Liability of Service Tax upon the noticee on the amount shown in profit & loss account as Liquidated damage and Debtor Written of.

[Sudhir Kumar]

The department has raised a demand on the income shown in profit & loss account as 'Liquidated Damage' and 'Debtor Written of' and now confirmed the same vide passing the Adjudicating Order. However, in defence reply various judicial pronouncement against the demand and in favour of the party on the above income was submitted by the party but department ignored all of them. Such income received as Liquidated Damage or Debtor Written of is not amounting to Sevice Tax liability.

[Shilpi Jain]

You either file an appeal against this order by paying the pre-deposit else approach HC to quash this order as the submissions made to the SCN were not considered.

Its now settled that no ST on liquidated damages and in case of debtors w/o no service is provided so no question of any liability. You could also consider to make submissions in the Writ to decide the matter.

[KASTURI SETHI]

There are so many judgments on this issue in favour of the party. The element of consideration is absent, it being compensation. Service is absent. Better option is to exhaust the departmental channel/remedy.. Hopefully, you can get fair justice at the hands of CESTAT. By the time the case is decided by CESTAT, you will come by more judgments in favour of the party.

There is risk in going High Court direct. Time, money and energy will be wasted, if High Court directs to exhaust departmental channel first. It often happens.

AI Summary

Service tax on liquidated damages: challenges where compensation lacks consideration, counsel advises appeal or departmental remedies. The tax department treated amounts recorded as 'Liquidated Damage' and 'Debtor Written off' as taxable service; the taxpayer relied on judicial authorities arguing these are compensation lacking the element of consideration and therefore not a service, but the adjudicating order sustained the demand. Advisers recommend pursuing appeal with required pre-deposit or a writ while noting the usual requirement to exhaust departmental remedies and the procedural risks of direct high court litigation.