No ST on liquidated damages recovered by SAIL from supplier for failure to deliver consignment within delivery schedule

Case details: Steel Authority of India Ltd. v. Commissioner of GST & Central Excise, Salem - [2021] 128 taxmann.com 400 (Chennai - CESTAT)

Judiciary and Counsel Details

• • Dilip Gupta, President and P.V. Subba Rao, Technical Member.
  • Ms. Krithika Jaganathan, Adv. for the Appellant. 
  •  Balakumar and L. Nandakumar for the Respondent.

Facts of the Case

The appellant was a Public Sector Undertaking and engaged in the manufacture of carbon steel, carbon steel sheet, coin blanks and alloy steel. It recovered liquidated damages for failure to deliver consignments within the delivery schedule from suppliers and Earnest Money Deposit was also forfeited on failure of the successful bidders to make full payment within the date specified in the sale order. The department levied and demanded service tax as it was of view that appellant had agreed to tolerate breach of timelines stipulated in the contract; the amount imposed as liquidated damages were consideration for the act of tolerating contractual default; and that the appellant had rendered declared service of ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act’ contemplated under section 66E (e) of the Finance Act, 1994. The appellant filed appeal against it.

CESTAT Held

The Honorable CESTAT relied on the decision of the Tribunal in M/s South Eastern Coalfields Ltd. v. Commissioner of Central Excise and Service Tax, Raipur wherein it was held that recovery of liquidated damages/penalty from other party cannot be said to be towards any service per se, since neither the appellant is carrying on any activity to receive compensation nor can there be any intention of the other party to breach or violate the contract and suffer a loss. The purpose of imposing compensation or penalty is to ensure that the defaulting act is not undertaken or repeated and the same cannot be said to be towards toleration of the defaulting party. The expectation of the appellant is that the other party complies with the terms of the contract and a penalty is imposed only if there is non-compliance. Therefore, it was held that service tax shall not be levied and order levying tax interest & penalty would be set aside.