Applicability Of Service tax on Liquidated Damages

[abhinav Goyal]

Whether Service tax is chargeable on Liquidated Damages being charged from supplier of goods due to late delivery of material . Liquidated Damages can be covered by "Agreeing to the obligation to tolerate an act or a situation " entry in notification on declared Services . Does it matters Whether Vendor is a Foreign vendor having or not having any agent in india.

[KASTURI SETHI]

Sh. Goyal Ji,

Yes. It is covered under Declared Service under Section 66 E(e) of the Finance Act read with Notification No.30/12- ST dated 20.6.12 (Serial No.10). Service Tax is applicable. This notification answers to your queries.

[CSSANJAY MALHOTRA]

Sh. Kasturi ji, I fully endorse your views.

[KASTURI SETHI]

Sh.CS Sanjay Malhotra ji,

Thanks a lot, Sir. Your approval is moral boosting for me.

[Ganeshan Kalyani]

Sir, also go through the below issue id.

#1 Issue Id: - 109779
Dated: 23-1-2016

Thanks.

[CSSANJAY MALHOTRA]

Dear Sh Ganeshan Ji,

Thanks for taking us back to the service tax on penalty issue.

Reference is drawn to ST Circular 192 dated April'16, specifically para 4. The same hasn't left any room to correlate things differently.

Anything specific, would appreciate as would add to our learning exercise.

[abhinav Goyal]

Sir,

Thanks a lot for quick replies . As CS Sanjay Mahlotra ji discussed about the " ST Circular 192 dated April'16, specifically para 4 " but sir in that circular , only the contracts with government or local authorities are exempted . what about the liquidated damages charged from anyone other than government or local authority . Is there any case law on such liquidated damages , then please provide citation of that case law .

I m very thankful to you all for sharing your valuable knowledage .

[KASTURI SETHI]

Sh.Goyal Ji,

Pl. refer to your cross query dated 28.8.16. Board's circular No.192/02/ST dated 13.4.16 talks of clarification regard leviability of Service Tax on Service provided by Govt. or Local Authority to a business entity. Title as well as Serial No. 4 of the circular has clarified about service by Govt. or local authority. Now there is no room for doubt as Sh.CS Sanjay Malhotra, Sir has also opined so. ST tax is applicable to you.

There is no need of any case-law. However, there is are case laws one is pro-revenue and other pro-assessee depending upon facts of each case.

[CSSANJAY MALHOTRA]

Dear Sh. Kasturi ji,

Thanks for addition and appreciate the same. Hopefully querist issue would have been addressed.

[YAGAY andSUN]

Service Tax on fines, penalties and liquidated damages

A question was raised in the “RAC meeting of Hyderabad Central Excise Zone”, held on 30.06.2016, was:

In many cases, companies are collecting fines, penalties and liquidated damages from their customers for any deficiency of performance or shortfall of supply/contract. These situations are very common and the amount so collected will form part other revenue of the company and as per the accounting standards, it cannot be clubbed with the normal revenue from operations. Whether such penalties, compensation for not doing, or shortfall in handling any prescribed quantity or deficiency in service, not completing the job within the prescribed period of time as agreed by contract would also attract service tax?

The Hon’ble Commissioner informed that issues similar to the point raised have been confirmed by him in favour of revenue as the fines, penalties and liquidated damages collected in the course of provision of service are liable for service tax as per Section 66E (e) of Finance Act, 1994, according to which "agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act" is a declared service and a taxable event. Hence, Fines, penalties and liquidated damages which are collected from customers in lieu of either deficiency in performance of service or violation of terms and conditions of agreement are liable to service tax under Section 66E(e) of Finance Act, 1994. It was also stated that, some of the cases are pending disposal at CESTAT.

The Chief Commissioner informed the members present in the meeting to continue to pay the Service Tax on the subject matter, since the issues similar to the point raised are pending in Tribunal as informed by the Commissioner, and the outcome of these cases may be awaited.

 

[MUKUND THAKKAR]

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