Service Tax Liability Can’t Be Fastened On Compensation Received By Fabindia For Loss Caused By Breach Of Contract: CESTAT

The Delhi Bench of Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) has held that service tax liability cannot be fastened on compensation received by Fabindia for loss caused by breach of contract.The bench of Binu Tamta (Judicial Member) observed that any penalty or compensation received for any loss or damage caused by breach or non-performance of the terms of the contract is not by way of consideration for any independent activity; rather, the same is in the course of performance of the contract, hence not taxable under the GST regime, including the erstwhile service tax regime.The appellant/assessee is in the business of manufacturing ready-made garments and made-up articles of textile falling under Chapters 62 and 63.During the course of the audit, it was also observed that the appellant had received an amount in view of penalties from their vendors, and as per the provisions of Section 66E of the Finance Act, 1994, they were liable to pay service tax. The show cause notice was issued towards service tax amounting to Rs. 7,04,381/- with consequential interest and penalty under the respective provisions.The issue raised was whether the penalties recovered by the assessee from the vendors were chargeable to service tax.The petitioner contended that any penalty or compensation received for any loss or damage caused by breach or non-performance of the terms of the contract is not by way of consideration for any independent activity but rather is in the course of performance of the contract, hence not taxable.“Service tax on the penalty amount received by the appellant gets resolved in favour of the appellant,” the CESTAT said.Counsel For Appellant: Shashank GoelCounsel For Respondent: Mahesh BhardwajCase Title: Fabindia Limited Versus Commissioner, Central Excise & Central Goods and Service TaxCase No.: Excise Appeal No. 54686 of 2023-SMClick Here To Read The Order

Service Tax Liability Can’t Be Fastened On Compensation Received By Fabindia For Loss Caused By Breach Of Contract: CESTAT

Mariya Paliwala

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