Northern Coalfields Ltd. Vs Commissioner CGST (CESTAT Delhi)
The Central Excise and Service Tax Appellate Tribunal (CESTAT), Delhi, allowed the appeal filed by Northern Coalfields Limited (NCL) against the Commissioner’s order demanding service tax, interest, and penalty. The dispute centered on whether amounts received by NCL as compensation/penalty from coal buyers for short-lifted/un-lifted coal, from contractors for breach of contract, and as liquidated damages from suppliers constituted a taxable “declared service” under Section 66E(e) of the Finance Act, 1994, specifically “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act.” The Department argued that by collecting these amounts, NCL was essentially being compensated for tolerating the non-performance of contractual terms by the other parties.
However, CESTAT relied on its previous ruling in the South Eastern Coalfields Ltd. case, which held that penal clauses in contracts are safeguards for commercial interests and that recovering sums under these clauses is not the primary intention behind the contract for an agreed consideration. The Tribunal emphasized that the purpose of imposing penalties is to ensure compliance, not to tolerate defaults. It further noted that “service” under Section 65B(44) involves an activity carried out for consideration, and the recovery of penalties cannot be considered consideration for a service per se, as there is no intention from either party for a breach to occur. CESTAT also cited a 2022 circular from the Department of Revenue clarifying that payments like liquidated damages are not consideration for tolerating an act but rather amounts recovered for not tolerating a breach, thus not constituting a taxable supply. Consequently, CESTAT concluded that the amounts collected by NCL did not fall under the definition of a taxable declared service, setting aside the Commissioner’s order and allowing NCL’s appeal.
