ST on compensation

[Guest]

Dear sir,

pls. suggest service tax will be applicable or not on compensation of erection work

[Rajagopalan Ranganathan]

Sir,

According to Section 66E (e) of Finance Act, 1994, 'Declared services' means agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. Before answering your query I would like to know why compensation is paid and what are the reasons therefore. If your give these details then only I can answer your query.

[YAGAY andSUN]

Through your query we understand that you are talking about compensation against liquidity damage i.e. late completion of erection work etc. Such compensation would fall under Section 66E and are prone to levy of service tax. The reply filed by Ranganathan Sir is perfectly completed.

[KASTURI SETHI]

Really I cherish the replies filed by Sh.Ranganathan and M/s.YAGAY and SUN. Moreover, both of you file replies quickly and accurately.

[YAGAY andSUN]

Dear Kasturi Sir,

Thanks for the appreciation. Under your guidance we will learn more.

Regards,

YAGAY and SUN

[Rajagopalan Ranganathan]

Dear Kasturi Sir,

Thank you for your complements.

[Dhruva]

Good Morning.

While on a plain reading it appears that the "compensation" or "liquidated damages" for late delivery of goods or delivery of project appears to be covered by declared services, the large bench of the tribunal has held that such amount relates to price reduction. In case of Victory Electricals the large bench of the tribunal held that such penalty or liquidated damages has the effect of reducing the price of the goods for the of levy of excise duty. My point is that, if the such amounts (compensation / liquidated damages / penalty) are to be treated as price adjustment, the value of goods (or services) it self gets reduced and there may not be a a levy of service tax.

Regards

Srinath

[YAGAY andSUN]

Yes, It is settled Legal Position that Excise Duty is not payable on LD. Therefore, such LDs compensations are prone to Service Tax.

[Mahir S]

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

Sir,

Yes sir, declared services relates to carrying/non carrying out any act for consideration, as explained above.

In your case, however, If the compensation part has already suffered service tax thereon, then in such case it shall not fall again under the declared services.

Further, the reason and grounds for such compensation shall decide and guide about the leviability under declared services or otherwise. There may be sufficient ground for not falling under such services depending upon the nature of the contract. etc.

AI Summary

Service tax on compensation: characterization as declared service or price reduction determines levy and taxability. Compensation or liquidated damages for delayed erection work may prima facie fall within declared services under Section 66E(e) and attract service tax; however, a tribunal view treating such amounts as a price reduction can reduce the taxable value of the supply and negate separate taxation. If the compensation has already been taxed, it should not be taxed again. The contractual basis and factual nature of the payment determine whether it is a declared service or a value adjustment.