Case Law Details
Bharat Heavy Electricals Limited PSWR Vs Commissioner of Central Excise and Service Tax (CESTAT Mumbai)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai first allowed the appellant’s miscellaneous application for early hearing and, with the consent of both parties, proceeded to hear and dispose of the appeal on merits. The dispute concerned the levy of service tax on liquidated damages/penalties recovered by the appellant from its suppliers and contractors for delayed completion of contractual work or delayed supply of goods.
The Service Tax Department examined the appellant’s trial balance, particularly the accounting entry titled “Recovery from suppliers/contractors towards penalty damages,” and formed the view that the amounts recovered constituted “consideration” for a declared service under Section 65E(e) of the Finance Act, 1994. Based on this interpretation, the Department issued proceedings that culminated in an adjudication order dated 24 December 2018, confirming a service tax demand of ₹6,52,76,360, along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.
The appellant submitted that it was engaged in erection and commissioning services, works contracts, and repair and maintenance of power plants, and that its contracts with suppliers and contractors contained clauses providing for liquidated damages or penalties in the event of delayed supply of goods or delayed completion of work. The Tribunal noted that the appellant had already paid service charges along with applicable service tax on the invoices raised by contractors. It held that the liquidated damages or penalties recovered due to delayed performance could not be regarded as a “service” for the purpose of levying service tax. It further held that such recoveries did not constitute “consideration” for providing any taxable service, and therefore could not form part of the taxable value.
The Tribunal observed that the issue was no longer res integra, relying on several earlier Tribunal decisions, including BHEL Bhopal, South Eastern Coalfields, MNH Shakti Ltd., Pradip Port Trust, Brahamputra C&PL, and the Supreme Court decision in Gammon India Ltd. It also noted that an earlier Tribunal order in the appellant’s own case had been accepted by the Service Tax Department, as no appeal had been filed before the Supreme Court.
The Tribunal further referred to CBIC Circular No. 214/1/2023-ST dated 28 February 2023, which clarified that the expression “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” under Section 66E(e) requires an independent contractual arrangement and a necessary and sufficient nexus between the supply and the consideration. In the present case, the Tribunal found that recovery of liquidated damages was not a routine occurrence, but arose only in cases of non-performance or delayed performance of contractual obligations. Consequently, it held that there was no sufficient nexus to treat such recoveries as consideration for any taxable service.
Holding that the issue stood settled by judicial precedents and the CBIC Circular, the Tribunal ruled that no contrary interpretation was warranted. Accordingly, it set aside the adjudication order and allowed the appeal in favour of the appellant.
FULL TEXT OF THE CESTAT MUMBAI ORDER
Heard both sides and perused the records.
The applicant/appellant has filed this miscellaneous application, seeking early hearing of the appeal. Ongoing through the averments made in the said application, we are of the view that the prayer made in support of out of turn hearing of the appeal can be considered, in the interest of justice. Accordingly, miscellaneous application filed by the applicant is allowed. Since, the issue involved in this appeal lies in a narrow compass, with the consent of both sides, the appeal is taken up for hearing and disposal today.
2. Taxability of Liquidated damages/ penalties recovered by the appellant from its suppliers and contractors for delayed completion of the assigned work is the subject matter of the present dispute. On scrutiny of the entries made in the Trial Balance under the accounting head no. 5380/81, with the narration “Recovery from suppliers/contractors towards penalty damages”, the Service Tax Department had entertained the belief that the amount recovered by the appellant from the contractors and suppliers of goods and services should be considered as “Consideration” for the provision of declared service and as such, should appropriately be classifiable under Section 65E(e) of the Finance Act, 1994 for the purpose of levy of service tax thereon. On the basis of such interpretation, the Department has proceeded against the appellant, seeking for recovery of the service tax, which culminated into the adjudication order dated 24.12.2018 (for short, referred to as “the impugned order”), wherein the learned Commissioner, CGST & CX., Nagpur has confirmed service tax demand of Rs.6,52,76,360/-along with interest and also imposed penalties under Section 77 and 78 of the Finance Act, 1994. Feeling aggrieved with the impugned order, the appellant has preferred this appeal before the Tribunal.
3. The appellant is engaged, inter-alia, in providing erection and commissioning services, works contract and repair/maintenance services of power plants. For carrying out such activities, the appellant procures the material as well as services from the contractors/ suppliers. For the said purpose, the appellant entered into various contracts, which inter-alia provide for liquidated damages/ penalty at the prescribed rate both in respect of supply of goods as well as for completion of the assigned work. The said clause in the contracts stipulates that if the contractor / job worker fails to maintain the required progress of work, which results in delay in the completion of the project work, the appellant shall impose the above charges or penalties on them. On perusal of the case records, we find that for provision of the taxable services, the appellant had paid the service charges along with service tax amount as per the claims made in the invoices. The liquidated damages / penalties recovered by the appellant for delayin completion of the work or supply of goods cannot be considered as ‘Service’, for the purpose of levy of service tax. Further, the amount received by the appellant cannot also be termed as ‘Consideration’ for provision of the taxable service. Thus, in our considered view, the amount charged by the appellant towards liquidated damages / penalty cannot form part of the taxable value for payment of service tax thereon. We find that the issue arising out of present dispute is no more res-integra, in view of the following judgments delivered by the Tribunal:-
a) BHEL Bhopal Vs. CCE [MANU/CE/0338/2022].
b) Principal Commissioner CGST-CE Vs. BHEL Bhopal [MANU/CE/0346/2022].
c) S.E. Coalfields Vs. CCE Raipur [MANU/CE/0263/2020]
d) MNH Shakti Ltd. Vs. Commissioner CGST-CE [F.O. No. 75689/2021 dated 16.09.2023].
e) Pradip Port Trust Vs. Commissioner CGST-CE [MANU/CE/0012/2022]
f) Brahamputra C&PL Commissioner CGST-CE [MANU/CIS/0039/2022].
g) Gammon India Ltd. Vs. Commissioner of Customs, Mumbai [2011 (269) ELT 289 (SC)].
4. Further, we also find that the order passed by this Tribunal in the case of the appellant itself has also been accepted by Service Tax Department inasmuch as no appeal against the said order was filed before the Hon’ble Supreme Court. Furthermore, with regard to the issue of leviability of service tax on the declared service under the category “Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act under clause (e) of Section 66E of the Finance Act, 1994”, the CBIC vide Circular No.214-1-2023-ST dated 28.02.2023 has clarified that the above expression has three limbs namely, agreeing to the obligation to refrain from an act; agreeing to the obligation to tolerate an act or a situation; and agreeing to the obligation to do an act. It has further been clarified that in order to be covered under such phrase, there must be independent contractual arrangements and must have necessary and sufficient nexus between the supply (agreement to do or to abstain from doing something) and the consideration. In the present case, it is not a matter of routine that the appellant had invariably collected the amount towards liquidated damages / penalties from each and every contract entered into between it and the service provider. Since, collection of such amount is towards delayed completion of work, which is not a regular phenomenon and arises out of non-performance of the contract in the manner prescribed, on rare occasions, it cannot be said that there are sufficient nexus between the parties on a regular basis for payment of such charges in order to abstain in proper performance of the assigned task within the scheduled time frame. Hence, such amount in our considered view, should not be equated with ‘consideration’, for the purpose of rendering any taxable service.
5. In view of the fact that the issue arising out of present dispute is no more open for any debate in view of the ratio laid down by the Tribunal and also accepted by the CBIC in terms of Circular Dated 28.02.2023 (supra), we are of the view that different interpretation cannot be placed in the present appeal for taking the contrary view. Therefore, the impugned order is set aside and appeal is allowed in favour of the appellant.
(Dictated and pronounced in the open court)
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