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

AI Summary

Debate on Service Tax Applicability to Liquidated Damages under Section 66E(e) of the Finance Act, 1994 A discussion on whether service tax (ST) should be levied on liquidated damages (LD) recovered from contractors. Company A issued a tender to Company B for inventory supply, with LD imposed for delays. The query revolves around whether such damages fall under Section 66E(e) of the Finance Act, 1994, which includes obligations to refrain from acts or tolerate situations as taxable services. Responses suggest that LD, being compensatory and not part of gross consideration, should not attract ST, referencing case law and circulars. The issue remains contentious, with potential for differing departmental interpretations.