CESTAT: No Service Tax on Forfeited Hotel Booking Advances, Rules in Favour of Bharat Hotels

April 15, 2026 : The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Principal Bench, New Delhi, has set aside a service tax demand raised against Bharat Hotels Limited, holding that amounts retained on cancellation of hotel bookings are not taxable as consideration for any service.

The ruling came in Bharat Hotels Limited v. Commissioner of CGST, New Delhi (Service Tax Appeal No. 54762 of 2023), decided on April 15, 2026, by a Division Bench comprising Judicial Member Ms. Binu Tamta and Technical Member Mr. P.V. Subba Rao.

The dispute centered on whether advance payments forfeited by the hotel when customers cancelled bookings or failed to check in could be subjected to service tax under Section 66E(e) of the Finance Act, 1994, which deals with “declared services,” including agreeing to tolerate an act.

Bharat Hotels, engaged in hospitality services, collected advance payments at the time of room bookings and discharged service tax upon receipt in line with the Point of Taxation Rules, 2011. However, when customers cancelled or did not show up, the hotel retained part or all of the advance as “room retention charges” to offset losses from blocked inventory.

The tax department treated these retained amounts as consideration for tolerating cancellation and sought to levy service tax. The Tribunal rejected this position.

Relying on a consistent line of precedents—including Indian Hotels Company Ltd., The Lalit, Shiv Vilas Resorts, Lemon Tree Hotel, and Narayan Builders and Developers—the Bench held that the issue was no longer res integra and had been settled in favour of assessees.

The Tribunal emphasized that for Section 66E(e) to apply, there must be a clear contractual agreement to tolerate an act, with consideration flowing specifically for such tolerance. In this case, the underlying agreement was for providing accommodation in exchange for room tariff, not for tolerating cancellation or non-performance.

It noted that when a customer cancels or fails to utilize a reserved room, the hotel incurs a loss due to blocked inventory. The forfeited amount is therefore compensatory in nature, akin to liquidated damages for breach of contract, rather than payment for any service.

The Bench further relied on the Supreme Court–affirmed ruling in South Eastern Coalfields Ltd., reiterating that damages or penalties recovered for breach of contract do not constitute consideration for a taxable service.

Concluding that retention or cancellation charges do not fall within the scope of taxable services, the Tribunal set aside the impugned order and allowed the appeal.