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

AI Summary

Service tax on liquidated damages may be payable under reverse charge; input credit depends on nexus to taxable output activity.
Service tax applies to amounts recovered as liquidated damages and may be collected either inclusive or bifurcated into taxable value and tax where the contract expressly treats the sum as inclusive of service tax. Input service tax credit on tax paid under reverse charge requires proof of nexus between the compensated amount and the recipient's taxable output activity; absent such nexus, input credit will likely be unavailable.