AVVNL Vs Principal Commissioner of CGST & Central Excise (CESTAT Delhi)
The CESTAT Delhi addressed an appeal by AVVNL, a public sector company, challenging a service tax demand of Rs. 2,39,18,841/-. This demand was levied on amounts AVVNL recovered as “Penalty” and “Recovery” from suppliers for breaches of contract, such as delivery delays and short-weighted goods, between April 2013 and June 2017. The revenue argued that these recoveries constituted consideration for “declared services” under Section 66E(e) of the Finance Act, 1994. AVVNL contested this, citing a series of judicial precedents that established penalties are not payments for services.
The CESTAT ruled in favor of AVVNL, determining that the recovered penalty amounts did not constitute consideration for any service provided. The tribunal relied heavily on the South Eastern Coalfields Ltd. case, where it was held that penalties are intended to safeguard commercial interests and are not payments for tolerating a contractual breach. The tribunal emphasized that the core purpose of a contract is the provision of goods or services, not the imposition of penalties. Consequently, the CESTAT concluded that the amounts recovered by AVVNL were not subject to service tax under Section 65B(44) of the Finance Act, which defines “service.” The impugned order was set aside, and AVVNL’s appeal was allowed.
