South Eastern Coalfields Ltd Tolerating an act theory rejected

The dispute arose from multiple show cause notices issued against South Eastern Coalfields Ltd., a subsidiary of Coal India Ltd., alleging non-payment and short-payment of service tax on various heads including liquidated damages, royalty-related payments, dead rent, renting of immovable property, security agency services, and delayed payment interest for the period spanning 2014-15 to June 2017.

The principal controversy related to service tax demands exceeding Rs. 1.07 crores on liquidated damages, penalties, and compensation recovered from coal purchasers, contractors, and suppliers for breach of contractual obligations. 

The Department treated such recoveries as taxable declared services under Section 66E(e) involving “agreeing to tolerate an act or situation.”

The Tribunal rejected the Department’s theory by extensively relying upon its earlier decision in the appellant’s own case reported in 2021 (55) GSTL 549 (Tri.-Del.). It held that contractual compensation or penalty clauses merely protect commercial interests and do not establish an independent agreement to tolerate contractual breaches for consideration. 

The Tribunal emphasized that consideration under Section 67 must possess direct nexus with a taxable service and cannot encompass damages recovered for unintended breaches.

The Tribunal additionally set aside demands relating to dead rent, renting of immovable property used for residential accommodation of workers, and reverse-charge liability on security agency services after finding that the service provider had already discharged tax liability. Only a small interest demand of Rs. 32,713 admitted by the assessee survived.