Payment of Service Tax on Liquidating damages received - reg.

[vinay wakde]

We are paying amount against Liquidated Damages. Kindly let us know the following :-

1. Whether we have to pay Service Tax @ 12.36% on the amount received from 01.07.2012
2. Whether we have to raised Invoice in the name of the party to collect amount with Service Tax

Regards,

VINAY

[YAGAY andSUN]

No, amount received on the event of LD can't be treated at par with the providing of Taxable Services.  It is in the nature of compensation.  Hence, Service Tax is not applicable.  No need to issue an invoice for such an event which is in nature of penalty for not fulfilling the terms and conditions of a Contract/agreement.

[vinay wakde]

We have attended the seminar on Service Tax - Negative List & Other recent changes of Mr. lakshmi Kumaran at Pune on 13.07.2012, wherein some of the assessee has raised the same query and he replied that the amount of Liquidating Damages received shall be covered under Service Tax from 01.07.2012

Regards,

VINAY

 

[Vijay Chitte]

In the Finance Act 2012 as per declared service clause (e) of section 66E "agreeing to the obligation to refrain from act, or to tolerance an act or situation, or to do an act" this defination, it can be said that obligation is a legal duty of a person by which he is bound to do or not to do an act because of law, promise, contract, agreement or any other document which is enforceable by law.

Obligation to refrain from act: means any act, which binds a person, of not to do or not doing a particular thing in a particular manner in a given circumstances.

For example : Not compete fees for not doing a particular business or not to practice a particular profession. 

Obligation to tolerate an act or a situation : means to accept the occurrence or existence of an act or a particular thing, which is imposed by condition or circumstances, in a contract, agreement or any other document which is legally enforceable by law.

For example : a) Demurrage  charges paid to the port authorities for not clearing the goods within a specified period of time b) Penalty for any breach of contract 
                      
Carefully reading of the above, my view, it is taxable.

[NEERAJ KUMAR, RANCHI]

If this damage is due to unforeen actions and the damages are not related to provisions of service, no service tax is payable otherwise it is payable, so you need to judge wether it is payable or not.

AI Summary

Taxability of liquidated damages may arise under agreeing-to-obligation concept, potentially attracting service tax depending on contractual nexus. Whether liquidated damages attract service tax is contested: one position treats such payments as compensation or penalty not constituting consideration for a taxable service and so not taxable; another relies on the declared service of agreeing to the obligation-covering obligations to refrain, tolerate, or perform acts-so that payments for breach may be taxable; a further view requires a fact-specific assessment of the nexus between the damages and any taxable service.