LIQUIDATED DAMAGES RECEIVED FROM THE BUYER SERVICE TAX LIABILITY

[muthu kumaran.vp]

Sir

I have doubt on liquidated damages.

One of my client received Purchase order from the buyer for an amount of ₹ 1,00,000. Based on PO, my client (seller) purchased the raw material and processed the same and manufactured the goods. Now, buyer does not want to buy these manufactured goods and instead buyer promised to pay liquidated damage of ₹ 60,000 for loss occurred to the seller. Now, whether the amount received from the buyer falls under liquidated damages definition?, if so, whether do we need to pay service tax on this. My client (seller) is a manufacturing company and does not provide any services.

AI Summary

Liquidated damages treated as taxable service under Section 66E(e), attracting service classification despite seller being a manufacturer.
The forum concludes that compensation received from a buyer for non-acceptance of manufactured goods is classified as a declared service under Section 66E(e) of the Finance Act, thereby bringing such liquidated damages within the service tax framework even though the recipient is primarily a manufacturer; earlier forum clarifications are cited as supporting precedent.