The Delhi Bench of Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that penalty/late delivery charges cannot be subjected to Service Tax.
The bench of Binu Tamta (Judicial Member) and Hemambika R. Priya, (Technical Member) has observed that the 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 it 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.
Section 65B(44) of the Finance Act 1994 defines “service” to mean any activity carried out by a person for another for consideration. Explanation (a) to Section 67 provides that “consideration” includes any amount that is payable for the taxable services provider to be provided.
The appellant is in the business of manufacturing cement, Clinker and holds Central Excise Registration.
During the course of Audit, it was observed that during the impugned period, the appellant had shown income of Rs. 38,18,710/- in their books under the head ‘Other Receipts’.
The amounts were collected from their customers as penalty for cheque dishonour. The appellants had collected Rs 500/- or 1000/- or Rs 1500/- etc on each dishonoured cheque as per the terms of the contract. The department formed an opinion that being a consideration, it was liable to service tax.
A Show Cause Notice was issued to the appellant. The demand of Rs. 15,11,667 along with interest and penalty was confirmed. The order was upheld by the Commissioner.
The appellant contended that the appellant has collected cheque dishonour charges from the buyers on account of their cheques being dishonoured and late delivery Charges from the suppliers who failed to provide the services within the agreed stipulated time. The charges were collected as penalty which has been noted in the impugned order. The amount recovered by the Appellant is not a consideration, as for an amount to qualify as consideration, there has to be “quid pro quo” or “activity for such consideration”. However, the Appellant does not undertake any activity against recovery of such amounts. Thus, there is no service under Section 65B(44) which is provided by the Appellant. Hence, no demand is sustainable under Section 66E(e).
The assessee argued that taxability of the amounts collected on account of dishonour/bouncing of cheque and on account of delay in delivery of services is well settled and accepted by the Department. Hence, demand is liable to be set aside. The amounts recovered are penal charges with the intention to make good for the losses and to also act as a deterrent to ensure that buyer or supplier do not violate the terms of contract.
The assessee stated that the Appellant was maintaining all the records and the demand was proposed on the basis of the records of the Appellant’s data only. No element of fraud or suppression has been established. Thus, suppression cannot be alleged and extended period of limitation cannot be invoked.
The department contended that the appellant has shown income of Rs. 38,18,710 in their books of accounts under the head of “other income”. It was found that they have collected a certain amount of Rs. 500/- or Rs. 1000 or Rs. 1500 etc. on each dishonoured cheque received from the buyers and these collections of amounts shown in other receipts but did not pay service tax on it. During the period 2013-14 they have also shown other income of Rs. 84,11,604 which relates to late delivery charges. He stated that they have collected sums of money against late delivery charges on account of not completing the services provided within the time specified by them and these collections of amounts shown in miscellaneous income but did not pay service tax on it.
The department contended that the amount collected by the appellant, the ‘promisor’, from their clients the ‘promisee’, tolerated the situation by not paying the due amount timely to appellant as a result the appellant has to tolerate an act or situation created by their clients due to cheque return/dishonour or late delivery charges on account of not completing the services by the service provider within time specified by the appellant. Thus the activity squarely falls within the purview of Section 66E (e) of the Finance Act, 1994.
The tribunal, while allowing the appeal, quashed the order demanding service tax on penalty/late delivery charges.
Case Title: Mangalam Cement Limited Versus Commissioner Of Central Goods Service Tax, Central Excise, Udaipur
Case No.: Service Tax Appeal No. 50818 Of 2019
Date: 05.09.2024
Counsel For Appellant: B.L. Narsimahan
Counsel For Respondent: S.K. Ray
