Madhya Pradesh Poorva Kshetra Vidyut Vitaran Company Limited Vs Commissioner of CGST & Central Excise (CESTAT Delhi)
Facts- The appellants are public sector undertakings established by the Government of Madhya Pradesh for distribution of electricity. The issue is 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.
Conclusion-
Compensation can be of two forms : un-liquidated damages or liquidated damages. If the suffering party sues the other in a court and damages are award by the court such damages are un-liquidated damages. The quantum of damages is decided by the court taking into account the facts and circumstances of the case and the damage suffered. Liquidated damages are those damages and which are built into the contract itself. They provide that the defaulting party shall pay to the other a certain amount in case of default. The 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. 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. We find no reason take a different view in this case.
FULL TEXT OF THE CESTAT DELHI ORDER
