Bharat Heavy Electricals Limited PSWR Vs Commissioner of Central Excise and Service Tax (CESTAT Mumbai)
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai first allowed the appellant’s miscellaneous application for early hearing and, with the consent of both parties, proceeded to hear and dispose of the appeal on merits. The dispute concerned the levy of service tax on liquidated damages/penalties recovered by the appellant from its suppliers and contractors for delayed completion of contractual work or delayed supply of goods.
The Service Tax Department examined the appellant’s trial balance, particularly the accounting entry titled “Recovery from suppliers/contractors towards penalty damages,” and formed the view that the amounts recovered constituted “consideration” for a declared service under Section 65E(e) of the Finance Act, 1994. Based on this interpretation, the Department issued proceedings that culminated in an adjudication order dated 24 December 2018, confirming a service tax demand of ₹6,52,76,360, along with interest and penalties under Sections 77 and 78 of the Finance Act, 1994.
The appellant submitted that it was engaged in erection and commissioning services, works contracts, and repair and maintenance of power plants, and that its contracts with suppliers and contractors contained clauses providing for liquidated damages or penalties in the event of delayed supply of goods or delayed completion of work. The Tribunal noted that the appellant had already paid service charges along with applicable service tax on the invoices raised by contractors. It held that the liquidated damages or penalties recovered due to delayed performance could not be regarded as a “service” for the purpose of levying service tax. It further held that such recoveries did not constitute “consideration” for providing any taxable service, and therefore could not form part of the taxable value.
