{"id":6797,"date":"2025-11-14T10:57:59","date_gmt":"2025-11-14T05:27:59","guid":{"rendered":"https:\/\/www.centaxonline.com\/blog\/?p=6797"},"modified":"2025-11-14T10:57:59","modified_gmt":"2025-11-14T05:27:59","slug":"penalty-for-delay-in-contract-work-not-taxable-as-service-cestat","status":"publish","type":"post","link":"https:\/\/www.centaxonline.com\/blog\/penalty-for-delay-in-contract-work-not-taxable-as-service-cestat","title":{"rendered":"Penalty for Delay in Contract Work Not Taxable as Service | CESTAT"},"content":{"rendered":"<pre><strong>Case Details: <a href=\"https:\/\/www.centaxonline.com\/latest-news-updates\/excise-service-tax\/101010000000408708\/penalty-imposed-on-contractor-for-not-completing-work-within-stipulated-time-not-liable-to-service-tax-cestat\">Gujarat State Electricity Corporation Ltd. vs. Commissioner of C.E. &amp; S.T., Surat-I (2025) 34 Centax 273 (Tri.-Ahmd)<\/a><\/strong><\/pre>\n<h2><em>Judiciary and Counsel Details<\/em><\/h2>\n<ul>\n<li><strong>Ramesh Nair<\/strong>, Member (J) &amp; <strong>C.L. Mahar<\/strong>, Member (T)<\/li>\n<li><strong>Mrs Neeta Ladha<\/strong>, Chartered Accountant Appeared, for the Appellant<\/li>\n<li><strong>Shri Ajay Kumar Samota<\/strong>, Superintendent (AR) for the Respondent.<\/li>\n<\/ul>\n<h2><em>Facts of the Case<\/em><\/h2>\n<p>Penalty amounts were recovered from contractors for non-completion of contractual work within the stipulated time, and notice pay was recovered from employees who failed to serve the prescribed notice period before resignation. The Department contended that these recoveries constituted consideration for a declared service under Section 66E(e) of the Finance Act, 1994, on the ground that they represented \u201cagreeing to the obligation to refrain from an act or to tolerate an act or a situation.\u201d It was submitted that the recoveries were in the nature of contractual penalties and not consideration for any activity, and that notice pay recovered from employees related to an employer-employee relationship, which stood excluded from the definition of \u2018service\u2019 under Section 65B(44) of the Finance Act, 1994. The matter was accordingly placed before the Customs, Excise and Service Tax Appellate Tribunal (CESTAT).<\/p>\n<h2><em>CESTAT Held<\/em><\/h2>\n<p>The CESTAT held that penalty recovered from contractors for non-completion of work within the stipulated time did not fall under Section 66E(e) of the Finance Act, 1994, as it was not consideration towards any service but a penalty for breach of contract. It held that recovery of penalty could not be regarded as being towards any service since the assessee was not carrying out any activity to receive such compensation and there was no intention of the other party to breach the contract. The Tribunal further held that notice pay recovered from employees was not liable to service tax as the employer-employee relationship did not fall within the definition of \u2018service\u2019 under Section 65B(44) of the Finance Act, 1994. Reliance was placed on South Eastern Coalfields Ltd. and GE T&amp;D India Limited. The appeal was accordingly allowed in favour of the assessee.<\/p>\n<h2><em>List of Cases Cited<\/em><\/h2>\n<ul>\n<li><a href=\"https:\/\/www.centaxonline.com\/search?searchData=2020%20(35)%20G.S.T.L.%2089%20(Mad.)&amp;itemType=AP\">GE T &amp; D India Ltd. v. Deputy Commissioner<\/a> \u2014 2020 (35) G.S.T.L. 89 (Mad.) \u2014 Relied on [Paras 2, 4, 5]<\/li>\n<li>Rajasthan Rajya Vidhyut Prasaran Nigam Ltd. v. Commissioner \u2014 Referred [Paras 2, 4, 5]<\/li>\n<li><a href=\"https:\/\/www.centaxonline.com\/search?searchData=2021%20(55)%20G.S.T.L.%20549&amp;itemType=AP\">South Eastern Coal Fields Ltd. v. Commissioner<\/a> \u2014 2021 (55) G.S.T.L. 549 (Tribunal) \u2014 Relied on [Paras 2, 4, 5]<\/li>\n<\/ul>\n<h2><em>List of Departmental Clarification Cited<\/em><\/h2>\n<ul>\n<li><a href=\"https:\/\/www.centaxonline.com\/search?searchData=Circular%20No.%20178%2F10%2F2022-GST&amp;itemType=AP\">C.B.I. &amp; C. Circular No. 178\/10\/2022-GST<\/a>, dated 3-8-2022 [Para 2]<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Case Details: Gujarat State Electricity Corporation Ltd. vs. Commissioner of C.E. &amp;&hellip;<\/p>\n","protected":false},"author":8,"featured_media":6800,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49,51,63],"tags":[],"class_list":["post-6797","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-excise-service-tax","category-news-excise-service-tax","category-est-case-chronicles"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.9 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Penalty for Delay in Contract Work Not Taxable as Service | CESTAT<\/title>\n<meta name=\"description\" content=\"CESTAT holds penalties for delayed contract work and notice pay from employees not liable to service tax, as 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