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.
