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Issue ID : 111340
- 0 -

Applicability of Service Tax

Date 08 Jan 2017
Replies8 Answers
Views 1141 Views
Asked By

I want to ask whether service tax is applicable on liquidated damages.

One of our clients have deducted the service tax on liquidated damages deducted by them from our bills. These liquidated damages relate to the not meeting the specified performance level of the equipment's supplied as well as the delay in supplies.

Further, in case service tax is applicable on liquidated damages whether it is possible to claim cenvat credit of the same.

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- 0
Replied on Jan 8, 2017
1.

Refer Issue ID = 109779 - Date: - 23/01/2016

- 0
Replied on Jan 8, 2017
2.

Sir,

According to Section 66 E (e) of finance Act, 1994 " 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 liable to service tax. In your case liquidated damages are deducted from your bills for the reason of not meeting the specified performance level of the equipment's supplied as well as the delay in supplies. This amounts to tolerating an act or a situation. Therefore liquidated damages are amenable to service tax.

Regarding availment of credit you have to satisfy the authorities in what way the service tax paid on liquidated damages satisfy the definition of 'input service' which is used in promoting your business. You may say that payment of liquidated damages improves you efficiency in manufacturing quality goods or providing services without any complaint from your customer. This you have to decide before availing the credit. This is my opinion.

- 0
Replied on Jan 8, 2017
3.

To prove liquidating damages as input service in relation to output (taxable) is a hard nut to crack. Near impossible.It is better not to take risk. The elements of 'interest' and 'penalty' would be attracted, if failed to establish relationship between both.

- 0
Replied on Jan 8, 2017
4.

Service tax is applicable on liquidated damages.

- 0
Replied on Jan 9, 2017
5.

I endorse the views of all experts regarding applicability of Service Tax on liquidated damages.

- 0
Replied on Jan 9, 2017
6.

The topic in question is a debatable one. Some are of the view that penalty cannot be considered as consideration and therefore no service tax would be applicable. And some experts opine that it is declared services and eligible to service tax. Hence it seems that it is upon interpretation of law. Thanks.

- 0
Replied on Jan 9, 2017
7.

Dear Friend,As already expresed by our learned friends, ST is payable on the liquidated damages since this falls under th ecategory of Declared Services.

With regard to the point of cenvat eligibility, in my view, you can take the said amount as credit as this relates to sale/supply of goods related.

Best Regards

Suryanarayana

- 0
Replied on Jan 10, 2017
8.

Sh.Atul Kumar Ji,

You can take credit on liquidated damages charges, if you cannot correlate input and output service (taxable).

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