Custom, Excise & Service Tax Tribunal
Nlc India Limited vs Jodhpur on 22 May, 2025
CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL
NEW DELHI
PRINCIPAL BENCH - COURT NO. - IV
Service Tax Appeal No. 51614 of 2019
[Arising out of Order-in-Appeal No. 371(CRM)ST/JDR/2019 dated 15.04.2019
passed by the Commissioner of Central Excise & Central Goods and Service Tax
(Appeals), Jodhpur]
M/s. NLC India Limited ...Appellant
Barsingsar Project, Barsingsar,
Udairamsar, Bikaner-334402
VERSUS
Commissioner of CGST and
Central Excise, Jodhpur ...Respondent
G-105, New Industrial Area, Basni, Near Diesel Shed, Jodhpur, Rajasthan - 342003 APPEARANCE:
Shri Kunal Agarwal, Advocate for the Appellant Shri Aejaz Ahmad, Authorized Representative for the Respondent CORAM:
HON'BLE DR. RACHNA GUPTA, MEMBER (JUDICIAL) HON'BLE MR. P.V. SUBBA RAO, MEMBER (TECHNICAL) DATE OF HEARING: 03.02.2025 DATE OF DECISION: 22.05.2025 FINAL ORDER No. 50755/2025 DR. RACHNA GUPTA M/s. Neyveli Lignite Corporation Limited (NLC), the appellants are into the core business activity of excavation of Lignite from their own mines which is principally consumed in generation of electricity at their Thermal Power Stations. They discharge Central Central Excise duty on Lignite excavated and fly ash manufactured during the course of generation of electricity. They have also obtained Service Tax Registration.
1.1 On perusal of records of NLC by Audit group of LTU-Audit Circle, Chennai, it was observed that the appellants have entered 2 Service Tax Appeal No. 51614 of 2019 into various contracts with several companies for both supply of goods as well as for providing services and these contracts carry clauses for liquidated damages for the delay in supply of goods as well as services but, no service tax was being paid in respect of the amounts so collected. Department formed an opinion that as per Section 66E(e) of the Finance Act, 1994, collection of such liquidated damages constitutes 'Declared Service'. Hence, Show Cause Notice No. 03/2018 dated 20.03.2018 was issued proposing the demand of service tax amounting to Rs.8,05,216/- on the amount of liquidated damages received by appellants during the period July 2012 to 2014-15.
1.2 The show cause notice was adjudicated vide Order-in-Original No. 10/2018 dated 26.09.2018 whereby the proposed demand was confirmed. The said demand has also been upheld by the impugned Order-in-Appeal No. 371/2019 dated 15.04.2019. Being aggrieved, the appellant is before this Tribunal.
2. We have heard Shri Kunal Agarwal, learned Advocate for the appellant and Shri Aejaz Ahmad, learned Authorized Representative for the department.
3. Learned counsel for the appellant has submitted that the appellant has collected certain amounts from the contractors who failed to provide the service/goods within the agreed stipulated time. The said charges were collected as penalty to deter such act in future by the same contractor or some other contractor, and to make good for the loss incurred by the appellant breach of the timelines stipulated in contract (delayed performance). 3
Service Tax Appeal No. 51614 of 2019 3.1 It is submitted that the amount recovered by the appellant is not a consideration for rendering a taxable service, as for an amount to qualify as consideration there has to be "quid pro quo" or "activity for such consideration". The appellant does not undertake any activity against recovery of such amount. Thus, there is no service as defined under Section 65 B (44) of the Finance Act, 1994 which is provided by the appellant. Hence, no demand is sustainable even under Section 66E(e) of the Act. 3.2 It is submitted that present proceedings are in continuation to the proceedings initiated against the Chennai unit of the appellant, wherein similar issue stands decided in favour of the assessee by Hon'ble CESTAT vide order dated 26.07.2021 reported at Neyveli Lignite Corporation Ltd. Vs. Commissioner of Customs, CE & ST, Chennai with NLC India Ltd. Vs. Commissioner of GST and CE, Trichy reprted as 2021 (7) TMI 1090- CESTAT Chennai. Further, appeal against the said order was withdrawn by the department as clarified in Circular No. 214/1/2023-ST dated 28.02.2023. Therefore, since, the issued stands settled in case of the appellant itself albeit different unit, present demand is liable to be set aside.
3.3 It is further submitted that issue is no longer res integra in light of other decisions as well. Amount collected as "damages/penalties" from the contractors on account of failure to provide the services within the agreed stipulated time, is not towards provision of any service, and hence, not susceptible to service tax. Learned counsel has brought to notice the following decisions:
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Service Tax Appeal No. 51614 of 2019
(i) Gujarat State Electricity Corporation Ltd. Vs. Commissioner of CE & ST, Surat-I reported as 2024 (11) TMI 473-CESTAT Ahmedabad
(ii) Madhya Pradesh Power Generating Co. Ltd. Vs. Commissioner, CGST, CE & Customs, Jabalpur reported as 2024 (1) TMI 676 - CESTAT New Delhi
(iii) Bharat Heavy Electricals Ltd. PSWR Vs. Commissioner of CE & ST, Nagpur reported as 2023 (5) TMI 11-CESTAT Mumbai
(iv) Dy. GM (Finance), BHEL Vs. Commissioner of Customs & Central Excise, Bhopal reported as 2022 (9) TMI 1005 -
CESTAT New Delhi
(v) Steel Authority of India Ltd., Salem Vs. Commissioner of GST & Central Excise, Salem reported as 2021 (7) TMI 1092
- CESTAT Chennai 3.4 In light of above, it is submitted that the issue of non- taxability of the amounts collected on breach of the agreed timelines is well settled and accepted by the department. The issue stands decided in favour of the appellant in its own case also. Hence, the order under challenge is prayed to be set aside and the appeal is prayed to be allowed.
4. While rebutting these submissions, Learned Departmental Representative has acknowledged about the issue involved in the present appeal to no more res integra. However, has reiterated the findings of the order under challenge and has prayed for dismissal of appeal.
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5. Having heard both the parties and perusing the record, we observe and hold as follows:
5.1 The impugned demand has been confirmed under Section 66E(E) of the Finance Act, 1994. We observe from the section that to be covered under Section 66E(e) of the Act, there must necessarily be as independent agreement to refrain or tolerate, or to do an act between the parties.
5.2 We also observe that the amount on which the demand has been confirmed are the amounts recovered as a penal charge which are charged 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. We hold that penal implications under contract cannot be identified as such an agreement. The payment towards delayed performance of service is only one condition of the contract, and thus cannot be called as the act of tolerating the delay of service. Hence, the disputed amount is not susceptible to service tax. Reliance in this regard is placed on the decision of South Eastern Coalfields Ltd. Vs. Commissioner of Central Excise and Service Tax reported as 2020 (12) TMI 912-CESTAT New Delhi affirmed by Hon'ble Supreme Court in Commissioner of Central Excise and Service Tax Vs. South Eastern Coalfields Ltd. reported as 2023 (8) TMI 606-SC Order. Hon'ble Supreme Court has held as follows:
"27. It is trite that an agreement has to be read as a whole so as to gather the intention of the parties. The intention of the appellant and the parties was for supply of coal; for supply of goods; and for availing various types of services. The consideration contemplated under the agreements was for such 6 Service Tax Appeal No. 51614 of 2019 supply of coal, materials or for availing various types of services. The intention of the parties certainly was not for flouting the terms of the agreement so that the penal clauses get attracted. The penal clauses are in the nature of providing a safeguard to the commercial interest of the appellant and it cannot, by any stretch of imagination, be said that recovering any sum by invoking the penalty clauses is the reason behind the execution of the contract for an agreed consideration. It is not the intention of the appellant to impose any penalty upon the other party nor is it the intention of the other party to get penalized.
28. It also needs to be noted that section 65B(44) 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 provided or to be provided. 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 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."
5.3 In another decision in the case of Food Corporation of India Vs. Surana Commercial Co. and others reported as (2003) 8 SCC 636, the Hon'ble Supreme Court pointed out that if a party promises to abstain from doing something, it can be regarded as a consideration, but such abstinence has to be specifically mentioned in the agreement. The relevant portion of the judgment is reproduced below:
Under the main agreement, a party had contracted for the conversion of whole arhar grain into dal. Subsequently, by another supplemental agreement, the party agreed to upgrade the dal. It was held that as soon as the first agreement was complied with and dal was delivered, the contract came to an end and the supplemental agreement, which was made subsequently, was a 7 Service Tax Appeal No. 51614 of 2019 separate and independent agreement. In this agreement, there was no consideration to be given to the promissor and thus that agreement could not be enforced in law. It was claimed that in the supplemental agreement consideration was that the bank guarantees were not to be encashed, but it was found that there was no mention of such a consideration in the supplemental agreement. Although if a party promised to abstain from doing something, it could be regarded as consideration for the contract, but in the present case there was no such case of abstinence and there was no consideration for supplemental contract."
(emphasis supplied) 5.4 Reliance is also placed on Circular No. 178/10/2022-GST dated 03.08.2022 and Circular No. 214/1/2023-ST dated 28.02.2023, wherein it was clarified that the charges collected on account of non-performance of work within agreed stipulated time are not susceptible to tax. It is a trite law that circulars are binding on the department.
5.5 In the present case also the agreements do not specify what precise obligation has been cast upon the appellant to refrain from an act or to tolerate an act or a situation. It is no doubt true that the contracts may provide for penal clauses for breach of the terms of the contract but, as noted above, there is a marked distinction between 'conditions to a contract' and 'considerations for a contract'. Thus the retention amount by the appellant does not undergo a change after receipt, it remains as 'condition to the contract'. Hence cannot be called as 'consideration to the contract'.
Accordingly, we hold that no service tax is attracted under the provisions of Section 66E(e) of the Finance Act. Once the service tax can not be levied, the imposition of interest and penalty also cannot be sustained.
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6. Consequent to entire above discussion, the order under challenge (O-I-A dated 15.04.2019) is hereby set aside. Consequent thereto, the appeal is hereby allowed.
[Order pronounced in the open court on 22.05.2025] (DR. RACHNA GUPTA) MEMBER (JUDICIAL) (P.V. SUBBA RAO) MEMBER (TECHNICAL) HK