TDS on Liquidated/Contractual damages

[ROHIT GOEL]

Dear Sir,

As per facts of our client's case, they had entered into agreement with a power company for supply of solar power. The client had assured the power co. that whatever surplus power would be generated by the plant, the client would ensure that the power co. could supply same to the Grid and earn incomes.

However, the client could not obtain necessary approvals as a result of which the power co. suffered losses. Now as per the contract, the client has to pay compensation to the power co. My question is whether TDS would be deductible on this compensation/liquidated damages?

AI Summary

TDS on liquidated damages may not be deductible for contractual compensation on breach, subject to case law guidance.
Whether TDS applies to contractual compensation paid as liquidated damages for failure to obtain approvals under a power-supply agreement; one view in the discussion states that TDS is not applicable, while another notes that multiple judgments, including an ITAT decision, have addressed withholding obligations on such damages.