Whether ST to be levied on Liquidated damages recovered from contractors - Reg

[CMA VENKATESHAM MUTA]

Sir/Madam,

Please guide me, whether ST should be recovered from the following issue.

Company A, issued a tender to supply an inventory, and company B is supplying the same. As per the tender, delay in supply will attract Liquidated damages and company A will recover the same from the Company B.

Liquidated damages (LD) recovered from the Vendor/Contractor is on account of the breach of contract and not against 'Obligation to refrain from an act or tolerate an act or situation' as covered under the Declared list of services.

Whether ST attracts the LD recovery as per the following provision.

(According to section 66E(e) of the Finance Act , 1994, as inserted by Finance Act, 2012, agreeing to the obligation to refrain from an act, or to tolerate on act or a situation, or to do an act shall be a declared service and liable to service tax.)

Kindly guide me in this regard

[AJAY KUMAR]

Mr.Venkatesham,

This is a subject matter prone to litigation inasmuch as the department may take a stand that it is covered under Section 66E(e) as declared service. But a Broader interpretation would reveal that the same is not covered under declared services as these are penal/compensatory charges not part of the gross consideration. It is covered in one case law viz., M/s.Religare Securities Ltd. V/s Commissioner of Service Tax, Delhi 2014 (4) TMI 588 - CESTAT NEW DELHI.Moreover , there are many Boards circular clarifying on this issue though they are not specific to some services and illustrate some specific services. the Last Board circular being dated 03.08.2011.

[Ganeshan Kalyani]

Sir, you may be interested in refer

#1Issue Id: - 109764
Dated: 21-1-2016

Thanks.

[CMA VENKATESHAM MUTA]

Sir,

Thanks a lot, 109764 id is much useful

[AJAY KUMAR]

Dear experts,

The said issue ID refers to forfeited amount whereas the issue here is liquidated damages. this is a penal/compensatory charge. Moreover, since it is as per the terms of the tender, there is a possibility that the department may take a stand under Section 66E(e), as rightly apprehended.Therefore, the discussion ID is not directly impinging on the issue here.

However, as stated earlier, the liquidated damages will not attract service tax even though it is mentioned in the terms of the tender as it is not related to the value of any service provided or to be provided. since the liquidated damage arises due to a event or non-happening of an event or delayed happening of an event, it is not related to the value of taxable services per se. It is incurred during the course of providing taxable service only incase of delay and is covered under the said case law and other circulars mentioned.

AI Summary

Service tax on liquidated damages: contractual penalties generally fall outside taxable consideration, though revenue may challenge this view. Liquidated damages recovered for breach or delay are penal or compensatory charges and, on a broad interpretation and consistent with administrative guidance and appellate authority, do not constitute consideration forming part of the taxable value of services and therefore are not liable to service tax, though this position may be contested by revenue authorities.