Order Date – 12 September 2023

Parties: Chennai Metro Rail Ltd. Vs Commissioner of GST & Central Excise

Facts – 

• The Appellant, Chennai Metro Rail Ltd. (CMRL), is a joint venture between the Government of India and the Government of Tamil Nadu that builds and operates Chennai Metro.
• A Show Cause Notice dated 29.9.20218 was issued to demand the service tax received through encashment of performance Guarantee / Bank Guarantee and towards collected/ retained as liquidated damages during the period along with interest and for imposition of penalties under various sections of Finance Act, 1994. 
• The demand was dropped with respect to the encashment of performance Guarantee / Bank Guarantee and demand along with interest and penalty was confirmed on liquidated damages. Being aggrieved both the appellant and the department filed appeals.

Issue – 

• Whether the demand of service tax on liquidated damages are valid?

Order - 

• The Tribunal observed that the issue is no longer res intigra and has been clarified by the CBIC itself as per the Circular No. 214/1/2023-Service Tax dated 28-02-2023 which clarified that when one party agrees to refrain from an act, or to tolerate an act or a situation, or to do an act, are the activities where the agreement specifically refers to such an activity and there is a flow of consideration for this activity.
• Revenue has not pointed out any such contractual arrangement which is an independent arrangement in its own right to receives damages by tolerating breach of contract. The amounts retained towards liquidated damages and also invoked as bank guarantee are not a consideration for tolerating breach of contract. Any amount, which is not a consideration for provision of service, cannot be subjected to service tax. 
• A demand for service tax on the monies received through encashment of performance Guarantee / Bank Guarantee and that collected/ retained as liquidated damages for non-performance and failure to comply with the agreed obligation by various contractors / sub-contractors, hence fails. the demands for duty along with interest made and the penalties imposed by the impugned order are Set aside. The appeal filed by the appellant succeeds and is allowed.