2026-VIL-159-CESTAT-CHE-ST
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SERVICE TAX CESTAT Cases

Service Tax - Taxability of penal interest, liquidated damages/notice pay, and CSR expenditure as sponsorship service - Demand of service tax on: (i) penal interest collected from borrowers for delay/default in EMI payments; (ii) liquidated damages/notice period pay recovered from employees who resigned without serving the stipulated notice period; and (iii) CSR expenditure incurred, which was alleged to involve sponsorship services - Department alleged that penal interest collected by the banks constituted consideration for "tolerating an act" under Section 66E(e) of the Finance Act, 1994, and was therefore taxable as a declared service – HELD – For Section 66E(e) to apply, there must exist a conscious, positive and pre-agreed obligation to tolerate an act, refrain from an act, or to do an act, where such toleration itself is the object of the contract. In loan transactions, the Banks do not agree to tolerate default. On the contrary, default is expressly discouraged, and penal interest is imposed only as a consequence of breach, not as a service willingly rendered - The penal interest recovered by banks on delayed payment of EMIs is compensatory in nature and does not constitute consideration for “tolerating an act”, and therefore does not amount to a taxable service. The provisions of Section 66E(e) are not attracted in such circumstances - The questions relating to penal interest and liquidated damages, are answered in favour of the appellants, and the demands raised thereon are set aside. The question relating to Sponsorship Services, is answered in favour of the respondent/Department and the demand of service tax on Sponsorship Services, along with applicable interest, is upheld – The appeal is partly allowed and partly dismissed - Taxability of liquidated damages/notice pay: The Department alleged that the recovery of liquidated damages/notice period pay from employees who resigned without serving the stipulated notice period was taxable under Section 66E(e) as "tolerating an act" – HELD - The Tribunal, following the judgment of the Madras High Court in GE T&D India Ltd. v. Dy. CCE and the Tribunal's decision in South Eastern Coal Fields Ltd., held that liquidated damages/notice pay recovered from employees are compensatory in nature and do not constitute consideration for a taxable service. The Tribunal observed that such recoveries arise from an employer-employee relationship, which is excluded from the definition of "service" under Section 65B(44). Accordingly, the demand on this count was set aside - Taxability of CSR expenditure as sponsorship service: The Department alleged that the CSR expenditure incurred by the banks involved sponsorship services, as evidenced by the display of the banks' logos or brand visibility, and was therefore taxable under Section 65(99a) read with the reverse charge mechanism – HELD - For an activity to be considered as a taxable sponsorship service, there must be an identifiable event and reciprocity or quid pro quo, where the sponsor derives a commercial or promotional benefit. While pure donations or gifts are excluded from the definition of "sponsorship" under Section 65(99a), the banks failed to provide adequate documentary evidence to establish that the impugned CSR expenditure was in the nature of a pure donation without any element of sponsorship or promotional benefit – Further, the essence of sponsorship service under the statute is not confined merely to formal advertising contracts but extends to any arrangement where consideration flows for promotion of the sponsor’s brand, name or logo. Therefore, references made by the adjudicating authority to advertisement or promotional benefits are only explanatory and incidental to establish the nature of sponsorship and do not amount to introduction of a new case beyond the SCN. The impugned orders do not travel beyond the scope of the SCN, and the findings of the adjudicating authority are not vitiated on this ground. Accordingly, the demand of service tax on the CSR expenditure to the extent it involved sponsorship services, is legal and proper, and the same is upheld.
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