Recently, the Principal Bench of CESTAT at New Delhi has allowed the Service Tax Appeal (no. 50567/2019) filed by South Eastern Coalfields by setting aside the Service Tax demand alongwith penalty and interest thereon giving a complete sigh of relief. The said demand was raised by Service Tax Department on the amount of Liquidated Damages, Forfeiture of Earnest Money Deposits & Penalty recoveries from the various contractors & suppliers, Coal buyers under long-term Fuel Supply Agreement and various coal e-auction schemes by holding that the said recoveries were made by assessee for providing ‘Declared Service’ under the clause “agreeing to an obligation or to refrain from an act or to tolerate an act or a situation or an act”.
While setting aside the demand, the Tribunal has given a very detailed order while noting the facts prevalent in commercial world where parties entering into contracts have clauses in the agreement for levying damage or penal charges for default committed by other party by not complying with the terms of contractual agreement, so as to compensate the losses occurred due to non-compliance with the terms of contract. The Tribunal observed that the party recovering the damage amount cannot be said to have rendered any service and there is no receipt of ‘consideration’ in such cases which is a pre-requisite for taxing any service element.
The Tribunal applied the ratio laid down in many decisions by the Supreme Court of India as well as European Court of Justice to interpret the meaning of term ‘consideration’ and thereafter came to a conclusion that “consideration” was absent in assessee’s case.