is the purpose of the contract. Liquidated damages are a compensation for failure of the defaulting party to perform as per the contract. Therefore, no service tax can be levied on liquidated damages received under any contract”.To Read the full text of the Order CLICK HERE

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