Service tax liability on compensation received

ANANTHANARAYANAN P V (SR MANAGER - TAXATION) (32 Points)

26 April 2012  

M/s X Ltd. has been awarded a contract (Works contract - taxable work) by M/s ABC Ltd.  After X Ltd. executed 10% of the contract work, ABC Ltd. thought that the work, even completed by X Ltd. would not be of any help to ABC Ltd. and the contract was terminated by ABC Ltd.  X Ltd. was paid compensation on termination of thecontract, as per the terms of the Agreement.  Is X Ltd. liable to pay service tax on the compensation received from ABC Ltd.?   Kindly clarify.  Will the answer differ if the work executed X Ltd. falls under the exempted category of services, under the works contract service?