Bharat Heavy Electricals Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)
In Bharat Heavy Electricals Ltd vs Commissioner of Central Tax, the core issue was whether liquidated damages and penalties recovered by BHEL from its contractors were subject to service tax under Section 66E(e) of the Finance Act, 1994. The tax department argued that these amounts qualified as “declared services” on the basis that they represented consideration for “agreeing to tolerate an act or a situation.” Based on this interpretation, two show cause notices were issued for the periods July 2012 to March 2017 and April 2017 to June 2017, demanding service tax totaling over ₹24 crore. The tax authority further invoked the extended limitation period, citing alleged wilful suppression of facts.
BHEL contested these demands, arguing that liquidated damages imposed for contractual breaches were not consideration for any service but a consequence of non-compliance, mutually agreed upon in the contract terms. The company contended that such penalties were not intended to tolerate any act but to deter delays or defaults. BHEL also emphasized that all related transactions were properly recorded in its financial records, negating any allegations of suppression.
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) Hyderabad sided with BHEL, referring to prior decisions including South Eastern Coalfields Ltd vs CCE & ST and Steel Authority of India Ltd vs CGST & CE, where it was established that penalties for breach of contract cannot be construed as service payments. The Tribunal reiterated that unless a contract explicitly states that a party agrees to tolerate an act in exchange for consideration, liquidated damages do not constitute a taxable service. As such, CESTAT set aside the tax demands and allowed BHEL’s appeal, also granting any applicable consequential relief under the law.
