Order date: 14 February 2023

Parties: Rajcomp Info Services Limited V/s Principal Commissioner CGST & CE - Jaipur

Facts –

• The Appellant, Rajcomp Info Services Limited, is wholly owned undertaking, and acts as Pure agent to government of Rajasthan for the implementation of various Information and Technology projects of the State Government under department of IT &C to select vendor for completion of project and make payments to sanction orders. Upon completion of the project, the unutilized amount is returned to the Government of Rajasthan.
• The audit of the record of the appellant reveals that the Appellant are providing taxable service to various Government departments  in which supply, installation of various hardware and /or software or provision of service was involved. The Appellant was found paying service tax only on the service charges so received from the concerned Department, instead of paying the service tax on the gross value of the amount so received.
• Further, the appellant deduct certain amount from payment to vendors for implementation of government projects in the name of liquidity damages.

Issue –

• Whether Service tax is leviable on gross value or on service charge ?
• Whether Service tax is leviable on such recovery in name of liquidator damages ?

Order –

• The Tribunal relied on its decision dated 18.02.2022 wherein it has been held that amount paid by the State Government Departments to the appellant are reimbursements, which cannot be subjected to levy of service tax. The only consideration received by the appellant was the ‘service charge’ on which service tax was discharged by the appellant.  Thus, as all the conditions of rule 5(2) of the Valuation Rules are satisfied, the appellant acted as a pure agent as a result of which the amount collected by the appellant from the State Government for payment to the vendors cannot be subjected to service tax.
• Further, in respect to the issue of liquidity damages, Tribunal relied on the case of Tribunal in M/s. South Eastern Coalfields Ltd. wherein it was held that 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.
• Further, CBIC Circular No. 178/10/2022-GST dated 03.08.2022 has clarified that “liquidated damages cannot be said to consideration received for tolerating the breach or non- performance of contract. They are rather payments for not tolerating the breach of contract.
• In this view of the above, service tax levied on the amount received from the Departments of the State Government and which has been paid to the vendors cannot sustain. It was also held that the demand of service tax  on amount received as liquidated damages also does not sustain.