Brahmos Aerospace Pvt Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)
CESTAT Rules Liquidated Damages Not Taxable Because They Are Not Consideration for Tolerating Delay; Service Tax Not Payable on Liquidated Damages for Contract Breach Due to Absence of Service Element; CESTAT Sets Aside Tax Demand on Delay Penalty Due to Absence of Service Element; Liquidated Damages Cannot Be Taxed Under Section 66E(e) Without Agreement to Tolerate Breach; CESTAT Hyderabad Relies on Earlier Precedents to Delete Service Tax on Liquidated Damages.
In Brahmos Aerospace Pvt Ltd Vs Commissioner of Central Tax, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeal and held that liquidated damages (LD) received for delay in performance of contractual obligations are not taxable as consideration for “tolerating an act” under section 66E(e) of the Finance Act, 1994.
The department alleged that the appellant had received payments in the nature of penalty for failure to adhere to timelines prescribed in agreements. According to the department, such amounts constituted liquidated damages and were taxable as a declared service under section 66E(e), which covers tolerating an act or situation. Based on this reasoning, service tax demand and penalty were confirmed through the adjudication order dated 31.12.2019.
