2026-VIL-96-CESTAT-DEL-ST
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SERVICE TAX CESTAT Cases

Service Tax - Forfeiture of security deposits/earnest money, Liquidated damages – Appellant invoked bank guarantees, forfeited earnest money/performance securities, and levied penalties against contractors who failed to perform their contractual obligations in time - Dept confirmed demands of service tax on the consideration for 'tolerating the act' of service providers/contractors under Section 66E(e) of the Finance Act, 1994 - Whether the amounts collected by the appellant in the nature of forfeiture of security deposits/earnest money and fines/penalties, liquidated damages against delayed completion of works are chargeable to service tax under Section 66E(e) of the Finance Act, 1994 – HELD - The recovery of liquidated damages/penalty from the other party cannot be said to be towards any service, as 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 compliance with the contract terms, not to tolerate the defaulting act. For an activity to be covered as a declared service under Section 66E(e), there must be an independent agreement to refrain or tolerate or to do an act between the parties, along with a flow of consideration for this activity. In the present case, the amounts collected by the appellant have no nexus with the provision of any taxable service, and are in the nature of penal charges on account of breach or non-performance of contract, intended to make good for the losses and act as a deterrent. Thus, these amounts cannot be treated as 'consideration' for any service under Section 65B(44) of the Act - the amounts collected by the appellant in the nature of forfeiture of security deposits/earnest money and fines/penalties, liquidated damages are not chargeable to service tax under Section 66E(e) of the Finance Act, 1994 - The impugned order is set aside and the appeal is allowed
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