Case Law Details
Bharat Heavy Electricals Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Hyderabad, allowed the appeal filed by Bharat Heavy Electricals Ltd. against the Order-in-Appeal dated 30.01.2020, which had upheld the Order-in-Original dated 14.08.2018 confirming service tax demand of ₹55.59 lakh along with equal penalty.
The dispute related to amounts collected by the appellant from vendors and suppliers as “liquidity damages” under contractual penalty clauses. The contracts entered into by the appellant for supply of goods and services contained clauses providing that, in case of delay by the supplier or service provider, specified amounts would be recovered as penalty per week or part thereof.
The department observed that substantial amounts had been collected by the appellant as liquidity damages during the period from 01.07.2012 to 30.06.2017. According to the department, these amounts represented consideration for tolerating an act and were therefore taxable as “declared service” under Section 66E(e) of the Finance Act, 1994. Consequently, service tax demand was raised on the amounts collected as liquidity damages.
The appellant argued that the issue was already settled by several Tribunal decisions holding that service tax is not leviable on liquidity damages. Reliance was placed on the Hyderabad Bench decision in Bharat Dynamics Ltd. v. CCT, Hyderabad-GST, where under similar facts the Tribunal had held that amounts recovered as liquidated damages or penalties from vendors could not be treated as consideration for any service and therefore were not liable to service tax under Section 66E(e). The appellant also referred to decisions including Steel Authority of India Ltd., Salem v. CGST & CE and South Eastern Coal Fields Ltd. v. CCE & ST, Raipur.
The Tribunal noted that the demand in the present case was entirely based on amounts collected as liquidity damages from suppliers and service providers due to delayed performance of contractual obligations. The appellant deducted amounts ranging from 0.5% to 1% of the contract value per week of delay, subject to specified maximum limits of 5% or 10%. These deductions were invoked only when suppliers failed to deliver goods or perform services within the agreed timelines.
CESTAT observed that the issue regarding taxability of liquidated damages was no longer res integra and that coordinate benches had consistently held that no service tax could be levied on such amounts because they did not constitute consideration for any service. The Tribunal found that the ratio of earlier decisions squarely applied to the facts of the present case.
Accordingly, the Tribunal held that the impugned order confirming service tax liability on liquidity damages was not legally sustainable. The Order-in-Appeal was set aside and the appeal was allowed.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s Bharat Heavy Electricals Ltd (hereinafter referred to as the appellant) are in appeal against OIA dt.30.01.2020, whereby, the Commissioner (Appeals) has upheld the OM dt.14.08.2018, wherein, the adjudicating authority has confirmed demand of Rs.55,59,272/- along with equal penalty.
2. The brief facts of the case are that the appellants were entering into various types of contracts for supply of certain materials and services and while placing the purchase orders, it contained a penalty clause for recovering charges towards ‘liquidity damages’, which stipulated that on delay caused by the supplier, the supplier was required to pay a penalty at a rate specified per week or part thereof. The department noticed that they had received substantial amount as ‘liquidity damages’ from their vendor/supplier, etc., and felt that the said amount is consideration towards an act of tolerance, which is liable to service tax as ‘declared service’ under clause (e) of section 66E of the Finance Act, 1994 w.e.f. 01.07.2012. Therefore, demand was raised in respect of liquidity damages collected for the period from 01.07.2012 to 30.06.2017.
3. Learned Advocate for the appellant submits that the issue of levying service tax on liquidity damages, as a declared service, is no longer res integra as in catena of judgments, the same has been held as not leviable to service tax by various Benches of the Tribunal. He invited our attention to the judgment of this Bench in the case of Bharat Dynamics Ltd Vs CCT, Hyderabad-GST [2025 (6) TMI 1269 – CESTAT Hyderabad], wherein, in the context of similar issue, the Bench held that the order of the adjudicating authority was not proper and legal and thereafter, set aside the said order. The relevant para is reproduced below for ease of reference.
“6. The issue involved in this appeal is whether demand of service tax on LD/penalties recovered by the appellant under section 66E(e) of the Finance Act is legally correct or otherwise. There is no dispute that the demand is based on the LD received from their vendor/contractor, which the department had felt would be liable to service tax in terms of declared service under section 66E(e). However, in view of various citations including Steel Authority of India Ltd, Salem Vs CGST & CE [2021 (7) TMI 1092 (Chennai)] and South Eastern Coal Fields Ltd Vs CCE & ST, Raipur (supra), where under the similar facts and circumstances, the Tribunals have held that no service tax is payable on the amount collected towards LD as such LD/penalty cannot be considered as receipts towards any service, per se. Therefore, in view of the same, there is no leviability of service tax on the amount of LD collected by the appellant. We also find that in their own case this Tribunal, vide Final Order No. A/30130/2022 dt.14.09.2022, has allowed the appeal of the appellant, who had come against the confirmation of demand of service tax on the amount received as LD.
7. Therefore, we do find that the Order passed by the adjudicating authority is not proper and legally tenable and accordingly, is set aside.”
4. Learned AR, on the other hand, is reiterating the findings of the Commissioner (Appeals).
5. Heard both sides and perused the records.
6. We find that it is an admitted fact that in this case, the demand has been made on the amount collected as liquidity damages by treating the same as chargeable to service tax as declared service in terms of section 66E(e). We find from the impugned order that the appellants were collecting certain amount, which they had declared as liquidity damages in their books of accounts from their supplier/service. These liquidity damages were charged only when the supplier or the service provider failed to deliver the goods or perform the service within the time limit specified in the contract. They used to deduct/reduce 0.5% / 1% of the total contract value per complete week of delay or part thereof subject to maximum of 5% / 10%. Therefore, in certain cases of purchase of goods or procurement of service, they had invoked this clause and had collected liquidity damages. The issue whether the ‘liquidity damages’ can be subjected to service tax, as a declared service or otherwise is no longer res integra as in catena of judgments, the Coordinate Benches have held that no service tax can be levied on liquidity damages. We find that the ratio of such judgments is squarely applicable in the present factual matrix.
7. In view of the discussion above, we do not find merit in the impugned order and accordingly, we set aside the said order.
8. Appeal allowed.
(Dictated and pronounced in the Open Court)
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