Delhi CESTAT sets aside the S.T. on liquidated damages for the breach of contract

{Citation : South Eastern Coalfields Limited vs Commissioner of Central Excise and Service Tax}
The Appellant had entered into various commercial agreements, whereby specific clauses were provided for the penalty for non-observance / breach of terms of the contract, to safeguard the Appellant's interests.
The Respondent had demanded the payment of service tax on the amount charged by the Appellant as penalty/compensation for breach of terms of contract holding such penalty/compensation for violation of terms of the agreement was taxable as declared services under Section 66(E)(e) of the Finance Act.
The Delhi CESTAT observed that service tax is chargeable on any taxable service concerning its value, then such value shall be determined in the manner provided for in (i), (ii) or (iii) of subsection (1) of  Section 67 of the Act. It was observed that each of these refer to where the provision of service is for a consideration, whether it be in the form of money, or not wholly or partly consisting of money, or where it is in the form of cash is not ascertainable. In either of the cases, there has to be a consideration for the provision of such a service.
It was further observed that the Explanation to Section 67(1) provides that only an amount that is payable for taxable service will be considered. It was observed that apart from this, what is important to note is that the term consideration is couched in an inclusive definition.
 
Basis of the above observations, the CESTAT allowed the appeal and set aside the Respondent's order.
 
MAG Comments:
In our opinion, the penalty for breach of contract cannot be construed as a service under Section 66E(e) of the Finance Act as it clearly shows that the Revenue does not shy away from demanding such tax at all. Further, it would be quite important to note that the Allahabad CESTAT in the case of M/s K. N. Food Industries Private Limited [Service Tax Appeal No.70737 of 2018] had held that an agreement should have an express concurrence of toleration of an act/situation to attract levy of Service Tax. Moreover, the amount paid should be 'consideration' & instead of  'compensation'. According to the principle laid down in K.N. Foods, it can be said that as the amount received by the concerned assessee is in the form of compensation vis-a-vis consideration, the same cannot be bought under the purview of Service Tax to our understanding.

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