CESTAT held that penal charges recovered for delayed service ...

Contractual Penalty Clauses Not Taxable: Service Delays Do Not Constitute Chargeable Service Under Section 66E(e)

May 29, 2025

Case Laws     Service Tax     AT

CESTAT held that penal charges recovered for delayed service performance do not constitute a taxable service. The tribunal determined that contractual penalty clauses representing conditions of contract, rather than specific considerations, are not subject to service tax. The disputed amounts represent contractual penalties aimed at deterring service delays, not a distinct taxable service. Relying on judicial precedents and departmental circulars, the tribunal distinguished between contract conditions and considerations. Consequently, the retention amount does not transform into a taxable service. The appeal was allowed, with no service tax levied under Section 66E(e) of the Finance Act, and consequential interest and penalties were also set aside.

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