Payment of service tax on Liquidating damages - reg.

[vinay wakde]

We have recovered amount of Liquidating damages from the party  as per the agreement. The service Tax is now payable @ 12.36% w.e.f. 01.07.2012 (under reverse charge method) on amount of liquidating damages. We are collecting said the amount by raising a debit note. In the matter, kindly clarify whether we have to raise the Debit note in favour of party inclusive of service tax to recover total amount of liquidating Damages from party i.e. Rs. 100/- inclusive service tax. or otherwise.

Regards,

VINAY

[YAGAY andSUN]

You may bifurcate the total amount into taxable amount as well as in tax amount provided you agreement/contract should specifically mention that amount received as liquidity damages will be inclusion of service tax amount.

[vinay wakde]

If we are received amount of L.D. say Rs.100/- as per our Debit Note and we have paid service Tax @ 12.36% under reverse charge method. whether the input service credit is eligible on the strength of Bank challan?

[YAGAY andSUN]

Well, whether you would be in position to prove that the amount received by you as liquidity damage will be treated at par with receiving the services which would be used in the manufacturing of final products or for providing the output services? If the answer is no, then, no service tax will be available to you.

It is because when any amount being received as liquidity damage, it will not be treated as for providing the services, moreover, it's for compensating the benefits which could not be accured by not providing services or goods not supplied.

Though Service tax may be payable but it would be difficult to prove the nexus with finishded goods or with output services.