TaxTMI 
TaxTMI 
DEAR EXPERT, PLEASE REPLY WHETHER SERVICE TAX UNDER SECTION 66E IS LEVIABLE ON LIQUIDATED DAMAGES ON ACCOUNT OF LATE SUPPLY OF MATERIAL.
SERVICE TAX ON LIQUIDATED DAMAGES
02 Sep 2014 
8 Replies 
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Service tax on liquidated damages may apply where LD is pre agreed compensation treated as consideration for a declared service.
Debate centers on whether liquidated damages for delayed supply constitute consideration for a declared service under section 66E(e). One view treats LD as a non taxable penalty; the prevailing analytical view treats commercially agreed LD as pre agreed compensation and therefore consideration attracting service tax. Rule 6(2)(vi)'s exclusion for accidental damages was distinguished from contractual LD. A tribunal authority treating contractually reduced amounts due to delay as transaction value was cited in support of taxability. (AI Summary)
Debate centers on whether liquidated damages for delayed supply constitute consideration for a declared service under section 66E(e). One view treats LD as a non taxable penalty; the prevailing analytical view treats commercially agreed LD as pre agreed compensation and therefore consideration attracting service tax. Rule 6(2)(vi)'s exclusion for accidental damages was distinguished from contractual LD. A tribunal authority treating contractually reduced amounts due to delay as transaction value was cited in support of taxability. (AI Summary)