Applicability of Service Tax

[Atul Kumar]

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.

[Ganeshan Kalyani]

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

[Rajagopalan Ranganathan]

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.

[KASTURI SETHI]

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.

[DR.MARIAPPAN GOVINDARAJAN]

Service tax is applicable on liquidated damages.

[KASTURI SETHI]

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

[Ganeshan Kalyani]

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.

[Suryanarayana Sathineni]

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

[KASTURI SETHI]

Sh.Atul Kumar Ji,

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

AI Summary

Liquidated Damages and Service Tax: Experts Debate Applicability Under Finance Act, 1994, and CENVAT Credit Challenges A user inquired about the applicability of service tax on liquidated damages deducted due to not meeting equipment performance levels and supply delays. Responses varied, with some experts affirming that such damages are subject to service tax under the Finance Act, 1994, as they constitute tolerating an act. Regarding claiming CENVAT credit, opinions differed; some suggested it might be challenging to prove liquidated damages as an input service related to output, while others believed credit could be claimed if related to goods supply. The topic remains debatable, hinging on legal interpretation.