Case Law Details
Brahmos Aerospace Pvt Ltd Vs Commissioner of Central Tax (CESTAT Hyderabad)
CESTAT Rules Liquidated Damages Not Taxable Because They Are Not Consideration for Tolerating Delay; Service Tax Not Payable on Liquidated Damages for Contract Breach Due to Absence of Service Element; CESTAT Sets Aside Tax Demand on Delay Penalty Due to Absence of Service Element; Liquidated Damages Cannot Be Taxed Under Section 66E(e) Without Agreement to Tolerate Breach; CESTAT Hyderabad Relies on Earlier Precedents to Delete Service Tax on Liquidated Damages.
In Brahmos Aerospace Pvt Ltd Vs Commissioner of Central Tax, the Hyderabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowed the appeal and held that liquidated damages (LD) received for delay in performance of contractual obligations are not taxable as consideration for “tolerating an act” under section 66E(e) of the Finance Act, 1994.
The department alleged that the appellant had received payments in the nature of penalty for failure to adhere to timelines prescribed in agreements. According to the department, such amounts constituted liquidated damages and were taxable as a declared service under section 66E(e), which covers tolerating an act or situation. Based on this reasoning, service tax demand and penalty were confirmed through the adjudication order dated 31.12.2019.
The appellant argued that the issue was already settled by various Tribunal decisions, including an earlier decision in the appellant’s own case through Final Order dated 08.10.2025, where it had been held that no service tax was leviable on amounts received as liquidated damages. Reliance was also placed on decisions including Airport Authority of India, South Eastern Coal Fields Ltd., Madhya Pradesh Poorva Kshetra Vidyut Vitran Co Ltd., and Inox Air Products Pvt Ltd.
The Tribunal observed that the issue was no longer res integra and referred to earlier decisions, including Bharat Dynamics Ltd. and Steel Authority of India Ltd., where it had been held that amounts collected as penalty or liquidated damages for non-compliance of contractual terms cannot be treated as consideration for tolerating an act. The Tribunal noted that the contracts did not impose any obligation on the assessee to tolerate breach or refrain from any act in exchange for consideration. It further observed that liquidated damages are compensatory in nature and not consideration for any service.
Accordingly, the Tribunal set aside the impugned order and allowed the appeal.
FULL TEXT OF THE CESTAT HYDERABAD ORDER
M/s Brahmos Aerospace Pvt Ltd (hereinafter referred to as the appellant) are in appeal against OIO dt.31.12.2019.
2. The issue, in brief, is that the department noticed that the appellants had received certain payments in the nature of penalty for not adhering to the time limit prescribed in the agreement and therefore, the said amount was in the nature of Liquidity Damage (LD). Accordingly, the department relied on the provisions under section 66E(e) of the Finance Act, 1994, which provides that an act of tolerating the delay attracts service tax as a declared service. On adjudication, the demand has been confirmed in full and penalty was also imposed.
3. Learned Advocate for the appellant submits that the matter is no longer res integra in view of various decisions of the Tribunal, including the decision of this Bench in their own case, vide Final Order No. A/30419/2025 dt.08.10.2025, wherein, it has been held that no service tax is leviable on the amount received as LD. He has relied on the following judgments.
a. Airport Authority of India Vs CST, Delhi [2015 (39) STR 35 (Tri-Del)]
b. South Eastern Coal Fields Ltd Vs CCE [2021 (55) GSTL 549 (Tri-Del)]
c. CCGST, Bhopal Vs M/s Madhya Pradesh Poorva Kshetra Vidyut Vitran Co Ltd [Order dt.13.07.2022]
d. Inox Air Products Pvt Ltd Vs CCE [2008 (232) ELT 338 (Tri-Bang)]
4. On the other hand, learned AR reiterates the findings of the Adjudicating Authority.
5. Heard both sides and perused the records.
6. We find the short question to be decided in this case is that whether the amount received as penalty or as LD can be considered as consideration for declared service or otherwise. We find that this issue is no longer res integra, as held by Coordinate Benches in various cases cited, supra. It is also important to note that in appellant’s own case for earlier period, this Bench has decided the issue in favour of the appellant, vide Final Order dt.08.10.2025 (supra). In the case of Bharat Dynamics Ltd also, this Bench has, inter alia, examined similar issue and relying on the judgment in the case of Steel Authority of India Ltd Vs Commissioner [2021 (7) TMI 1092 (Chennai)], held that no service tax is payable on the amount collected towards LD. The relevant para is cited below for ease of reference.
“7. Learned Counsel for the Appellant urges that the issue is no longer res integra and under similar facts and circumstances, this Tribunal in the case of Steel Authority of India Ltd, Salem vs Commissioner of GST & Central Excise, 2021(7) TMI 1092, Chennai, held that no service tax is payable on the amount collected 4 ST/30964/2018 towards liquidated damages, following the ruling of the Tribunal in South Eastern Coalfields Ltd vs Commissioner of Central Excise & Service Tax 2020 (12) TMI (912). In SECL, this Tribunal observed that such amounts collected by way of penalty/liquidated damages for non-compliance of contract, cannot be considered as consideration for tolerating an act and hence, not leviable to service tax under section 66E (e) of the Finance Act. The contracts nowhere provided obligation on the assessee to refrain from an act or tolerate an act or a situation and flow of consideration thereof. Such liquidated damages/penalty cannot be considered as receipts towards any service per say, since neither assessee is carrying on any activity to receive compensation nor there can be an intention of other party to breach or violate the contract and suffer a loss. This Tribunal relied on the ruling of Hon’ble Supreme Court in Tara Chand vs Balkishan AIR 1963 SC 1405.”
7. Therefore, we find that the issue is no longer res integra and therefore, in view of the same, the impugned order is set aside.
8. Appeal allowed.
(Dictated and pronounced in the Open Court)
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